Friday, June 29, 2012 9:29:05 AM
European Leaders Agree to Use Bailout Fund to Aid Banks
By STEVEN ERLANGER and PAUL GEITNER
Published: June 28, 2012
BRUSSELS — Working through the night in the face of pressure from the embattled euro zone countries Italy and Spain, European leaders agreed early Friday to use the Continent’s bailout funds to recapitalize struggling banks directly, according to the European Council president, Herman Van Rompuy.
Pool photo by Guido Bergmann
Chancellor Angela Merkel of Germany and Prime Minister Mario Monti of Italy conferred on Thursday in Brussels.
The decision, by leaders of the 17-nation euro zone, would allow help to banks without adding directly to the sovereign debt of countries, which has been a problem for Spain and potentially for Italy. Both countries have seen the interest rates on their debt rise to levels that would be unsustainable in the long term, and the Italian and Spanish leaders, Prime Ministers Mario Monti and Mariano Rajoy, came here to push their colleagues to help.
Late Thursday, they said they would block all other agreements, on a 130 billion euro growth pact for example, until their colleagues did something to help take the pressure off the third- and fourth-largest economies in the euro zone. If their countries could not go to the markets to rollover their debt, Mr. Monti and Mr. Rajoy argued, there would be an existential threat to the euro .. http://topics.nytimes.com/top/reference/timestopics/subjects/c/currency/euro/index.html?inline=nyt-classifier .. in the short to medium term. Spain is seeking 100 billion euros to recapitalize its banks, damaged by a property bubble.
Mr. Van Rompuy called the agreement a “breakthrough that banks can be recapitalized directly,” which represents a concession by northern European countries, including Germany. .. http://topics.nytimes.com/top/news/international/countriesandterritories/germany/index.html?inline=nyt-geo .. The leaders agreed that the euro zone’s permanent bailout fund, the 500 billion euro European Stability Mechanism, due to come into being next month, could recapitalize banks directly once a banking supervisory body overseen by the European Central Bank has been set up. That should happen by the end of the year, he said. The joint banking supervisory body is also a breakthrough, an effort to ensure the future health of the area’s banks, but details about that component of the agreement were scarce.
In the meantime, Mr. Van Rompuy said the euro zone would make more “flexible” use of the existing bailout funds for “well-behaving nations” in order “to reassure markets and to get again some stability around the sovereign bonds of our member states.” There would be unspecified conditions attached to this use of the bailout funds, he said, but it would not require a special adjustment or austerity program.
Mr. Monti, an experienced European player and former European Union commissioner, .. http://topics.nytimes.com/top/reference/timestopics/organizations/e/european_union/index.html?inline=nyt-org .. hailed the agreement as a “very important deal for the future of the E.U. and the euro zone,” adding, “it is a double satisfaction for Italy.” He had argued that other euro zone leaders must find ways to help “virtuous countries” like his own and Spain, he said, which were fixing their economies and were solvent, but were under speculative market pressure.
Countries that request bond support from the rescue fund will have to sign a memorandum of understanding setting out their existing police commitments and agreeing to a timetable. But they will not face the intrusive oversight of a “troika” of international leaders to which Greece, Ireland and Portugal have been subjected, Mr. Monti said.
The euro zone “will be strengthened by this,” Mr. Monti said, calling it a step on the path to collective responsibility and mutualized debt. The decision also opened the way to agreement on the growth pact, and the euro rose in early trading in Asia on the news.
Italy has no immediate plans to ask for help from the existing funds, he Monti said, on the assumption that markets will ease after this agreement although many details were unclear. For Spain, help from the temporary bailout funds will be transferred to the permanent one once it is set up, Mr. Van Rompuy said.
The decision followed a difficult afternoon and night of discussions, after most leaders of countries who do not belong to the euro zone had left Brussels.
Italy and Spain were supported in their efforts by the new French president, François Hollande, .. http://topics.nytimes.com/top/reference/timestopics/people/h/francois_hollande/index.html?inline=nyt-per .. who arrived here on Thursday demanding “rapid solutions” to the euro’s problems. But Chancellor Angela Merkel .. http://topics.nytimes.com/top/reference/timestopics/people/m/angela_merkel/index.html?inline=nyt-per .. of Germany gave little sign of budging on any quick fixes, arguing that existing mechanisms could be used, illustrating some of the deep divisions as European leaders try to restore faith in the single currency.
Heading into the two-day meeting, Ms. Merkel had brushed aside questions about the mounting economic pressure on Spain and Italy, both of which saw their borrowing costs spike again on Thursday to ever-more-painful levels that are not sustainable in the long run.
Mr. Hollande showed no such reticence. “I have come here to get very rapid solutions to support those countries that are in the most difficulty in the markets, and that have made considerable efforts to shore up their public accounts,” he said.
European Union summit conferences were once scripted by the governments in Paris and Berlin, which often dictated the course by releasing a “Franco-German letter” just before other leaders arrived. But despite repeated meetings in recent days, there had been no far-reaching French-German proposal, which the two leaders promised on the day six weeks ago that Mr. Hollande became president.
Ms. Merkel has given Mr. Hollande the growth pact that he demanded during his election campaign, but it is largely made up of existing funds. There had been little effort to disguise their differences over sharing liability, through collectivized debt, to avert a euro zone breakup and take the pressure off Spain and Italy.
“The current disconnect between Paris and Berlin is destabilizing the euro,” Charles Grant, the director of the Center for European Reform, a research organization in London, wrote this week. .. http://centreforeuropeanreform.blogspot.com/2012/06/needed-franco-german-concordat.html .. “In the long run the euro is not sustainable without a grand bargain between France .. http://topics.nytimes.com/top/news/international/countriesandterritories/france/index.html?inline=nyt-geo .. and Germany.”
Approval of the growth pact was delayed by disagreements ranging from the mundane — disputes over a European patent office — to the more fundamental, with Italy and Spain insisting on a more urgent discussion of short-term measures to ease their financial strains. Mr. Monti told the other leaders that Italy would not agree to any other issue here until there was serious discussion of how the union could help bring down interest rates on Italian bonds, and Mr. Rajoy, under even more pressure from the markets, joined him.
In a speech on Wednesday to German lawmakers, Ms. Merkel argued that short-term solutions like pooled debt would be counterproductive without the construction, first, of a political and economic union among the member states in the euro zone. Without mutual responsibility and control over national budgets, she argued, there could not be mutual liabilities that can turn into blank checks.
While she made a concession Friday for the use of the bailout fund, it was accompanied by the requirement for a centralized banking supervisor, to ensure more bloc-wide discipline.
Financial markets have been looking ahead to the next meeting of the European Central Bank amid speculation that it would be forced to step in with new funds again or slash interest rates.
The central bank, however, indicated that it would not make any move until it saw concrete progress on the political side.
“How the E.U. summit pans out will be a key influence on what the E.C.B. opts to do,” Kenneth Wattret, an economist at BNP Paribas, wrote in a research note.
The European Union gathering has goals for both the short and longer term — to ease the pressure on Spain and Italy, but also to lay the ground for increased integration of the euro zone.
The leaders will also discuss proposals for the future of the euro drafted by the heads of the major European institutions and released Tuesday, .. http://www.nytimes.com/2012/06/27/world/europe/european-union-prods-germany-with-fiscal-plan.html .. plans that could lead to the creation of a euro zone finance ministry and — eventually — greater sharing of debt burdens.
James Kanter contributed reporting from Brussels, and Stephen Castle from London.
http://www.nytimes.com/2012/06/29/world/europe/european-union-meeting-opens-without-french-german-accord.html?src=me&ref=world&pagewanted=all
========
London Session: Surprise breakthrough at the EU summit
By Kathleen Brooks
June 29, 2012 7:13 AM GMT
Don't forget that you can now follow Forex.com's research team on Twitter: http://twitter.com/FOREXcom
At an unscheduled news conference early this morning the EU President announced sweeping changes to Europe's bailout facilities in an attempt to ring-fence Spain and Italy from the bond vigilantes' grip.
Risk assets loved this announcement and the euro jumped nearly 200 pips on the news. European stock futures are also poised to open sharply higher.
The main changes are:
1, Bailout loans to Spain's banks won't have seniority status
2, Bailout funds (EFSF and ESM) can be tapped by Eurozone countries to help reduce their borrowing costs even if they have not formally signed bailout programmes.
3, Ireland's bailout package is likely to be renegotiated.
4, The shift to more flexible bailout funds won't be put in place until there is a Eurozone wide banking supervision authority that the EU Commission has until the end of the year to prepare.
What does this breakthrough do?
1, Eurozone authorities have attempted to break the toxic link between banks and sovereigns. The move on Spain is extremely positive in our view. Although it doesn't irradiate the problem of bad loans on Spain's banks' balance sheets it does mean that banking debt won't clog up Spain's sovereign balance sheet that was relatively healthy before the banks started to fail. This should reduce Spain's borrowing costs in the short to medium term.
2, It shows that the Northern bloc of countries led by Germany, who had been against allowing the ESM to buy sovereign debt, is willing to give up some ground as the EU tries to solve this sovereign debt crisis. The move on scrapping credit seniority for bailout loans to Spain's banks is a very positive move to us as it encourages the private sector to invest in Spain and Italy's sovereign debt. Only yesterday the Finnish PM spoke out against this....
4, But Germany and co. won't be hoodwinked at this summit. A central banking authority marks a big change for Europe. It scraps the 17 individual authorities and should help enforce re-capitalisation rules across the continent and allow European banks' capital levels to get up to the same levels as their US counterparts.
5, A banking union could be a pre-curser to fiscal union, which many people think is the only way to save the currency bloc.
What are the drawbacks?
1, the EFSF/ESM rescue funds only have EU 500bn of available capital, yet the total liabilities on Spain's and Italy's balance sheets' top EU 2.4 trillion.... This could curb the market's enthusiasm as we haven't heard any signs that these bailout funds will be topped up.
2, Timelines: things in Europe tend to take forever, and a single bank supervisor could take more than 6 months to implement, which could delay the proposed changes to Europe's bailout funds.
Market moves: .. inside if interested ..
http://www.ibtimes.com/articles/357758/20120629/london-session-surprise-breakthrough-eu-summit.htm?page=all
By STEVEN ERLANGER and PAUL GEITNER
Published: June 28, 2012
BRUSSELS — Working through the night in the face of pressure from the embattled euro zone countries Italy and Spain, European leaders agreed early Friday to use the Continent’s bailout funds to recapitalize struggling banks directly, according to the European Council president, Herman Van Rompuy.
Pool photo by Guido Bergmann
Chancellor Angela Merkel of Germany and Prime Minister Mario Monti of Italy conferred on Thursday in Brussels.
The decision, by leaders of the 17-nation euro zone, would allow help to banks without adding directly to the sovereign debt of countries, which has been a problem for Spain and potentially for Italy. Both countries have seen the interest rates on their debt rise to levels that would be unsustainable in the long term, and the Italian and Spanish leaders, Prime Ministers Mario Monti and Mariano Rajoy, came here to push their colleagues to help.
Late Thursday, they said they would block all other agreements, on a 130 billion euro growth pact for example, until their colleagues did something to help take the pressure off the third- and fourth-largest economies in the euro zone. If their countries could not go to the markets to rollover their debt, Mr. Monti and Mr. Rajoy argued, there would be an existential threat to the euro .. http://topics.nytimes.com/top/reference/timestopics/subjects/c/currency/euro/index.html?inline=nyt-classifier .. in the short to medium term. Spain is seeking 100 billion euros to recapitalize its banks, damaged by a property bubble.
Mr. Van Rompuy called the agreement a “breakthrough that banks can be recapitalized directly,” which represents a concession by northern European countries, including Germany. .. http://topics.nytimes.com/top/news/international/countriesandterritories/germany/index.html?inline=nyt-geo .. The leaders agreed that the euro zone’s permanent bailout fund, the 500 billion euro European Stability Mechanism, due to come into being next month, could recapitalize banks directly once a banking supervisory body overseen by the European Central Bank has been set up. That should happen by the end of the year, he said. The joint banking supervisory body is also a breakthrough, an effort to ensure the future health of the area’s banks, but details about that component of the agreement were scarce.
In the meantime, Mr. Van Rompuy said the euro zone would make more “flexible” use of the existing bailout funds for “well-behaving nations” in order “to reassure markets and to get again some stability around the sovereign bonds of our member states.” There would be unspecified conditions attached to this use of the bailout funds, he said, but it would not require a special adjustment or austerity program.
Mr. Monti, an experienced European player and former European Union commissioner, .. http://topics.nytimes.com/top/reference/timestopics/organizations/e/european_union/index.html?inline=nyt-org .. hailed the agreement as a “very important deal for the future of the E.U. and the euro zone,” adding, “it is a double satisfaction for Italy.” He had argued that other euro zone leaders must find ways to help “virtuous countries” like his own and Spain, he said, which were fixing their economies and were solvent, but were under speculative market pressure.
Countries that request bond support from the rescue fund will have to sign a memorandum of understanding setting out their existing police commitments and agreeing to a timetable. But they will not face the intrusive oversight of a “troika” of international leaders to which Greece, Ireland and Portugal have been subjected, Mr. Monti said.
The euro zone “will be strengthened by this,” Mr. Monti said, calling it a step on the path to collective responsibility and mutualized debt. The decision also opened the way to agreement on the growth pact, and the euro rose in early trading in Asia on the news.
Italy has no immediate plans to ask for help from the existing funds, he Monti said, on the assumption that markets will ease after this agreement although many details were unclear. For Spain, help from the temporary bailout funds will be transferred to the permanent one once it is set up, Mr. Van Rompuy said.
The decision followed a difficult afternoon and night of discussions, after most leaders of countries who do not belong to the euro zone had left Brussels.
Italy and Spain were supported in their efforts by the new French president, François Hollande, .. http://topics.nytimes.com/top/reference/timestopics/people/h/francois_hollande/index.html?inline=nyt-per .. who arrived here on Thursday demanding “rapid solutions” to the euro’s problems. But Chancellor Angela Merkel .. http://topics.nytimes.com/top/reference/timestopics/people/m/angela_merkel/index.html?inline=nyt-per .. of Germany gave little sign of budging on any quick fixes, arguing that existing mechanisms could be used, illustrating some of the deep divisions as European leaders try to restore faith in the single currency.
Heading into the two-day meeting, Ms. Merkel had brushed aside questions about the mounting economic pressure on Spain and Italy, both of which saw their borrowing costs spike again on Thursday to ever-more-painful levels that are not sustainable in the long run.
Mr. Hollande showed no such reticence. “I have come here to get very rapid solutions to support those countries that are in the most difficulty in the markets, and that have made considerable efforts to shore up their public accounts,” he said.
European Union summit conferences were once scripted by the governments in Paris and Berlin, which often dictated the course by releasing a “Franco-German letter” just before other leaders arrived. But despite repeated meetings in recent days, there had been no far-reaching French-German proposal, which the two leaders promised on the day six weeks ago that Mr. Hollande became president.
Ms. Merkel has given Mr. Hollande the growth pact that he demanded during his election campaign, but it is largely made up of existing funds. There had been little effort to disguise their differences over sharing liability, through collectivized debt, to avert a euro zone breakup and take the pressure off Spain and Italy.
“The current disconnect between Paris and Berlin is destabilizing the euro,” Charles Grant, the director of the Center for European Reform, a research organization in London, wrote this week. .. http://centreforeuropeanreform.blogspot.com/2012/06/needed-franco-german-concordat.html .. “In the long run the euro is not sustainable without a grand bargain between France .. http://topics.nytimes.com/top/news/international/countriesandterritories/france/index.html?inline=nyt-geo .. and Germany.”
Approval of the growth pact was delayed by disagreements ranging from the mundane — disputes over a European patent office — to the more fundamental, with Italy and Spain insisting on a more urgent discussion of short-term measures to ease their financial strains. Mr. Monti told the other leaders that Italy would not agree to any other issue here until there was serious discussion of how the union could help bring down interest rates on Italian bonds, and Mr. Rajoy, under even more pressure from the markets, joined him.
In a speech on Wednesday to German lawmakers, Ms. Merkel argued that short-term solutions like pooled debt would be counterproductive without the construction, first, of a political and economic union among the member states in the euro zone. Without mutual responsibility and control over national budgets, she argued, there could not be mutual liabilities that can turn into blank checks.
While she made a concession Friday for the use of the bailout fund, it was accompanied by the requirement for a centralized banking supervisor, to ensure more bloc-wide discipline.
Financial markets have been looking ahead to the next meeting of the European Central Bank amid speculation that it would be forced to step in with new funds again or slash interest rates.
The central bank, however, indicated that it would not make any move until it saw concrete progress on the political side.
“How the E.U. summit pans out will be a key influence on what the E.C.B. opts to do,” Kenneth Wattret, an economist at BNP Paribas, wrote in a research note.
The European Union gathering has goals for both the short and longer term — to ease the pressure on Spain and Italy, but also to lay the ground for increased integration of the euro zone.
The leaders will also discuss proposals for the future of the euro drafted by the heads of the major European institutions and released Tuesday, .. http://www.nytimes.com/2012/06/27/world/europe/european-union-prods-germany-with-fiscal-plan.html .. plans that could lead to the creation of a euro zone finance ministry and — eventually — greater sharing of debt burdens.
James Kanter contributed reporting from Brussels, and Stephen Castle from London.
http://www.nytimes.com/2012/06/29/world/europe/european-union-meeting-opens-without-french-german-accord.html?src=me&ref=world&pagewanted=all
========
London Session: Surprise breakthrough at the EU summit
By Kathleen Brooks
June 29, 2012 7:13 AM GMT
Don't forget that you can now follow Forex.com's research team on Twitter: http://twitter.com/FOREXcom
At an unscheduled news conference early this morning the EU President announced sweeping changes to Europe's bailout facilities in an attempt to ring-fence Spain and Italy from the bond vigilantes' grip.
Risk assets loved this announcement and the euro jumped nearly 200 pips on the news. European stock futures are also poised to open sharply higher.
The main changes are:
1, Bailout loans to Spain's banks won't have seniority status
2, Bailout funds (EFSF and ESM) can be tapped by Eurozone countries to help reduce their borrowing costs even if they have not formally signed bailout programmes.
3, Ireland's bailout package is likely to be renegotiated.
4, The shift to more flexible bailout funds won't be put in place until there is a Eurozone wide banking supervision authority that the EU Commission has until the end of the year to prepare.
What does this breakthrough do?
1, Eurozone authorities have attempted to break the toxic link between banks and sovereigns. The move on Spain is extremely positive in our view. Although it doesn't irradiate the problem of bad loans on Spain's banks' balance sheets it does mean that banking debt won't clog up Spain's sovereign balance sheet that was relatively healthy before the banks started to fail. This should reduce Spain's borrowing costs in the short to medium term.
2, It shows that the Northern bloc of countries led by Germany, who had been against allowing the ESM to buy sovereign debt, is willing to give up some ground as the EU tries to solve this sovereign debt crisis. The move on scrapping credit seniority for bailout loans to Spain's banks is a very positive move to us as it encourages the private sector to invest in Spain and Italy's sovereign debt. Only yesterday the Finnish PM spoke out against this....
4, But Germany and co. won't be hoodwinked at this summit. A central banking authority marks a big change for Europe. It scraps the 17 individual authorities and should help enforce re-capitalisation rules across the continent and allow European banks' capital levels to get up to the same levels as their US counterparts.
5, A banking union could be a pre-curser to fiscal union, which many people think is the only way to save the currency bloc.
What are the drawbacks?
1, the EFSF/ESM rescue funds only have EU 500bn of available capital, yet the total liabilities on Spain's and Italy's balance sheets' top EU 2.4 trillion.... This could curb the market's enthusiasm as we haven't heard any signs that these bailout funds will be topped up.
2, Timelines: things in Europe tend to take forever, and a single bank supervisor could take more than 6 months to implement, which could delay the proposed changes to Europe's bailout funds.
Market moves: .. inside if interested ..
http://www.ibtimes.com/articles/357758/20120629/london-session-surprise-breakthrough-eu-summit.htm?page=all
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