Pre-summit document for banking union as EU leaders aim to fix crisis
The paper that is being revised details four ?pillars? for a strong economic and monetary bloc
Reuters / Brussels Jun 26, 2012, 00:45 IST
European leaders will discuss specific steps towards a cross-border banking union, closer fiscal integration and the possibility of a debt redemption fund at a summit on June 28-29, according to a document prepared for the meeting.
Two officials familiar with the 10-15 page document, drawn up over the past month and which is still being revised ahead of the summit, said it sets out in detail the four “pillars” required for a strong economic and monetary union which leaders believe is necessary to secure the currency project’s future. As well as progress towards a banking union, the paper discusses the need for a more integrated budget policy, steps required for deeper economic integration, and how to retain “democratic legitimacy” if countries give up some sovereignty.
The document has been drafted by European Commission President Jose Manuel Barroso, European Council President Herman Van Rompuy, European Central Bank chief Mario Draghi, and Jean-Claude Juncker, head of the Eurogroup countries using the euro. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ON TALKS TABLE Leaders in the European Union have drawn up a 10-15 page document which will form the basis of the talks at Brussels on June 28-29. The document is being revised but some of the points in them are:
* More integrated budget, deeper economic integration * Common banking supervisor, deposit-guarantee scheme, bank-resolution fund * Option of an entity to supervise major banks with cross-border operations, and another to monitor day-to-day activities * Resolution fund to get cash from banking sector taxes * Euro zone’s permanent ESM bailout fund to recapitalise banks directly, instead of giving cash to governments * Need to go beyond legislative proposals * Greater EU labour mobility ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
European leaders have already said the first area they need to work on is a banking integration as they try to break the link between bad banks and indebted governments, with the worsening situation in Spain an immediate concern.
EU officials believe that could be achieved in a year, although Berlin wants to see much more progress towards fiscal integration first, something that would require much longer due to the need to change the European Union treaty to achieve it.
The document goes into most detail on the banking proposals, setting out the need for a single European banking supervisor, a common EU deposit-guarantee scheme and a single bank-resolution fund to wind down the region’s bad banks, the officials said.
The paper sets out options under each heading, saying that when it comes to a single banking supervisor it could either be charged with overseeing all EU banks, or else look after the major systemic banks with cross-border operations, while another body looks after broader, day-to-day oversight.
The expectation is the ECB will eventually be given sole responsibility for overseeing Europe’s biggest banks, while the European Banking Authority watchdog retains a broader oversight role along with coordinating the work of national regulators.
On a common deposit insurance mechanism, the paper suggests that there needs to be a strengthening of and closer integration among national guarantee schemes to provide a more reassuring backstop across the whole European Union.
On a resolution fund to deal with failing banks, it calls for a single mechanism “with a large envelope” that would be financed via levies on the banking sector, such as a financial transaction tax, and would offer “an integrated EU solution for resolution”.
The document, which draws heavily on proposals made by the European Commission on June 6, says an “immediate and permanent mutualisation” of risk may be required to backstop the banking sector. It suggests the Euro zone’s permanent ESM bailout fund could be used to recapitalise banks directly, rather than having to lend to governments for on-lending to banks.
All of those proposals would be possible under existing EU treaties and could be implemented relatively rapidly, the document indicates.
Even if it took only a year, this will probably not come quick enough to ease market pressure on Spain and Italy that is now reaching danger levels, although some analysts believe a strong signal of intent could help. That could also persuade the ECB to step in.
“Short term, there is clearly a risk that the summit will disappoint markets yet again. If that were to be the case, I have no doubt that the ECB will step in,” said Erik Neilsen, global chief economist at Unicredit.
That could take the form of an interest rate cut, further easing of collateral rules for Spanish banks so they can continue to access ECB funds or even a resumption of the bank’s bond-buying programme, which several of its policymakers oppose, he said.
In a second section examining the steps required for closer fiscal coordination, the document says there is a need to go beyond existing legislative proposals such as the fiscal treaty, which 25 of the EU’s 27 countries have signed up to and which commits them to a balanced budget.
The paper says that as closer banking and fiscal integration is achieved, the issue of mutualisation of debt will become more immediate and it raises the option of a debt redemption fund along the lines of that proposed by Germany’s “wise men”.
That is an idea that France, Italy and others have pushed hard for but which German Chancellor Angela Merkel opposes.
Merkel has not ruled out a sharing of debt per se, but has said any discussion on it can only happen at the end of a long process of integration that is likely to take many years. In contrast, France will find it difficult to stomach the loss of sovereignty that fiscal union would demand.
“The political leaders are now trying to move to a degree of fiscal and political union within a very short period of time. In democracies, such changes usually take a few years, and whether enough can be achieved in time remains to be seen,” Neilsen said.
“However, in my mind, this does not imply an imminent risk of a breakdown of the Euro zone ... It’s a political project, and political leaders are unlikely to throw in the towel because markets don’t like the policies.”
Other sections of the document discuss the broader aims of greater EU labour mobility, efforts to improve pan-EU competitiveness, and to examine common taxation such as a common corporate tax base and a financial transactions levy.
There is likely to be heated discussion on issues such as debt mutualisation and any pooling of liability under a banking union, with Germany adamant that it will not be put on the line to underwrite the liabilities of other Euro zone countries.
No decisions are expected at the summit, but if leaders agree that there are grounds to push ahead, Barroso, Van Rompuy and the others will be given a further mandate to develop the ideas in greater detail, including more specific timelines.
Van Rompuy has said he hopes to have a more thorough set of plans drawn up by the next EU leaders’ summit in October or possibly the one after in December.
Ben Bernanke, the chairman of the Federal Reserve, and Mario Draghi, the president of the European Central Bank, have both argued correctly that the slowing global economy requires decisive action by political leaders.
Mr. Bernanke has come as close to pleading with Congress as a Fed chairman can, telling lawmakers on several occasions that the Fed alone cannot repair the economy and asking them for “help,” “support” and “collaboration.” That’s all Fed-speak for “more federal spending, now, please.”
Mr. Draghi, for his part, has sternly said, .. http://www.bbc.co.uk/news/business-18339334 .. “It is not right for monetary policy to fill other institutions’ lack of action,” a reference to the urgent need for Europe’s leaders to resolve the euro crisis.
But what if politicians refuse to act?
In the United States, legislative obstructionism is the approach of Republicans who do not want the economy to improve before Election Day. In Europe, a European Union summit meeting later this week will give leaders yet another chance to deliver on stimulus, banking reforms and political strategies to stabilize the euro zone. But the experience of the past two years suggests that they will do too little, too slowly.
Meanwhile, growth is faltering. The Fed now expects the United States economy to expand by 1.9 percent to 2.4 percent .. http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120620.pdf .. in 2012, down from its forecast of 3.5 percent a year ago. The European Central Bank’s economic forecast for the euro zone this year is -0.5 percent to 0.3 percent growth. And that’s being optimistic.
Mr. Bernanke and Mr. Draghi would clearly prefer to act in concert with politicians. But with the economy relapsing, more aggressive action is overdue. For the Fed, that means renewed quantitative easing, an attempt to lower long-term borrowing rates and spur demand by creating money with which to purchase bonds. To send the message that help will be provided as long as the economy remains weak, a bond-buying program or other support should be tied to specific goals for lower unemployment, higher inflation or stronger overall growth.
The European Central Bank can start with the obvious: cutting its benchmark interest rate below 1 percent, coupled with resurrecting its own moribund bond-buying program. The growth and inflation that could result from these measures would help to counteract the ills unleashed by excessive and premature fiscal austerity.
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.
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.
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.
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.
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