Spitfire List Web site and blog of anti-fascist researcher and radio personality Dave Emory.

News & Supplemental  

Surprise! It’s Not the EUrozone Crisis Anymore. Welcome to the EU, LLC. It’s Still a Crisis.

Well, it’s offi­cial (pend­ing approval). The ‘sec­ond pil­lar’ of the EU’s bank­ing union — a 55 bil­lion euro bail-out fund and a bunch of new rules — appears to be in place fol­low­ing recent nego­ti­a­tions. It was an all night com­pro­mise ben­der! Yes, lots of com­pro­mis­es were made, but the core prin­ci­ples that have emerged dur­ing the EU’s mul­ti-year-long quest for a bank­ing union are still intact. Those prin­ci­ples being, of course:

1. Bail-ins by depos­i­tors and cred­i­tors should be expect­ed for bank fail­ures before the bail-out fund is tapped. In oth­er words, it’s the ‘Cyprus Solu­tion’ of bail-ins for the entire EU so it’s poten­tial­ly fair­er to small­er nations in that respect.

2. The bank­ing union can’t be too for­giv­ing. Nations with ail­ing banks should have the min­i­mal help need­ed to avoid a com­plete cat­a­stro­phe. The joint bank bail-out fund should­n’t be large enough to actu­al­ly solve a large bank­ing cri­sis. Small­er nations should still remain dis­pro­por­tion­ate­ly vul­ner­a­ble because the bailout fund, itself, will be so small that any seri­ous crises will quick­ly over­whelm the fund and leave the remain­ing lia­bil­i­ties on the indi­vid­ual nation. At that point, it’s troi­ka-time!

3. The euro­zone mem­ber nations, which are pre­sum­ably more inclined to a mutu­al pool­ing of lia­bil­i­ties giv­en the shared cur­ren­cy, will not actu­al­ly share those lia­bil­i­ties in the event that the bail-out fund is spent even though that was a cen­tral tenet of the orig­i­nal bank­ing union idea.

4. Banks should­n’t be allowed to treat their nation­al debt as ‘risk-free’, a move intend­ed to min­i­mize the ‘bank-sov­er­eign nexus’ where domes­tic banks load up on domes­tic gov­ern­ment debt because it’s giv­en favored ‘risk-free’ sta­tus. It’s been a pro­pos­al cham­pi­oned by Bun­des­bank chief Jens Wei­d­mann. As Greece demon­strat­ed, sov­er­eign bonds in the EU aren’t nec­es­sar­i­ly ‘risk free’ because bond­hold­ers just might be forced to take a trip to the bond-bar­bor­shop. In the­o­ry, pre­vent­ing risk-free sov­er­eign bonds should pre­vent the con­cen­tra­tion of a nation’s debt in its own bank­ing sys­tem. In real­i­ty, it might accom­plish that goal, but it will prob­a­bly also exac­er­bate any exist­ing “sov­er­eign debt bank nexus” prob­lems if imple­ment­ed poor­ly and gen­er­al­ly goes against the spir­it of a real “union” by empha­siz­ing a “each mem­ber is on its own” atti­tude.

5. The min­i­mal­ly help­ful plans should be hailed as a tri­umph of com­pro­mise, prac­ti­cal­i­ty, and fair­ness.

Yes, the sec­ond pil­lar in the EU’s bank­ing union is a tri­umph of com­pro­mise, prac­ti­cal­i­ty, and fair­ness:

Europe strikes deal to com­plete bank­ing union

Thu Mar 20, 2014 8:33pm GMT

(Reuters) — Europe took the final step to com­plete a bank­ing union on Thurs­day with an agency to shut fail­ing euro zone banks, but there will be no joint gov­ern­ment back-up to pay the costs of clo­sures.

The break­through ends an impasse with the Euro­pean Par­lia­ment, which per­suad­ed euro zone coun­tries to strength­en the scheme. It com­pletes the sec­ond pil­lar of bank­ing union, which starts at the end of the year when the Euro­pean Cen­tral Bank takes over as watch­dog.

The accord means that the ECB has the means to shut banks it decides are too weak to sur­vive, rein­forc­ing its role as super­vi­sor as it pre­pares to run health checks on the still frag­ile sec­tor.

...

Michel Barnier, the Euro­pean com­mis­sion­er in charge of reg­u­la­tion, said the scheme would help to bring “an end to the era of mas­sive bailouts”.

“The sec­ond pil­lar of bank­ing union will allow bank crises to be man­aged more effec­tive­ly,” he said.

Thurs­day’s agree­ment makes it hard­er for EU coun­tries to chal­lenge the ECB if the cen­tral bank trig­gers bank clo­sures, and estab­lish­es a com­mon 55 bil­lion euro back-up fund over eight years — quick­er than planned but far longer than the ECB’s watch­dog had hoped.
...

Notice that the com­pro­mis­es include estab­lish­ing the 55 bil­lion euro bail out fund in eight years, which is soon­er than expect­ed but far longer than the ECB’s new watch­dog had hoped. It rais­es the ques­tion of the time frame the ECB’s Watch­dog would have pre­ferred for the full fund­ing of the too-small fund? 5 years? 3 years? Now?

Con­tin­u­ing...

...
But the new sys­tem, which Barnier con­ced­ed was not ‘per­fect’, has short­com­ings.

For one, the ‘res­o­lu­tion’ fund is small and would, in the view of the ECB watch­dog, be quick­ly spent. To rem­e­dy that the fund will be able to bor­row to replen­ish spent mon­ey.

Euro zone gov­ern­ments will not, how­ev­er, club togeth­er to make it cheap­er and eas­i­er for it to do so.

The 18 euro zone coun­tries do not intend to cov­er joint­ly the cost of deal­ing with indi­vid­ual bank fail­ures, a cen­tral tenet of the orig­i­nal plan for bank­ing union.

Ger­many resist­ed pres­sure from Spain and France to make such a con­ces­sion. Its finance min­is­ter Wolf­gang Schaeu­ble wel­comed new rules forc­ing bank cred­i­tors to take loss­es and that “the mutu­alised lia­bil­i­ty ... remained ruled out” — a ref­er­ence to shar­ing the bur­den of a bank col­lapse.

Nei­ther will there be any joint pro­tec­tion of deposits.

DEADLY EMBRACE

Almost sev­en years since Ger­man small busi­ness lender IKB became Europe’s first vic­tim of the glob­al finan­cial cri­sis, the region is still strug­gling to lift its econ­o­my out of the dol­drums and banks are tak­ing much of the blame for not lend­ing.

The bank­ing union, and the clean-up of banks’ books that will accom­pa­ny it, is intend­ed to restore their con­fi­dence in one anoth­er. It is also sup­posed to stop indebt­ed states from shield­ing the banks that buy their bonds, treat­ed in law as ‘risk-free’ despite Greece’s default in all but name.

Under the deal reached, a fund made up by levies on banks will be built up over eight years, rather than 10 as orig­i­nal­ly fore­seen. Forty per­cent of the fund will be shared among coun­tries from the start and 60 per­cent after two years.

It also envis­ages giv­ing the Euro­pean Cen­tral Bank the pri­ma­ry role in trig­ger­ing the clo­sure of a bank, lim­it­ing the scope for coun­try min­is­ters to chal­lenge such a move.

Mark Wall, Deutsche Bank’s chief euro zone econ­o­mist, said new rules to impose loss­es on the bond­hold­ers of trou­bled banks would reduce the bur­den on the fund but warned that its size was too mod­est. “A cross-Euro­pean fund of the size of 55 bil­lion rais­es some eye­brows in terms of scale,” he said.

The fund will be able to bor­row against future bank levies but will not be able to rely on the euro zone bailout fund to raise cred­it. Crit­ics say this means pri­ma­ry respon­si­bil­i­ty for prob­lem lenders remained with their home coun­tries and that the bank­ing union will nev­er live up to its name.

“The key to the bank­ing union is an author­i­ty with finan­cial clout. They don’t have it so we don’t have a bank­ing union,” said Paul De Grauwe of the Lon­don School of Eco­nom­ics.

“The whole idea was to cut the dead­ly embrace between bank and sov­er­eign. But if a bank­ing cri­sis were to erupt again, it would be back to how it was in 2008 with every coun­try on its own.”

...

Let’s review some of the details being pro­posed:
— A 55 bil­lion euro bailout fund is being cre­at­ed from levies on banks. The CEB Watch­dog say this is much too small and could be spent quick­ly.

- It will take 8 years for the fund to be ful­ly financed, less than the planned 10 years but much longer than the ECB watch­dog was hop­ing for.

- The 55 bil­lion euro fund can bor­row against future blank levy’s but it can’t rely on the euro­zone bailout fund (which makes sense since this bank­ing union includes euro­zone and non-euro­zone mem­bers).

- And, due pri­mar­i­ly to Ger­man oppo­si­tion, the 18 euro­zone mem­bers states are not going to be joint­ly fund­ing for the bailouts, even though joint fund­ing was one of the orig­i­nal cen­tral tenets of the bank­ing union. There will also be no joint pro­tec­tion of deposits (it’s the third pil­lar of the bank­ing union, so some scheme involv­ing). So the small­er nations or those with weak­er economies should prob­a­bly be expect­ing some sort of troi­ka fol­low­ing any future major finan­cial crises.

- Once the 55 bil­lion euro fund is exhuast­ed, “it would be back to how it was in 2008 with every coun­try on its own”.

The More Things Change, the More They Stay the Same In the Bank­ing Union. Via Veto Pow­er
If the above plan does­n’t sound very like­ly to suc­ceed keep in mind that there’s noth­ing pre­vent­ing cor­rec­tive changes to the bank­ing union in the future. Except for the veto-pow­er of indi­vid­ual mem­ber states. Yes, because this was an inter-gov­ern­men­tal agree­ment, indi­vid­ual mem­bers need to agree to future changes and hold an implied veto pow­er. So while the bank­ing union may be here to stay, it does­n’t have to stay the same. But it eas­i­ly could:

Finan­cial Times

A high­ly imper­fect bank­ing union
Euro­zone banks and sov­er­eigns remain tight­ly embraced
March 23, 2014 5:01 pm
Edi­to­r­i­al

Twen­ty months ago, at the height of the sov­er­eign debt cri­sis, EU lead­ers vowed to shore up the eurozone’s finan­cial sys­tem by build­ing a “bank­ing union”. The aim was to end the dead­ly embrace between gov­ern­ments and banks that had proven cat­a­stroph­ic for coun­tries such as Spain and Ire­land. Nev­er again would a sin­gle mem­ber state have to deal with a bank­ing cri­sis alone, as its part­ners would help by shar­ing some of the bur­den.

Last week the jour­ney towards the EU’s most ambi­tious inte­gra­tion project since the cre­ation of the euro came to an end. After a 16-hour nego­ti­a­tion, the Euro­pean par­lia­ment and mem­ber states agreed to cre­ate a uni­fied sys­tem for han­dling bank­ing crises. The so-called “sin­gle res­o­lu­tion mech­a­nism” is one of the build­ing blocks of a bank­ing union. The oth­er cor­ner­stone – remov­ing from nation­al reg­u­la­tors the pow­ers to super­vise the eurozone’s largest banks and attribut­ing them to the Euro­pean Cen­tral Bank – had already been laid last year.

Con­struct­ing a bank­ing union was always going to involve uneasy com­pro­mis­es between states. Ear­ly in the nego­ti­a­tions it became clear that Ger­many was opposed to the idea of build­ing a com­mon guar­an­tee scheme that would pro­tect small depos­i­tors in case of a bank fail­ure. But while this part of the plan was aban­doned, the hope was that the oth­er ele­ments of the bank­ing union would not be watered down. Alas, the oppo­site has hap­pened.

...

Most impor­tant­ly, the promise that euro­zone mem­bers would share the bur­den of res­cu­ing or resolv­ing a bank has been for­got­ten. True, the exten­sive use of “bail-in” rules means that bond­hold­ers will final­ly face the true cost of the risks they take. But after that the finan­cial respon­si­bil­i­ty for sav­ing a bank will large­ly fall on the shoul­ders of an indi­vid­ual gov­ern­ment. As for banks that need to be shut down, at just €55bn the com­mon res­o­lu­tion fund is tiny and, any­way, will take eight years to build.

One would wor­ry less about these imper­fec­tions if it were clear that the agree­ment would be improved at a lat­er stage. But this will be dif­fi­cult. For exam­ple, since the sin­gle res­o­lu­tion fund was includ­ed in an inter-gov­ern­men­tal agree­ment, mem­ber states will retain veto pow­ers over sub­se­quent changes. Ger­many, which is ter­ri­fied of any­thing that involves a mutu­al­i­sa­tion of lia­bil­i­ties, is unlike­ly to give much ground.

The euro­zone risks being stuck with a flawed bank­ing union until the next cri­sis. This places a greater onus on the ECB. The cen­tral bank is under­tak­ing a foren­sic audit of the bal­ance sheets of the insti­tu­tions it will super­vise to ensure they hold enough cap­i­tal. This assess­ment must be cred­i­ble and put the largest banks in posi­tion to with­stand the next shock. After this week’s defi­cient agree­ment on bank­ing union, any mis­take risks being extreme­ly cost­ly.

Yes, “since the sin­gle res­o­lu­tion fund was includ­ed in an inter-gov­ern­men­tal agree­ment, mem­ber states will retain veto pow­ers over sub­se­quent changes. Ger­many, which is ter­ri­fied of any­thing that involves a mutu­al­i­sa­tion of lia­bil­i­ties, is unlike­ly to give much ground.”. And if Ger­many isn’t giv­ing much ground, ground prob­a­bly isn’t going to be giv­en at all. That just how things work. It’s the implied sixth prin­ci­ple of the bank­ing union:

6. He who has the gold makes the rules.

So does this implied veto right by mem­ber nations mean that a clear­ly ques­tion­able bank­ing union is now the law of the land? Indef­i­nite­ly? Well, per­haps, but that does­n’t mean there aren’t oth­er pos­si­ble pos­i­tive changes com­ing as a result of the new union. For instance, one of the unam­bigu­ous pos­i­tives to the new ‘bad bank’ res­o­lu­tion scheme is that it takes us one step clos­er to resolv­ing the the pre­vi­ous ‘bad bank’ res­o­lu­tion schemes. As Berlin recent­ly made clear, those pre­vi­ous real­ly bad ‘bad bank’ res­o­lu­tion schemes that bank­rupt­ed entire coun­tries and man­dat­ed troikas aren’t going to get resolved until the entire bank­ing union is set up. So, as bad as many the new bank­ing union seems with the announce­ment of these new pro­pos­als, at least it gets us clos­er to undo­ing the last hor­ri­ble bank­ing scheme:

Irish Times
Ger­many damp­ens hopes of Irish bank recap­i­tal­i­sa­tion from ESM
Schäu­ble rules out mutu­al lia­bil­i­ty of EU mem­ber states

Suzanne Lynch, Derek Scal­ly

Fri, Mar 21, 2014, 01:00

Ger­many has damp­ened expec­ta­tions of immi­nent bank recap­i­tal­i­sa­tions for Irish banks from the Euro­pean Sta­bil­i­ty Mech­a­nism bailout fund after yesterday’s agree­ment on a fur­ther pil­lar of the Euro­pean bank­ing union.

After 16 hours of talks through the night, Euro­pean Union mem­ber states and the Euro­pean Par­lia­ment agreed final details of a sin­gle res­o­lu­tion mech­a­nism (SRM) to wind up fail­ing banks.

Taoiseach Enda Ken­ny wel­comed yesterday’s agree­ment as anoth­er “essen­tial” stage in the euro area’s post-cri­sis path towards a bank­ing union.

“This means that we’re mov­ing towards the endgame in terms of hav­ing the struc­ture put in place by which mat­ters of recap­i­tal­i­sa­tion can be con­sid­ered,” he said, speak­ing on his way into a sum­mit of EU lead­ers in Brus­sels. “And, as I’ve always said, that will apply on a case-by-case basis by the end of the year.”

Ger­man finance min­is­ter Wolf­gang Schäu­ble agreed that yesterday’s deal marked a “great step for­ward for Europe” on the bank­ing union, which he described as the “great­est Euro­pean pro­jec­tion since the intro­duc­tion of the euro”.

Mutu­al lia­bil­i­ty ruled out
While the polit­i­cal deal rep­re­sent­ed a sen­si­ble com­pro­mise, with Berlin giv­ing ground on key points, Mr Schäu­ble insist­ed that it “still rules out mutu­al lia­bil­i­ty of par­tic­i­pat­ing mem­ber states”. Berlin offi­cials were cir­cum­spect about the time it would take to com­plete the bank­ing union’s final lap. For now, they said, Berlin’s pri­or­i­ty was “pour­ing the SRM deal into a con­crete struc­ture”.

“Only then can we look fur­ther,” said a finance min­istry spokesman.

After agree­ment in Decem­ber 2012 on a sin­gle super­vi­so­ry mech­a­nism for banks, the SRM is the sec­ond of three pil­lars of Europe’s bank­ing union with talks still out­stand­ing on a third: a com­mon deposit insur­ance fund. Until all three are in place, and the bank­ing union is oper­a­tional, Berlin declines to enter­tain even dis­cus­sion of recap­i­tal­i­sa­tions. The idea of estab­lish­ing a com­mon Euro­pean bank­ing deposit insur­ance fund is high­ly unpop­u­lar both with Ger­man banks and Ger­man savers and is like­ly to trig­ger a pro­longed polit­i­cal debate there.

...

Note that the Ger­man Con­sti­tu­tion­al Court very recent­ly ruled that a direct recap­i­tal­i­sion of Ire­land banks would indeed be con­sti­tu­tion­al, remov­ing a major hur­dle to this need­ed step. But don’t expect any recapil­i­sa­tions any time soon since, as men­tioned above, Berlin is declin­ing to enter­tain even dis­cus­sion of bank recap­i­tal­iza­tions until all three pil­lars are in place for the new bank­ing union. And the third pil­lar — deposit insur­ance — has yet to even be addressed and is like­ly to trig­ger a pro­longed debate. So the Ire­land, the ‘good stu­dent’ that has been hold­ing out for recap­i­tal­i­sa­tion for years, is going to have to keep wait­ing.

Con­tin­u­ing...

...
Late-night hag­gling
Yesterday’s agree­ment between mem­ber states and the Euro­pean Par­lia­ment under the co-deci­sion process fol­lows agree­ment among mem­ber states in Decem­ber. The cen­tralised res­o­lu­tion body and accom­pa­ny­ing €55 bil­lion fund will be respon­si­ble for wind­ing-up strug­gling banks.

After late-night hag­gling, includ­ing a report­ed 5.30am phone call to Mr Schäu­ble, euro-group pres­i­dent Jeroen Dijs­sel­bloem emerged with a deal at 7am.

It has been seen as favour­ing small­er coun­tries such as Ire­land because it accel­er­ates the pace at which the €55 bil­lion fund will be ful­ly mutu­alised. (The first SRM draft pro­pos­als envis­aged a 30 per cent mutu­al­i­sa­tion in the first three years, with full mutu­al­i­sa­tion only after a decade.)

This was one cru­cial con­ces­sion Euro­pean Par­lia­ment nego­tia­tors wrung from Ger­many; anoth­er was reduc­ing from 10 to eight years the tran­si­tion peri­od dur­ing which a pool of nation­al funds would shift towards a shared fund.

Mutu­al­i­sa­tion
The revised pack­age also brings for­ward mutu­al­i­sa­tion: 40 per cent in the first year; 20 per cent in the sec­ond year; and the rest equal­ly over a fur­ther six years.

Accord­ing to Dutch MEP Cori­enn Wort­mann-Kool the result­ing res­o­lu­tion process will treat banks equal­ly regard­less of their home coun­try.

“We want bail-in of cred­i­tors and investors to be applied in the same way to all banks irre­spec­tive of the mem­ber states these banks are locat­ed in,” she said, using the exam­ple of Ire­land as com­pared with larg­er states such as Ger­many and France.

The plan agreed by mem­ber states in Decem­ber would have seen, for exam­ple, French or Ger­man banks backed by a large fund allow­ing mod­er­ate bail-ins. An Irish bank with a small­er nation­al fund would, under draft pro­pos­als, have been forced into a deep­er bail-in, lead­ing to high­er fund­ing costs, she said.

“This would def­i­nite­ly not be what we want to achieve in terms of break­ing the link between sov­er­eign and bank­ing debt,” she said.

The agree­ment also envis­ages that the Euro­pean Com­mis­sion, rather than mem­ber states, will approve deci­sions made by the SRM’s board on resolv­ing banks. MEPs were anx­ious to lim­it polit­i­cal inter­fer­ence from mem­ber states, though finance min­is­ters will still have pow­er to inter­vene in cer­tain cas­es.

...

So it’s bad, but not all bad, right? At least it was­n’t “def­i­nite­ly not be what we want to achieve in terms of break­ing the link between sov­er­eign and bank­ing debt” like the pro­posed plan in Decem­ber was where the larg­er mem­bers would have larg­er bail-out funds. Instead, every­one shares in the too-small-too-suc­ceed bailout fund.

The EU’s ‘Mutu­al’ Fund Has ‘Eye-Open­ing’ Non-Mutu­al Ben­e­fits
Addi­tion­al­ly, notice how the ‘com­pro­mise’ is being spun as “favour­ing small­er coun­tries such as Ire­land because it accel­er­ates the pace at which the €55 bil­lion fund will be ful­ly mutu­alised.” As the arti­cle points out:

...
The plan agreed by mem­ber states in Decem­ber would have seen, for exam­ple, French or Ger­man banks backed by a large fund allow­ing mod­er­ate bail-ins. An Irish bank with a small­er nation­al fund would, under draft pro­pos­als, have been forced into a deep­er bail-in, lead­ing to high­er fund­ing costs
...

What does this mean? Well, basi­cal­ly, the 55 bil­lion euro bailout fund isn’t ful­ly fund­ed or ful­ly “mutu­alised” for 8 years. There’s a tran­si­tionary phase of 8 years when the fund builds up. Dur­ing this phase the funds are sep­a­rat­ed between “nation­al” funds and “Euro­pean funds” and mon­ey in each nation’s “nation­al” com­part­ment is only avail­able for bail­ing out that nation’s bank. In oth­er words each mem­ber is sort of on their own when it comes to deal­ing with a bank­ing cri­sis dur­ing this tran­si­tion peri­od. But the degree to which a coun­try is on its own will go down each year as the fund grows in size and become increas­ing­ly “mutu­al­ized”. But, again, it’s going to take 8 years for this process to be com­plet­ed and 8 years can last a LONG time when you’re in the midst of some sort of socioe­co­nom­ic exper­i­ment gone hor­ri­bly awry.

So the recent changes made in the com­pro­mise agree­ment real­ly would reduce the risk assumed by the small­er states because that’s what mutu­al­i­sa­tion does. By speed­ing up the over­all time frame from 10 to 8 years and by speed­ing up the mutu­al­i­sa­tion sched­ule from the 10 year sched­ule pro­posed in Decem­ber it real­ly does reduce sys­temic risk (oth­er­wise insur­ance would­n’t real­ly work). So this is quite an accom­plish­ment, right?

Well, as we already saw above, mutu­al­i­sa­tion is indeed help­ful but that help­ful­ness is dra­mat­i­cal­ly lim­it­ed by the fact that the bailout fund is lim­it­ed to 55 bil­lion euros.

Sure, 55 bil­lion euros sounds like a lot of mon­ey, but keep in mind the Ire­land, alone, spent 85 bil­lion euros bail­ing out its pri­vate banks and this basi­cal­ly bank­rupt­ed the coun­try (require an addi­tion­al bailout and end­less austerity...and the ongo­ing need for recap­i­tal­i­sa­tions). Por­tu­gal need 78 bil­lion euros. Once that 55 bil­lion euro bailout fund is expend­ed the lia­bil­i­ties fall back on the mem­ber nations. So bailouts are mutu­alised, but only to an extent that would have been inad­e­quate for deal­ing with vir­tu­al­ly ALL of the crises we’ve seen thus far.

Still, we can be a bit relieved that the new­ly pro­posed bailout fund scheme is an improve­ment over the pro­pos­al in Decem­ber. By push­ing up the fund­ing sched­ule from 10 to 8 years and increas­ing the mutu­al­i­sa­tion rates the new scheme is prob­a­bly fair­er over­all. At least, it’s hope­ful­ly a fair­er arrange­ment between the larg­er nations (like Ger­many and France) and the small­er states like Ire­land.

As the fol­low­ing arti­cle points out, how­ev­er, there’s still a ques­tion of fair­ness between the larg­er states. Yes, in what turned out to be quite an “eye open­er” last week, it looks like France, and not Ger­many, will be pay­ing more into the bailout fund than any­one else and “mutu­al­i­sa­tion” will dra­mat­i­cal­ly bring down Ger­many’s over­all share for the 55 bil­lion euro fund. Giv­en the intense oppo­si­tion by Ger­man nego­tia­tors to the very idea of mutu­al­i­sa­tion, this was­n’t the expect­ed out­come:

Finan­cial Times

March 17, 2014 4:41 pm
France and Ger­many squab­ble over who pays for EU bank­ing union

By Alex Bark­er in Brus­sels

France and Ger­many are squab­bling over who should foot the bill for Europe’s bank­ing union, with Paris fear­ing its banks will pay the biggest share towards a €55bn res­cue fund.

As the EU enters a poten­tial­ly deci­sive week in talks on a cen­tral sys­tem for han­dling bank crises, France is fight­ing plans to make its sec­tor of big uni­ver­sal banks the lead­ing con­trib­u­tors to the com­mon insur­ance plan.

It is one of sev­er­al high­ly polit­i­cal issues that remain unre­solved with days left before a Wednes­day dead­line to agree leg­is­la­tion with the Euro­pean par­lia­ment, so that it has time to pass before the Euro­pean elec­tions.

Although it is high­ly tech­ni­cal, the dis­pute over the bank levy cuts across some fraught EU issues: whether the res­cue sys­tem is gen­uine­ly Euro­pean or actu­al­ly part­ly nation­al; whose bank­ing sys­tem is most risky; and there­fore whose lenders should pay more for insur­ance. France, Spain and Por­tu­gal have all sub­mit­ted papers on the top­ic.

One senior diplo­mat said the break­down of con­tri­bu­tions was an “eye open­er”, giv­en that Ger­many, the EU’s biggest econ­o­my, is lead­ing resis­tance to increas­ing the heft of the res­cue fund or accel­er­at­ing its mutu­al­i­sa­tion.

“Every­one put up with [Germany’s] antics because they thought it was the Ger­man banks that pay by far the most, but that isn’t quite true. It is the French banks that will fund this par­ty,” the offi­cial said.

Some MEPs think it right that com­plex, “too big to fail” banks pay more. Sven Giegold, a Ger­man Green in the par­lia­ment nego­ti­at­ing team, said he was “appalled” by mem­ber states’ attempt­ing to rig the cal­cu­la­tion, to “give a sub­sidy to risky banks”.

A French infor­mal posi­tion paper, cir­cu­lat­ed on Fri­day, lays out rough esti­mates show­ing the vari­ance in nation­al con­tri­bu­tions depend­ing on the method used. One big fac­tor is whether the fund­ing tar­get – expect­ed to be around 1 per cent of cov­ered deposits – is set at Euro­pean lev­el or nation­al lev­el.

Under a Euro­pean tar­get France’s high­ly con­cen­trat­ed bank­ing sec­tor, includ­ing BNP Paribas and Société Générale, is on the hook for 21 per cent of the fund, slight­ly more than Germany’s more deposit fund­ed sec­tor.

By con­trast, if the tar­get is set at nation­al lev­el, the con­tri­bu­tions of Ger­man banks would rise to 35 per cent, while France’s remain at 21 per cent. Berlin fought hard to lim­it the con­tri­bu­tions of its big sav­ings bank sec­tor to the cen­tral fund.

France argues that giv­en the fund is estab­lished with nation­al com­part­ments that are grad­u­al­ly bro­ken down over 10 years, the Euro­pean tar­get lev­el should also be phased in. This would leave French banks pay­ing 21 per cent, or around €11bn, while Ger­man lenders would pay 28 per cent, around €15bn.

“Using a ref­er­ence to nation­al tar­get lev­el dur­ing the tran­si­tion­al peri­od is con­sis­tent with the exis­tence of nation­al com­part­ments,” the French paper argues, point­ing out that a fail­ing bank’s access to res­cue funds varies accord­ing to its home state.

...

That might have seemed like a lot of jar­gon. Here’s the crit­i­cal part:

...
Under a Euro­pean tar­get France’s high­ly con­cen­trat­ed bank­ing sec­tor, includ­ing BNP Paribas and Société Générale, is on the hook for 21 per cent of the fund, slight­ly more than Germany’s more deposit fund­ed sec­tor.

By con­trast, if the tar­get is set at nation­al lev­el, the con­tri­bu­tions of Ger­man banks would rise to 35 per cent, while France’s remain at 21 per cent. Berlin fought hard to lim­it the con­tri­bu­tions of its big sav­ings bank sec­tor to the cen­tral fund.

France argues that giv­en the fund is estab­lished with nation­al com­part­ments that are grad­u­al­ly bro­ken down over 10 years, the Euro­pean tar­get lev­el should also be phased in. This would leave French banks pay­ing 21 per cent, or around €11bn, while Ger­man lenders would pay 28 per cent, around €15bn.
...

Keep in mind that the above arti­cle was writ­ten days before the lat­est deal, so the ear­li­er bailout fund sched­ule was still on the table (10 years for financ­ing the fund and slow­er mutu­al­iza­tion) but the over­all dynam­ic described has­n’t changed with the new deal. Now notice the point made by the French nego­tia­tors at the time: The bailout fund is estab­lished with nation­al com­part­ments that are bro­ken down and merged into the “Euro­pean” com­part­ment as the fund gets mutu­alised. If the con­tri­bu­tions where set at the “nation­al tar­get lev­el”, Ger­many’s bank­ing sec­tor would be on the hook for 35% of the 55 bil­lion euro fund. But at the “Euro­pean lev­el” the Ger­man banks are only liable for 20% of the fund. The French banks, on the oth­er hand, appear to be on the hook for 21% either way. So, some­how, the for­mu­la used for the “mutu­al­i­sa­tion” of lia­bil­i­ties seems to dra­mat­i­cal­ly slash the Ger­man lia­bil­i­ties with­out impact­ing the French bank­ing sec­tor at all. Banks can have dif­fer­ent struc­tures and risks, so this isn’t entire­ly sur­pris­ing that the for­mu­las cho­sen can have dif­fer­ent impacts on dif­fer­ent bank­ing sec­tor. But, again, the oppo­si­tion to debt mutu­al­i­sa­tion has been the strongest in Ger­many and yet, in the end, debt mutu­al­i­sa­tion appears cut the Ger­man lia­bil­i­ties by 42%! It helps explain why this scheme was such an ‘eye open­er’.

You Say Mutu­alise, I Say Mutu­al­ize. Let’s Call the Whole Thing Off All Cre­ate A Lim­it­ed Lia­bil­i­ty Com­pa­ny
Still, our eyes should­n’t be too wide with sur­prise by the new EU bank­ing New Deal and its quirky fund­ing for­mu­las because it was­n’t sim­ply “mutu­al­i­sa­tion” of the bail-out fund that Ger­many has been oppos­ing this entire time. It’s the “mutu­al­i­sa­tion” of ALL poten­tial lia­bil­i­ties that Berlin has been fear­ing.

Sure, the “mutu­al­i­sa­tion” of the 55 bil­lion euro fund appears to reduced Ger­many’s bailout lia­bil­i­ties for the 55 bil­lion euro fund, but that’s not where the major sav­ing for Ger­many are accrued. The major reduc­tion in Ger­man lia­bil­i­ties (and the lia­bil­i­ties of any lead­ing Euro­pean economies in the future) come from the fact that the “mutu­al­i­sa­tion” of lia­bil­i­ties is capped at 55 bil­lion euros. That’s the major ‘eye-open­er’ in this plan because once that 55 bil­lion euro bailout fund gets used up noth­ing else gets mutu­al­ized and the rel­e­vance of the bank­ing union effec­tive­ly ends. The EU, at the end of the day, is a lim­it­ed lia­bil­i­ty com­pa­ny for nation states. That’s the uni­fy­ing prin­ci­ple under­ly­ing the bank­ing union. My Broth­er’s Keep­er, LLC.

And why kind if bank­ing union “cri­sis res­o­lu­tion” pow­er will a nation state LLC have? One that appears to inten­tion­al­ly cre­ate of a scheme that is unable to han­dle any­thing oth­er than a small, sin­gle-nation bank­ing cri­sis cou­pled with a very seri­ous threat of “Troi­ka Time!” for any mem­ber states that that find them­selves in need of nation­al bailout. In oth­er words, it’s a pre­ven­ta­tive approach. The EU’s new plan for deal­ing with a cri­sis is to have a bank cri­sis res­o­lu­tion scheme that is so com­plete­ly inad­e­quate that mem­ber nations will pre­emp­tive­ly cur­tail excess­es in their bank­ing sys­tems sim­ply to avoid the pos­si­bil­i­ty of need­ing a nation­al bailout (and more Troi­ka time­outs). It’s the ‘all stick, no car­rot’ approach to cre­at­ing a union.

But will it work? Can it work? After all, we’re talk­ing about a bank­ing union with­in a Euro­pean union. Can unions root­ed in con­flicts of inter­est, a lack of trust, and a deep aver­sion to bur­den-shar­ing actu­al­ly sur­vive in the long run? If so, is a lim­it­ed lia­bil­i­ty com­pa­ny real­ly the kind of long-term rela­tion­ship the EU wants to be?

Would­n’t the E-“U‑and-Me” be bet­ter?

Discussion

14 comments for “Surprise! It’s Not the EUrozone Crisis Anymore. Welcome to the EU, LLC. It’s Still a Crisis.”

  1. Well isn’t this reas­sur­ing: Lithua­nia is sched­uled to ditch its cur­ren­cy and join the euro in Jan­u­ary 2015 and that has Ger­man con­ser­v­a­tives on edge. Why? Because Lithua­nia is going to be the 19th euro­zone mem­ber, and 19 is sort of a mag­i­cal num­ber the way the treaty was writ­ten. Once more than 18 mem­bers are in the EU, the five nations with the largest finan­cials sec­tors will no longer get 5 per­ma­nent votes on the ECB coun­cil. Instead, Ger­many, France, Italy, Spain and the Nether­lands are going to have to start shar­ing 4 votes on a rotat­ing basis which means each of them will be with­out an ECB coun­cil vote once every five months. Not sur­pris­ing, this is has a lot of Ger­many’s pol­i­cy mak­ers freaked out and ask­ing for a treaty change to give Ger­many a per­ma­nent vote. Ger­many’s Finance Min­istry has said that it has no inten­tion of a treaty change. At least no inten­tions, “at the moment”:

    UPDATE 1‑Germany does­n’t want ECB reform to give Bun­des­bank per­ma­nent vote

    Mon Jun 16, 2014 6:56pm IST

    * ECB votes start to rotate once euro zone mem­bers exceed 18

    * Lithua­nia to become 19th euro zone mem­ber in Jan­u­ary 2015

    * Bun­des­bank will have to sit out once every five months

    * Amend­ing ECB rota­tion sys­tem would require treaty change (Adds quotes, com­ments Ger­man politi­cians)

    By Stephen Brown and Eva Tay­lor

    BERLIN/FRANKFURT, June 16 (Reuters) — Ger­many sees no rea­son to change the new vot­ing sys­tem at the Euro­pean Cen­tral Bank that takes effect when Lithua­nia joins the euro next year, despite a poten­tial loss of influ­ence for the Bun­des­bank, the finance min­istry said on Mon­day.

    Once Lithua­nia becomes the 19th state to adopt the Euro­pean Union’s sin­gle cur­ren­cy next Jan­u­ary, the nation­al cen­tral bank gov­er­nors who sit on the ECB’s Gov­ern­ing Coun­cil will take turns vot­ing, to speed up deci­sion-mak­ing

    The Bun­des­bank will have to sit out once every five months. Crit­ics — most­ly Ger­man con­ser­v­a­tive politi­cians — argue that Ger­many, which pro­vides just over a quar­ter of the ECB’s over­all cap­i­tal, should keep its per­ma­nent vote. But there is no sup­port from Berlin for such a move.

    “We see no rea­son to make any changes at the moment,” said Ger­man finance min­istry spokes­woman Mar­i­anne Kothe. “The rea­sons for this prin­ci­ple are still valid.”

    Nation­al cen­tral bank gov­er­nors who do not get to vote can still take part in the ses­sion with the right to speak, “so they can always join in the dis­cus­sion”, Kothe told reporters. “The Euro­pean Cen­tral Bank is a Euro­pean insti­tu­tion which looks after Euro­pean inter­ests, not nation­al ones.”

    Once Lithua­nia joins, the five largest economies with the biggest finan­cial sec­tors will share four votes. On cur­rent rank­ings that means Ger­many, France, Italy, Spain and the Nether­lands. The remain­ing 14 coun­tries will get 11 votes.

    The sys­tem was set by the ECB and the EU in 2003, but so far the num­ber of mem­ber coun­tries has not increased enough to trig­ger the rota­tion sys­tem.

    Alter­ing the new rules would require an EU treaty change, which needs a unan­i­mous vote. Lack of sup­port from the Ger­man gov­ern­ment makes that unlike­ly.

    UNCHARTED WATERS

    Tak­ing turns to vote will affect all euro zone mem­bers, but will be more keen­ly felt in Ger­many, whose cen­tral bank served as a blue­print for the ECB. Its influ­ence has since shrunk and sup­port for its stern views on mon­e­tary pol­i­cy has dimin­ished dur­ing the euro zone debt cri­sis.

    But as the ECB moves deep­er into unchart­ed waters, some non-Ger­man cen­tral bankers also believe the bloc’s largest econ­o­my should main­tain a con­stant lev­el of influ­ence, par­tic­u­lar­ly as mon­e­tary pol­i­cy deci­sions could move clos­er to the fis­cal realm.

    The ECB could ulti­mate­ly start buy­ing sov­er­eign or pri­vate debt in the mar­ket to keep the euro zone from enter­ing a spi­ral of weak or falling prices, which would slow growth and curb con­sump­tion, though such a step has not been need­ed so far.

    The Alter­na­tive for Ger­many (AfD), a small Euroscep­tic par­ty found­ed last year which threat­ens to steal right-wing votes from Chan­cel­lor Angela Merkel’s Chris­t­ian Democ­rats (CDU), is push­ing to pre­serve the Bun­des­bank’s influ­ence.

    AfD leader Bernd Lucke wants to annul the agreed rota­tion of votes “to ensure that sta­bil­i­ty-ori­ent­ed cen­tral banks like the Ger­man Bun­des­bank always have a vot­ing right appro­pri­ate to their sta­tus”, he told Han­dels­blatt news­pa­per’s online edi­tion.

    Vot­ing rights should depend on the share of ECB cap­i­tal, to which Ger­many con­tributes around 27 per­cent, Lucke said.

    Con­ser­v­a­tive Ger­man law­mak­er Klaus-Peter Willsch from the CDU also called for a rule change. “It must not be accept­ed that (Bun­des­bank Pres­i­dent Jens) Wei­d­mann will be tem­porar­i­ly with­out a vot­ing right,” he told Die Welt news­pa­per.

    So far, the Bun­des­bank has tak­en a prag­mat­ic view, stress­ing that all coun­tries will still have a voice in ECB dis­cus­sions and that gov­er­nors are not meant to rep­re­sent their coun­try’s inter­ests on the coun­cil but those of the whole bloc.

    As we can see, it’s not only the AfD call­ing for giv­ing Ger­many a per­ma­nent seat on the ECB coun­cil oppos­ing. Some of Merkel’s own CDU mem­bers are call­ing for a per­ma­nent Ger­man seat too. So when Ger­many’s Finance Min­istry says that it does­n’t see any rea­son to change the treaty “at this time”, the obvi­ous next ques­tion is “ok, so when is as good time?” A sud­den finan­cial cri­sis that over­whelms the exist­ing bailout struc­ture (cre­at­ed in the new EU bank­ing union) could be such a cat­a­lyst. Or how about a slow motion polit­i­cal cri­sis?

    Ger­man euroscep­tics go main­stream in threat to Merkel

    By Noah Barkin and Stephen Brown

    BERLIN Sun Jun 15, 2014 6:09am EDT

    (Reuters) — The Alter­na­tive for Ger­many (AfD) failed to make as big a splash in Euro­pean elec­tions last month as its euroscep­tic coun­ter­parts in France and Britain. But that may be about to change.

    Less than a month after the vote, the par­ty formed last year by a group of rene­gade aca­d­e­mics is on track to estab­lish itself as a per­ma­nent force in Ger­man pol­i­tics and a long-term headache for Chan­cel­lor Angela Merkel and her Chris­t­ian Democ­rats (CDU).

    The admis­sion last week of the AfD into British Prime Min­is­ter David Cameron’s con­ser­v­a­tive fac­tion in the Euro­pean Par­lia­ment has giv­en the par­ty a dose of cred­i­bil­i­ty and its lead­ers a boost in their dri­ve to dis­tance the AfD from the pop­ulist, anti-immi­grant move­ments of France’s Marine Le Pen and Geert Wilders of the Nether­lands.

    After a pro­fes­sion­al­ly run EU cam­paign in which the par­ty spoke less about its sig­na­ture issue, the euro, and more about con­ser­v­a­tive Ger­man val­ues, poll­sters say the AfD is being seen by a grow­ing num­ber of vot­ers as a legit­i­mate, demo­c­ra­t­ic par­ty to the right of the CDU, and less like a flash in the pan.

    Ahead of three region­al elec­tions in east­ern Ger­many which are like­ly to vault the AfD into state assem­blies for the first time, their rise is unset­tling mem­bers of the CDU, with some now sug­gest­ing their par­ty con­sid­er coop­er­at­ing with the upstarts they had hoped would fade away.

    “The AfD is estab­lish­ing itself as a nation­al con­ser­v­a­tive par­ty, the kind that could­n’t emerge after 1949 (when West Ger­many was found­ed) but has a tra­di­tion in pre-war Ger­many,” said Ulrike Guerot of the Open Soci­ety Ini­tia­tive for Europe.

    Its core sup­port­ers are not rabid xeno­phobes, as Ger­many’s main­stream par­ties have seemed to sug­gest, but church-going tra­di­tion­al­ists who believe in con­ser­v­a­tive fam­i­ly val­ues, are deeply wor­ried about the loose poli­cies of the Euro­pean Cen­tral Bank (ECB) and want Ger­many to cure its own ills rather than help its euro part­ners.
    ...

    Note that the state­ment, “its core sup­port­ers are not rabid xeno­phobes, as Ger­many’s main­stream par­ties have seemed to sug­gest, but church-going tra­di­tion­al­ists who believe in con­ser­v­a­tive fam­i­ly val­ues”, sort of leaves out the AfD’s prob­lems with far-right infil­tra­tion and the use of slo­gans alarm­ing­ly close to the NPD’s dur­ing last fal­l’s elec­tions.

    Con­tin­u­ing...

    ...

    “Until now these vot­ers had stuck with the CDU. But under Merkel the CDU has lost much of its con­ser­v­a­tive fla­vor,” Guerot said.

    BROADER MESSAGE

    In the Ger­man fed­er­al elec­tion last Sep­tem­ber, the AfD fell just shy of the 5 per­cent thresh­old need­ed to enter the Bun­destag low­er house of par­lia­ment.

    Some experts pre­dict­ed the par­ty would with­er away like the once trendy Pirates par­ty, and in the months after the Ger­man vote that looked like a good bet. At the turn of the year, media reports on the AfD described a par­ty in cri­sis, beset by infight­ing and strug­gling to stem an exo­dus of mem­bers.

    Most dam­ag­ing, in a coun­try where far-right views are not tol­er­at­ed in pol­i­tics because of the Nazi past, were alle­ga­tions the AfD was being hijacked by extrem­ists.

    But leader Bernd Lucke, a 51-year-old eco­nom­ics pro­fes­sor and father of five, appears to have silenced the more rad­i­cal ele­ments in the par­ty and broad­ened out the AfD’s mes­sage.

    At its found­ing, it was a one issue par­ty call­ing for a return to the Deutsche Mark. Dur­ing the recent EU cam­paign it talked as much about edu­ca­tion, domes­tic secu­ri­ty and sup­port for small busi­ness­es as it did about the euro, scor­ing 7 per­cent.

    These are the themes region­al AfD leader Frauke Petry hopes will secure the par­ty a dou­ble-dig­it result in an elec­tion in the east­ern state of Sax­ony in late August. State votes in Thuringia and Bran­den­burg fol­low two weeks lat­er.

    “If we get into all three state assem­blies it would estab­lish the AfD as a sta­ble force in Ger­man pol­i­tics,” said Petry, a 39-year-old chemist and founder of a small busi­ness that makes sealant for tires.

    “The fact that we are now work­ing with Britain’s Tories in Brus­sels shows we’ve arrived on the Euro­pean scene. We’ll use this in the elec­tion cam­paign to send a sig­nal to vot­ers about our legit­i­ma­cy.”

    Sax­ony, which shares a bor­der with Poland and the Czech Repub­lic, has been ruled by Merkel’s CDU ever since Ger­man reuni­fi­ca­tion in 1990. It is the last state in the coun­try where the CDU gov­erns with the Free Democ­rats (FDP), its tra­di­tion­al ally on the right but now a par­ty in free fall.

    The FDP’s weak­ness may force the CDU to look for anoth­er part­ner this time around. And offi­cials like Stef­fen Flath, CDU leader in the region­al par­lia­ment in Sax­ony, believe his par­ty can­not afford to rule out coop­er­a­tion with the AfD.

    That seems high­ly unlike­ly giv­en strict orders from Merkel that the par­ty steer clear of the AfD. But if a sim­i­lar sce­nario plays out in oth­er states over the com­ing years, the CDU could face the same fate as the cen­ter-left Social Democ­rats (SPD), crip­pled half a decade ago by a divi­sive inter­nal debate over coop­er­a­tion with the rad­i­cal Left par­ty.

    “I think the elec­tions in the east­ern states are com­ing too ear­ly for the CDU to con­sid­er chang­ing its stance on work­ing with the AfD,” said Ger­man poll­ster Klaus-Peter Schoepp­n­er.

    “But if the AfD plays its cards right, there will be peo­ple in the CDU who say it needs to con­sid­er the AfD option for the next fed­er­al elec­tion in 2017.”

    SCARED OLD MEN

    ...

    Under Merkel, the par­ty that has shift­ed to the left, embrac­ing a min­i­mum wage, renew­able ener­gy, female quo­tas in board­rooms and rental caps.

    This has been wel­comed by the broad­er Ger­man elec­torate, which re-elect­ed Merkel to a third term in Sep­tem­ber with her par­ty’s strongest score since reuni­fi­ca­tion.

    But the pol­i­cy shift, and Merkel’s sup­port for euro bailouts and accom­moda­tive ECB poli­cies, have also alien­at­ed a core group of CDU tra­di­tion­al­ists, open­ing the door to the AfD and its Ger­many-first, con­ser­v­a­tive val­ues mes­sage.

    “I real­ly don’t know what the CDU stands for today,” com­plained Rein­hold Festge, head of the Ger­man Engi­neer­ing Asso­ci­a­tion (VDMA) in a news­pa­per inter­view last week. “My par­ty has lost most of its iden­ti­ty. This sad­dens and infu­ri­ates me.”

    Guerot of the Open Soci­ety Ini­tia­tive believes the AfD, fueled by CDU defec­tors, has the poten­tial to grab up to 10 per­cent of the vote in Ger­many.

    This would put it on a par with more estab­lished par­ties like the Greens and Left — and pro­found­ly change the Ger­man polit­i­cal land­scape.

    Could the rise of the AfD bring about the rise of a reac­tionary CDU? We’ll see. But keep in mind that with the way the bank­ing union is struc­tured — with a 55 bil­lion euro fund that observers view as far too small to deal with anoth­er EU-wide finan­cial cri­sis — the pos­si­bil­i­ty of future finan­cial crises mor­ph­ing into a polit­i­cal cri­sis is still very acute. A bailout scheme that inevitable requires its own bailout prob­a­bly isn’t going to be polit­i­cal­ly viable in Ger­many once the next cri­sis hits. So a revis­i­ta­tion of the struc­ture of the ECB’s gov­ern­ing coun­cil may not be on the agen­da “at the moment”, but it’s prob­a­bly going to hap­pen soon­er or lat­er.

    Posted by Pterrafractyl | June 22, 2014, 6:37 pm
  2. Here’s some­thing to watch: The ECB is rewrit­ing the rules for the big bank­ing stress tests after Ger­many’s banks balked at some of the pro­vi­sions. The first com­plaint relates to the con­fi­den­tial­i­ty require­ment for the results the ECB is plan­ning on com­mu­ni­cat­ing to banks on the results of their stress test in advance of mak­ing the results pub­lic. Ger­man banks are mak­ing argu­ing that such an agree­ment could run foul of Ger­many’s mar­ket dis­clo­sure laws. And the sec­ond com­plaint is over the fact that this pri­vate dis­clo­sure peri­od is only 48 hours before the results are made pub­lic, which the banks say is too lit­tle time. So now the rules are chang­ing:

    ECB to change bank secre­cy agree­ment amid legal doubts

    Tue Sep 16, 2014 10:29am EDT

    (Reuters) — The Euro­pean Cen­tral Bank (ECB) will change a non-dis­clo­sure agree­ment with banks under­go­ing its stress tests after com­plaints from Ger­man banks that they risked get­ting into con­flict with laws requir­ing them to dis­close price-sen­si­tive infor­ma­tion.

    >Ger­man banks have refused to sign a con­fi­den­tial­i­ty agree­ment which requires them to remain silent about meet­ings planned for Sep­tem­ber, at which the reg­u­la­tor will offer gen­er­al guid­ance about the results of the tests which will be pub­lished in late Octo­ber.

    In a let­ter to the ECB’s top reg­u­la­tors, the Ger­man Bank­ing Indus­try Com­mit­tee — an umbrel­la asso­ci­a­tion rep­re­sent­ing the likes of Deutsche Bank (DBKGn.DE), Com­merzbank (CBKG.DE) and thou­sands of unlist­ed coop­er­a­tive and sav­ings banks — warned of “sig­nif­i­cant risks” and said the ECB’s demands to keep mum about the so-called super­vi­so­ry dia­logue put banks in con­flict with laws requir­ing dis­clo­sure of price-sen­si­tive infor­ma­tion.

    The ECB told Reuters it was plan­ning to alter the con­fi­den­tial­i­ty pact.

    ...

    The ECB is putting some 130 of the euro zone’s largest banks through checks of their abil­i­ty to with­stand future crises before it becomes their super­vi­sor in Novem­ber.

    The Ger­man Bank­ing Indus­try Com­mit­tee said the ECB’s plans did not allow them enough time to ana­lyze and ver­i­fy the test results once they are revealed as planned in the sec­ond half of Octo­ber. It called on the ECB for more time and trans­paren­cy to deal with the results.

    Sep­a­rate­ly, the com­mit­tee also crit­i­cized ECB plans to guard against data leaks by giv­ing banks just 48 hours to review the full results of the bal­ance sheet checks before the ECB makes them pub­lic.

    “This lead time is by no means suf­fi­cient for a review of the respec­tive data,” the com­mit­tee said in a let­ter to Daniele Nouy, head of the ECB’s super­vi­so­ry board, and Exec­u­tive Board mem­ber Sabine Laut­en­schlaeger.

    The committee’s com­plaint comes short­ly after Germany’s sav­ings bank asso­ci­a­tion accused the ECB of act­ing arbi­trar­i­ly and incon­sis­tent­ly, say­ing its pro­ce­dures seemed designed to dis­ad­van­tage the strongest insti­tu­tions.

    So there appears be sig­nif­i­cant con­cern about the report­ing of these stress test results com­ing from Ger­many’s banks which seems a lit­tle odd giv­en the rel­a­tive strength of the Ger­man banks com­pared to the rest of the EU. And yet, as the arti­cle below points out, “in par­tic­u­lar, bankers are con­cerned that the 48-hour win­dow does not give them time to con­test the ECB’s find­ings if a large cap­i­tal short­fall is dis­cov­ered.” So is a “a large cap­i­tal short­fall” expect­ed at this point?

    Finan­cial Times

    Sep­tem­ber 16, 2014 7:03 pm
    Lenders hit at ECB over secre­cy agree­ments

    By Alice Ross in Frank­furt

    The Euro­pean Cen­tral Bank has come under fire from banks after ask­ing them to sign secre­cy agree­ments ahead of the results of sweep­ing stress tests that are prob­ing the bal­ance sheets of the eurozone’s largest lenders.

    The Ger­man bank­ing asso­ci­a­tion warned in a pri­vate let­ter that it had “seri­ous con­cerns” with the way the ECB is han­dling its probe of Euro­pean banks’ bal­ance sheets as the cen­tral bank pre­pares to give lenders feed­back on the exer­cise this month.

    The let­ter, a copy of which was seen by the Finan­cial Times, was sent to Danièle Nouy, head of the ECB’s new bank­ing super­vi­sion arm, and her deputy Sabine Laut­en­schlaeger on Sun­day.

    ...

    The feed­back process has raised con­cerns that banks could be required to make dis­clo­sures to the mar­ket under Euro­pean Union laws gov­ern­ing insid­er deal­ing and mar­ket manip­u­la­tion. Peo­ple famil­iar with the process have insist­ed that any feed­back will be par­tial and will not be detailed enough to force the banks to make a state­ment to the mar­ket. Banks have been asked to sign non-dis­clo­sure agree­ments with the ECB to min­imise the risk of mar­ket leaks, with a dead­line of 15 Sep­tem­ber that has now been missed.

    In the let­ter, the Ger­man bank­ing asso­ci­a­tion com­plained that banks have still not had enough infor­ma­tion about how the stress tests and the asset qual­i­ty review will be com­bined, a process the ECB refers to as “the join-up”. Banks are also unhap­py about plans to inform them of their offi­cial results just 48 hours before they are pub­lished to the mar­ket.

    “Par­tic­i­pat­ing banks need more trans­paren­cy on the mechan­ics of the join-up in order to under­stand in detail the cal­cu­la­tions made by the ECB,” the let­ter states.

    In par­tic­u­lar, bankers are con­cerned that the 48-hour win­dow does not give them time to con­test the ECB’s find­ings if a large cap­i­tal short­fall is dis­cov­ered. One per­son famil­iar with the let­ter said that bankers are con­cerned they could be vul­ner­a­ble to legal action from share­hold­ers if they sign off on the ECB’s judg­ment and are then unable to defend them­selves because of the non-dis­clo­sure agree­ment, which cur­rent­ly has no time lim­it.

    The ECB said that the inten­tion had always been that banks would be able to dis­cuss their results with investors after they were pub­lished. ‘We’re work­ing close­ly with banks and as part of this, we will address feed­back received on the non-dis­clo­sure agree­ment in a revised ver­sion to issue to banks in the com­ing days.”

    It’ll be inter­est­ing to see how the rules are changed. It’ll also be inter­est­ing to see which large Ger­man finan­cial insti­tu­tions would have had rea­son to be con­cerned about what to do in that 48 hour peri­od if their stress tests showed a large cap­i­tal short­fall...

    Posted by Pterrafractyl | September 16, 2014, 11:08 am
  3. Here’s an update on the loom­ing bank­ing stress tests: Deutsche Bank might be in the clear for a cap­i­tal short­fall. Com­merzbank, on the oth­er hand, might have a bit of a prob­lem. And it’s not the only one:

    Finan­cial Times
    Cap­i­tal short­falls like­ly to emerge from unprece­dent­ed ECB probe

    By Sam Flem­ing and Alice Ross
    Sep­tem­ber 17, 2014 4:54 pm

    The probe of the euro area bank­ing sec­tor being led by the Euro­pean Cen­tral Bank has been billed as a once-and-for-all oppor­tu­ni­ty to kill the lin­ger­ing cri­sis of con­fi­dence that is ham­per­ing lend­ing in the region.

    But amid huge uncer­tain­ty over the like­ly results at the end of next month, observers of the process cau­tion that the out­come may prove less deci­sive than some have hoped.

    The ini­tial answers thrown up by the exer­cise in late Octo­ber will leave grey areas and scope for hag­gling, and the full reper­cus­sions of the so-called Asset Qual­i­ty Review which has lain at the heart of the exer­cise may not become clear for many months. With only weeks to go before the results are dis­closed, there is no clear con­sen­sus on what the out­come will be.

    A poll by Gold­man Sachs of insti­tu­tion­al investors shows nine banks that are expect­ed to have cap­i­tal short­falls, led by Ban­ca Monte dei Paschi di Siena, Com­merzbank and Mil­len­ni­um BCP, lead­ing to €51bn of funds in cap­i­tal rais­ings expect­ed on aver­age.

    Few­er investors now expect sig­nif­i­cant cap­i­tal holes to be exposed, how­ev­er, with a sharp decline in the num­ber of respon­dents expect­ing more than €100bn to be raised over­all.

    Nick Ander­son, a bank­ing ana­lyst at Beren­berg, warns that there is mar­ket com­pla­cen­cy around the ECB’s health check – despite what he believes to be deep-root­ed issues in the Euro­pean bank­ing sys­tem.

    “The over­whelm­ing con­sen­sus is that the tests are a non-event and there will be few prob­lems,” he says. But he adds: “I’m con­vinced there are large scale hid­den loan loss­es.”

    The health checks are the most com­plex and far-reach­ing such exer­cise in euro area his­to­ry, cov­er­ing 85 per cent of all bank­ing assets in the region and prob­ing more than 130 lenders.

    The exer­cise, com­pris­ing the AQR and a set of stress tests, is an attempt to scotch the region’s rep­u­ta­tion for avoid­ing prob­lems with its bank­ing sec­tor. It will be crit­i­cal to the rep­u­ta­tion of the ECB’s new Sin­gle Super­vi­so­ry Mech­a­nism, which takes over reg­u­la­tion of major banks in Novem­ber.

    ...

    Banks will take their two weeks’ grace peri­od – where they have to come up with plans to plug any cap­i­tal hole – to make the best case they can as to why exist­ing or planned cuts could count towards paint­ing their finances in a bet­ter light.

    The details of these plans, which will be pre­sent­ed to the ECB, will not be made pub­lic, accord­ing to a per­son famil­iar with the exer­cise. Kin­ner Lakhani, an ana­lyst at Citi, esti­mates an ini­tial short­fall of €28bn across the sec­tor that will fall to just €12bn once bal­ance sheet repairs in 2014 are tak­en into account.

    The process will trig­ger a fur­ther, longer-term set of impli­ca­tions. Nico­las Véron, of the Peter­son Insti­tute think-tank, expects inten­sive dis­cus­sions between banks and reg­u­la­tors fol­low­ing the AQR find­ings, with the result that some lenders end up mod­i­fy­ing account­ing and val­u­a­tion prac­tices. This could have a sig­nif­i­cant, longer-term impact on reg­u­la­to­ry cap­i­tal – and many investors are not ready for it, he argues.

    “This is, in effect, the bad news to come – the impact of the Com­pre­hen­sive Assess­ment will be felt long after Octo­ber,” says Mr Véron. “This makes it more dif­fi­cult to assess the impact of the AQR on the day of the result. There could be a long sequence of recap­i­tal­i­sa­tions and restruc­tur­ings that last beyond the ini­tial six to nine months fol­low­ing the Octo­ber announce­ment.”

    ...

    So it sounds like Deutsche Bank has prob­a­bly already raised the cap­i­tal it needs but Com­merzbank might fall short. And Nico­las Veron of the pro-aus­ter­i­ty Peter­son Insti­tute is pre­dict­ing that the bank­ing stress tests are going to cause much more sig­nif­i­cant, long-term impacts than the mar­kets appear to be expect­ing although, in the arti­cle below, it’s not Com­merzbank that faces the biggest shake­up. It’s the pub­licly owned banks, like the Ger­man Lan­des­banks, that are the like­li­est to be over­hauled and/or pri­va­tized:

    EurAc­tive
    ECB stress tests to chal­lenge Ger­many’s Lan­des­banken
    Pub­lished: 17/09/2014 — 12:38 | Updat­ed: 17/09/2014 — 14:41

    For the first time since the finan­cial cri­sis struck in 2008, the Euro­pean Union is car­ry­ing out stress tests that could force change at banks with strong polit­i­cal con­nec­tions, such as Ger­many’s region­al banks — the “Lan­des­banken”.

    The Euro­pean Cen­tral Bank (ECB) is lead­ing the lat­est attempt to uncov­er prob­lems that would endan­ger any lender’s sur­vival in a future cri­sis. Unlike the three pre­vi­ous efforts, which were ham­strung by nation­al author­i­ties’ reluc­tance to expose their banks’ weak­ness­es, Frank­furt has a vest­ed inter­est in reveal­ing prob­lems before it takes over as super­vi­sor in Novem­ber.

    ...

    “The last time the process was done at the nation­al lev­el by the same old super­vi­sors,” said Nico­las Veron, an expert on bank­ing at the Bruegel think-tank in Brus­sels and the Peter­son Insti­tute for Inter­na­tion­al Eco­nom­ics in Wash­ing­ton.

    “Here, we have a com­plete­ly new pair of eyes, and the ECB has every incen­tive to be tough because the ECB does­n’t own the present fail­ures but it will own the future fail­ures.”

    The tests are like­ly to force some banks into rais­ing more cash to prove they can with­stand anoth­er down­turn with­out the tax­pay­er-fund­ed res­cues that a num­ber need­ed in the last cri­sis.

    But cru­cial­ly, EU rules restrict­ing state aid have been tough­ened since the last stress tests in 2011. This means any bank seek­ing gov­ern­ment mon­ey to fill a hole revealed by the ECB review may have to restruc­ture its busi­ness, as well as forc­ing loss­es on share­hold­ers and junior cred­i­tors if the Euro­pean Com­mis­sion decides the injec­tion rep­re­sents state aid.

    Ger­many’s HSH Nord­bank, major­i­ty owned by the local gov­ern­ments of Ham­burg and Schleswig-Hol­stein, and a major lender to the trou­bled ship­ping indus­try, flagged this restruc­tur­ing risk in a note accom­pa­ny­ing its half-year results.

    HSH has said it is con­fi­dent it will pass the tests, the results of which are expect­ed in late Octo­ber, but some ana­lysts see it as one of the Ger­man lenders at risk of fail­ing.

    If it were unable to fill any cap­i­tal hole itself and need­ed its local gov­ern­ment own­ers to step in, Brus­sels could order HSH to close down as it has already received €13 bil­lion in guar­an­tees and cap­i­tal from Ger­man tax­pay­ers.

    The Com­mis­sion nor­mal­ly requires banks that receive state aid at least to under­go sub­stan­tial restruc­tur­ing, shrink their bal­ance sheets and spin off some activ­i­ties to avoid dis­tort­ing com­pe­ti­tion with healthy lenders. All such aid has to be noti­fied to the EU com­pe­ti­tion com­mis­sion­er, who typ­i­cal­ly sets tough con­di­tions for approval.

    If any of Ger­many’s region­al banks, known as Lan­des­banken, do need help from their state own­ers, this could put the fed­er­al gov­ern­ment in Berlin on a col­li­sion course with Brus­sels. Such fund­ing would con­sti­tute state aid, but would not nec­es­sar­i­ly be ille­gal. EU rules per­mit gov­ern­ment help if it is linked to restruc­tur­ing, and the pub­lic own­er acts as a ratio­nal investor.

    In their coali­tion agree­ment, Ger­many’s gov­ern­ment par­ties said help from pub­lic sec­tor own­ers fol­low­ing the ECB tests should be treat­ed in the same way as that from pri­vate own­ers.

    “That is a polit­i­cal promise that I trust,” Liane Buch­holz, man­ag­ing direc­tor of the VOEB asso­ci­a­tion of pub­lic sec­tor banks said. “It can­not be that one EU insti­tu­tion (the ECB) asks for a recap­i­tal­i­sa­tion and anoth­er EU insti­tu­tion (the Com­mis­sion) then sanc­tions this as state aid,” she said, adding that the VOEB was con­fi­dent all Lan­des­banken would pass the tests.

    Spe­cial favours?

    Euro­pean tax­pay­ers shelled out €1.6 tril­lion euros to guar­an­tee and sup­port their banks between 2008 and 2010 alone. To ensure this nev­er hap­pens again, EU lead­ers agreed to cre­ate a bank­ing union so that investors, rather than the pub­lic, pick up the tab when banks get into trou­ble.

    As a major step towards Europe’s long-term goal of break­ing the link between gov­ern­ments and banks, the after­math of the ECB’s tests will be close­ly watched.

    “Will there be no spe­cial favours for banks that have pow­er­ful polit­i­cal spon­sors? To me, that is going to be the test,” said Veron. “If there is noth­ing that changes in the Lan­des­bank land­scape after results of the com­pre­hen­sive assess­ment, many peo­ple will be sur­prised and dis­ap­point­ed.

    It is hard to say yet whether nation­al gov­ern­ments will be able to influ­ence the size of the cap­i­tal holes revealed or the treat­ment of any pub­lic funds used to plug short­falls.

    Fran­co-Bel­gian lender Dex­ia, which has had €12 bil­lion euros in state aid and is being wound down, won a pow­er­ful con­ces­sion by not hav­ing to prove it could with­stand a finan­cial cri­sis in the tests, accord­ing to sources famil­iar with the mat­ter.

    On the oth­er hand, the ECB has over­ruled Ger­man objec­tions, and is mak­ing banks such as HSH Nord­bank and fel­low Lan­des­bank Nord LB as well as Com­merzbank use more con­ser­v­a­tive val­u­a­tions for their ship­ping loans, sources have told Reuters.

    This treat­ment is one of the rea­sons why some ana­lysts believe these three banks might fail the stress test and bal­ance sheet review. The banks them­selves have said they are well pre­pared for the scruti­ny.

    The ECB is giv­ing lenders 6–9 months to fill any cap­i­tal short­falls it uncov­ers; they are expect­ed to sell shares, cut div­i­dends, raid earn­ings and sell assets and bonds to do so.

    Euro­zone banks under­go­ing the ECB’s tests have increased their cap­i­tal buffers by €103.5 bil­lion since June last year, near­ly half of it by sell­ing shares on the stock mar­ket.

    Banks with­out a stock mar­ket list­ing — around half of the 130 or so being test­ed in the euro­zone — are more con­strained in their abil­i­ty to raise extra cap­i­tal.

    Cred­it rat­ings agency Fitch said Aus­tri­an coop­er­a­tive bank Volks­banken, which has been bailed out three times by the gov­ern­ment since 2008, may need yet more state aid because it looks like­ly to fail the ECB review.

    Exter­nal impe­tus

    Polit­i­cal­ly-con­nect­ed banks have been at the heart of Europe’s finan­cial cri­sis. These ranged from Hypo Alpe-Adria, a sleepy Aus­tri­an provin­cial lender until it raised its expo­sure to the Balka­ns with the back­ing of late far-right leader Jörg Haider, to Spain’s sav­ings banks or “cajas”, whose prop­er­ty loan binges were approved by politi­cians sit­ting on their boards.

    Exter­nal insti­tu­tions have had some suc­cess in dilut­ing the inter­play of local pol­i­tics and high finance in Europe.

    The Com­mis­sion can­celled state guar­an­tees for the Ger­man Lan­des­banken in 2001 and it sound­ed the death knell of West­LB, once the biggest, which was wound down in 2012 after repeat­ed bailouts on the back of trad­ing scan­dals and loss­es.

    The IMF and the EU pushed Spain effec­tive­ly to do away with the sav­ings bank mod­el after the coun­try was forced into a €41.3 bil­lion bailout due to their prop­er­ty loss­es. Spain has replaced the cajas with a sys­tem of more tight­ly-reg­u­lat­ed bank­ing foun­da­tions which in turn are share­hold­ers in com­mer­cial banks.

    But even this sys­tem, and Spain’s hand­ful of coop­er­a­tive banks, could face fur­ther changes when the ECB takes over as super­vi­sor and lenders come under ever greater pres­sure to beef up their cap­i­tal, push­ing them to bring in out­side investors and over­haul­ing their struc­ture.

    Italy’s coop­er­a­tive banks, owned by their cus­tomers and employ­ees, could also come under pres­sure to reform their own­er­ship mod­el if they are revealed to have large cap­i­tal holes that require them to raise more funds from investors.

    Although some of these “popo­lari” banks are list­ed on the stock mar­ket, they give all share­hold­ers the same vot­ing rights regard­less of the size of their hold­ings.

    The one-investor-one-vote rule, designed to bind the popo­lari to their region, has not pre­vent­ed them rais­ing €4.3 bil­lion in equi­ty so far this year, but investors could demand a greater say in a sec­ond round of rights issues.

    “I would not rule out that some popo­lari banks, espe­cial­ly if they fare par­tic­u­lar­ly poor­ly in the asset-qual­i­ty-review and stress tests, may be under some pres­sure to switch to the stan­dard gov­er­nance mod­el,” said Andrea Resti, pro­fes­sor of finance at Boc­coni Uni­ver­si­ty and a mem­ber of the super­vi­so­ry board for UBI Ban­ca.

    Crit­ics of the Lan­des­banken hope that hav­ing the ECB as super­vi­sor will force more change. The banks have already shrunk their bal­ance sheets by 40% since the cri­sis, part­ly due to restruc­tur­ing plans agreed with Brus­sels.

    “The polit­i­cal affil­i­a­tion with the Lan­des­banken is too strong, so reforms from with­in Ger­many are not very like­ly to hap­pen,” said Jörg Rocholl, pres­i­dent of the Euro­pean School of Man­age­ment and Tech­nol­o­gy (ESMT) in Berlin. “This exter­nal impe­tus may lead to change.”

    The IMF and the OECD have both called for more pri­vate own­er­ship of the Lan­des­banken to boost their prof­itabil­i­ty, which was weak even before the cri­sis struck, and to dilute the influ­ence of local politi­cians who sit on their super­vi­so­ry boards.

    Buch­holz said pri­vatis­ing the Lan­des­banken did not make sense because their eco­nom­ic posi­tion had improved since the cri­sis and she defend­ed hav­ing politi­cians help over­see their activ­i­ties. “Exper­tise is impor­tant for mem­ber­ship of a super­vi­so­ry board. I don’t think it’s fair to assume that politi­cians per se don’t have the nec­es­sary exper­tise.”

    Could we be see­ing the begin­ning of the end for the Lan­des­banks and oth­er pub­licly-owned EU banks? As Nicholas Veron of the Peter­son Insti­tute indi­cat­ed, there’s an incen­tive for the ECB to “play tough” in order to avoid­ing “own­ing” any future crises, and it sounds like the pub­licly owned banks are clear­ly in the cross hairs of insti­tu­tions like the IMF and OECD (and the major pri­vate banks pre­sum­ably would­n’t mind forced pri­va­ti­za­tions of their pub­licly owned brethren). So it’s cer­tain­ly look­ing like a major overhaul/privatization of the EU’s pub­lic bans could be on the way.

    And since the IMF and OECD also have greater prof­itabil­i­ty in mind as one of the goals of a pub­lic sec­tor bank­ing over­haul, it’s worth point­ing out that the Ger­man Lan­des­banks’ big dive into risky secu­ri­ties and lend­ing prac­tices was pre­cip­i­tat­ed by a 2001 change in the laws that sched­uled the removal of the Lan­des­banks’ state-back­ing by 2005, rais­ing their bor­row­ing costs and help­ing to fuel prop­er­ty bub­ble across the EU by caus­ing a chase for high­er yield­ing invest­ments. So that pre­vi­ous attempt to reduce the link between Ger­many’s banks and the pub­lic sec­tor (a link that new EU bank bailout rules are designed to sev­er across the EU) end­ed up encour­ag­ing the kind of behav­ior that led to the sit­u­a­tion requir­ing a large num­ber pub­lic bailouts for the Lan­des­banks any­ways after the finan­cial cri­sis. It’s a reminder that prof­itabil­i­ty and sta­bil­i­ty are gen­er­al­ly mutu­al­ly con­tra­dic­to­ry in the world of finance which is impor­tant to keep in mind since it looks like both greater prof­itabil­i­ty and sta­bil­i­ty are the goals going forward...unless all of the “too big to fail” banks are pre­emp­tive shrunk down to a “small enough to fail” size. Some­thing’s got to give.

    Posted by Pterrafractyl | September 18, 2014, 12:45 pm
  4. Here’s anoth­er fol­lowup on the loom­ing shake up in the EU finan­cial sys­tem fol­low­ing the stress tests next month: It’s an arti­cle from 1999 dis­cussing the fight between Brus­sels and Berlin to strip the state back­ing of the Lan­des­banks. And that’s cer­tain­ly a legit­i­mate top­ic for debate, espe­cial­ly for banks that played as sig­nif­i­cant roles in the finan­cial bub­bles out­side of their home coun­tries like the Lan­des­banks. But it’s notable that the pri­vate banks, includ­ing Deutsche Bank, were amongst the biggest back­ers of strip­ping the state guar­an­tees in part because the Lan­des­banks could lend at cheap­er rates vs their pri­vate sec­tor part­ner not only because of the state backed guar­an­tees but also because they did­n’t need to be quite as prof­it-ori­ent­ed as their pri­vate coun­ter­parts. Today, the Lan­des­banks have already lost their state guar­an­tees although they still got bailed out with much of the rest of the bank­ing sec­tor, they’re still pub­licly owned, and that pub­lic own­er­ship has an implied state back­ing (although that implied pub­lic back­ing could change with the new EU bank­ing union). So this pub­lic vs pri­vate dynam­ic is some­thing to keep in mind should pub­lic banks across the EU end up fail­ing the stress tests because there’s lit­tle rea­son to believe Deutsche Bank and the oth­er big pri­vate banks that want­ed to gob­ble up the pub­lic banks back in 1999 aren’t still hun­gry:

    Bloomberg Busi­ness­week
    Bank­ing: It’s Brus­sels Vs. Berlin (Int’l Edi­tion)
    Novem­ber 14, 1999

    By David Fair­lamb in Frank­furt
    The EC says Ger­man state banks have an unfair advan­tage

    For years, Ger­many’s state-backed Lan­des­banks have been a thorn in the side of the coun­try’s pri­vate banks. With the sup­port of state and fed­er­al offi­cials, they have expand­ed aggres­sive­ly by lend­ing to local com­mu­ni­ties and com­pa­nies on terms that pri­vate banks could­n’t match. Those balmy days are about to end. In July, the Euro­pean Com­mis­sion ruled that Dus­sel­dor­f’s West­deutsche Lan­des­bank, Ger­many’s fourth-largest bank by assets, must repay $860 mil­lion-plus in inter­est to its main own­er, the state of North Rhine-West­phalia, which gave it a huge sub­sidy in 1992. Now, Mario Mon­ti, the EC’s com­pe­ti­tion com­mis­sion­er, wants to end the priv­i­leged sta­tus of pub­lic-sec­tor com­pa­nies in gen­er­al. If he suc­ceeds, as seems like­ly, West­LB and Ger­many’s 11 oth­er Lan­des­banks will suf­fer a dev­as­tat­ing blow.

    Mon­ti’s plan, which the EC will review lat­er this month, would even­tu­al­ly strip the Lan­des­banks of their state guar­an­tees. Lan­des­banks are house banks to state gov­ern­ments, han­dle whole­sale bank­ing for local sav­ings banks, and are usu­al­ly owned in part by the states. As a result, they ben­e­fit from their own­ers’ strong cred­it rat­ings. That means they can raise mon­ey up to 50 basis points cheap­er than pri­vate rivals–and offer bor­row­ers bet­ter terms. “The Lan­des­banks can do lots of big-tick­et lend­ing at knock-down rates,” says Jens Schmidt-Bugel, asso­ciate direc­tor for finan­cial insti­tu­tions at rat­ing agency Fitch IBCA in Lon­don. “They would­n’t be able to do that with­out their guar­an­tees and cred­it rat­ings.”

    The EC plans have wide sup­port out­side Ger­many. But West­L­B’s man­age­ment-board chair­man, Friedel Neu­ber, backed by the oth­er Lan­des­banks, is prepar­ing to fight them with every­thing he’s got. Pow­er­ful Ger­man politi­cians, from Chan­cel­lor Ger­hard Schroder to Finance Min­is­ter Hans Eichel and Wolf­gang Clement, prime min­is­ter of North Rhine-West­phalia, are also rush­ing to defend the sta­tus quo. That’s no sur­prise con­sid­er­ing the Lan­des­banks’ usu­al­ly spir­it­ed sup­port for the eco­nom­ic poli­cies of their polit­i­cal mas­ters. “There is going to be a huge bat­tle between Berlin and Brus­sels over this,” pre­dicts Mete­han Sen, a bank­ing ana­lyst at B. Met­zler seel. Sohn & Co., a pri­vate bank in Frank­furt. “The future of the entire Ger­man bank­ing sec­tor is at stake.”

    Ger­many’s pri­vate banks are root­ing for Mon­ti, too. They resent that the Lan­des­banks have bet­ter cred­it rat­ings than they do (table). What’s more, state gov­ern­ments are usu­al­ly sat­is­fied with more mea­ger returns on their shares than pri­vate bank share­hold­ers are, so the Lan­des­banks can lend even more aggres­sive­ly. Indeed, Ger­man pri­vate banks have been pushed into a cor­ner. Pri­vate banks in France, Spain, the Nordic coun­tries, and Benelux account for more than 40% of all domes­tic lend­ing, but in Ger­many, their share is below 20%. That’s why Com­merzbank Chief Exec­u­tive Mar­tin Kohlhaussen, who is chair­man of the Ger­man Bankers’ Assn., round­ly con­demns the Lan­des­banks’ priv­i­leges. “We aren’t play­ing by the same rules,” he com­plains.

    He has a point. If it weren’t for their state guar­an­tees, the Lan­des­banks would almost cer­tain­ly have less impres­sive rat­ings. West­LB and Bay­erische Lan­des­bank, for exam­ple, are grad­ed Aa1 and Aaa, respec­tive­ly. Yet both are sad­dled with mil­lions of dol­lars’ worth of non­per­form­ing loans in emerg­ing mar­kets and low returns on equi­ty of around 5.4%. Their cred­it rat­ings should prob­a­bly reflect their finan­cial-strength ratings–D and C.

    And it’s not just inside Ger­many that the Lan­des­banks are throw­ing their weight around. Over the past two decades, they have expand­ed aggres­sive­ly abroad. West­LB and Frank­furt’s Lan­des­bank Hes­sen-Thurin­gen now have siz­able cap­i­tal-mar­ket oper­a­tions in Lon­don and New York as well as Ger­many. Their close links to region­al gov­ern­ments also mean that pub­lic-sec­tor under­writ­ing man­dates come their way. They have become major issuers of bonds in their own right. Sarah-Jo Mil­lan, an ana­lyst at Bar­clays Cap­i­tal Inc. in Lon­don, fig­ures that the Lan­des­banks’ bond busi­ness has soared ten­fold, from $2.3 bil­lion in 1990 to $23.3 bil­lion last year. Their top rat­ings give them a big advan­tage in the deriv­a­tives busi­ness. They’re involved in local-gov­ern­ment financ­ing in Scan­di­navia, the Aus­tralian-dol­lar cap­i­tal mar­kets, and even Indi­an trade financ­ing. Now, they are push­ing hard into mon­ey man­age­ment. In April, West­LB Asset Man­age­ment Co. bought the Hous­ton-based fixed-income busi­ness of Nicholas-

    Apple­gate Cap­i­tal Man­age­ment; West­LB hopes to have $100 bil­lion under man­age­ment with­in three years. “They are far more active abroad than they would ever be with­out those guar­an­tees,” says Peter Vipond, a direc­tor of the British Bankers’ Assn. “They real­ly have an unfair advantage.”“LOGICAL.” Stripped of their guar­an­tees, the Lan­des­banks would need new sources of equi­ty to under­pin their vast bal­ance sheets and sprawl­ing empires. They would have to cut the range of ser­vices they offer and sell off busi­ness­es. Some might even be pri­va­tized. “The idea of sell­ing off Lan­des­banks has always been taboo,” says Met­zler’s Sen. “But it could be the log­i­cal thing if Brus­sels gets rid of their priv­i­leges.”

    Indeed, senior region­al politi­cians sus­pect that the likes of Deutsche Bank and Dres­d­ner Bank want to force the pri­va­ti­za­tion of the Lan­des­banks so they can buy them. “Obvi­ous­ly, we want Brus­sels to get rid of the guar­an­tees,” says a man­ag­ing board mem­ber at one of the largest pri­vate-sec­tor banks. “But we don’t want to irri­tate the politi­cians again. We’re scared of retal­i­a­tion.” The banks already irked some pols by com­plain­ing to the EC about the trans­fer of a pub­lic hous­ing agency to West­LB, which they claimed amount­ed to an unfair $1.4 bil­lion sub­sidy. That was the case Brus­sels decid­ed in their favor in July. Schroder imme­di­ate­ly appealed the rul­ing.

    ...

    How­ev­er much pres­sure comes from Ger­man pols, Com­mis­sion­er Mon­ti’s per­sis­tence is like­ly to pre­vail. Short run, he’s sug­ar­ing the pill by stress­ing that he isn’t tar­get­ing any one insti­tu­tion or coun­try. Nor is he call­ing for an abrupt end to all state guar­an­tees. Instead, Mon­ti wants the EU to lim­it guar­an­tees such as those the Lan­des­banks receive and make sure they’re paid for at mar­ket rates. Once that hap­pens, the Lan­des­banks will lose much of their present rai­son d’etre–and the play­ing field for Euro­pean finan­cial ser­vices will be a lot more lev­el than it is now.

    And here’s a 2010 piece that make the point that even after the 2005 loss of state guar­an­tees, the Lan­des­banks were still a source of reduced prof­its for the Ger­man pri­vate bank­ing sec­tor. And the pri­vate banks were still pissed about it:

    The New York Times
    Lan­des­bank Loss­es May Bring Change to Ger­man Bank­ing

    By JACK EWING
    Pub­lished: Jan­u­ary 11, 2010

    FRANKFURT — Even in an era of bad bank­ing deals, the case of Bay­erische Lan­des­bank, a bank based in Munich, stands out.

    Its ill-fat­ed attempt to expand in East­ern Europe has cost Bavar­i­an tax­pay­ers 3.7 bil­lion euros ($5.4 bil­lion). It has also led to a crim­i­nal inves­ti­ga­tion of the bank’s for­mer chief exec­u­tive, which includ­ed the spec­ta­cle of Munich police and pros­e­cu­tors raid­ing offices of an insti­tu­tion whose super­vi­so­ry board is stacked with local politi­cians.

    The crim­i­nal inves­ti­ga­tion is a new twist in the trou­bled his­to­ry of Germany’s state-owned banks, but the siz­able loss­es are not. Even before the most recent scan­dal, the Bay­erische Lan­des­bank, known as Bay­ernLB, had required a tax­pay­er bailout equal to a quar­ter of the state’s annu­al bud­get, in part caused by invest­ments placed with banks in Ice­land.

    Tax­pay­ers in Baden-Würt­tem­berg and Ham­burg have also had to pump bil­lions into their state-owned banks. In North-Rhine West­phalia, Germany’s most pop­u­lous state, West­LB in Düs­sel­dorf need­ed 8 bil­lion euros in gov­ern­ment grants and loan guar­an­tees to stay afloat after mak­ing dis­as­trous invest­ments that includ­ed deriv­a­tives tied to sub­prime mort­gages in the Unit­ed States.

    The Lan­des­bank res­cues — rem­i­nis­cent of the finan­cial crises at Amer­i­can-backed lenders Fred­die Mac and Fan­nie Mae — have placed a seri­ous bur­den on Ger­man state gov­ern­ments already suf­fer­ing from slump­ing tax rev­enue, as well as the fed­er­al gov­ern­ment, which is help­ing to cov­er some loss­es.

    “They wast­ed bil­lions that we could have spent on schools, police and streets,” said Inge Aures, deputy chair­woman of a Lan­des­bank over­sight com­mit­tee in the Bavar­i­an leg­is­la­ture, refer­ring to Bay­ernLB.

    But the prob­lems of the Lan­des­banks could turn out to ben­e­fit the frag­ment­ed com­mer­cial bank­ing sec­tor, which has long strug­gled to pro­duce glob­al play­ers.

    Rivals, econ­o­mists and Euro­pean Union antitrust reg­u­la­tors have long com­plained that the state banks enjoy unfair advan­tages over com­mer­cial banks because they can raise mon­ey more cheap­ly, because of their implic­it gov­ern­ment back­ing. The pub­lic-sec­tor insti­tu­tions are a major rea­son Germany’s big banks have the low­est prof­it mar­gins, on aver­age, in West­ern Europe, even though Ger­many is the largest econ­o­my.

    Now, though, the Lan­des­banks are being forced to scale back oper­a­tions to sur­vive, cre­at­ing more space for Deutsche Bank and oth­er pri­vate-sec­tor insti­tu­tions.

    “The prospects for pri­vate banks will improve because the com­pe­ti­tion won’t be as severe,” said Dirk Schiereck, a pro­fes­sor of bank­ing at the Tech­ni­cal Uni­ver­si­ty of Darm­stadt. He esti­mates the Lan­des­banks will have to shrink their assets by half com­pared with 2008.

    The Ger­man eco­nom­ics min­is­ter, Rain­er Brüder­le, told Der Tagesspiegel, the Berlin dai­ly, in an inter­view pub­lished on Jan. 4 that the coun­try need­ed only one Lan­des­bank, rather than the sev­en it now has. But such severe con­sol­i­da­tion is unlike­ly any time soon, because local politi­cians are reluc­tant to give up con­trol over their Lan­des­banks, a potent source of influ­ence in the local econ­o­my.

    There is also a risk that bor­row­ing costs for com­pa­nies could rise if there is less com­pe­ti­tion from the state banks — one rea­son that politi­cians will resist pri­va­tiz­ing the banks. How­ev­er, they may be chas­tened enough by the recent loss­es to sup­port merg­ers with oth­er state-owned banks.

    “The polit­i­cal will to sup­port merg­ers is high­er than it has ever been,” said Katha­ri­na Barten, a senior ana­lyst at Moody’s Investors Ser­vice, who added that she expect­ed con­sol­i­da­tion to take sev­er­al years.

    The loss­es, how­ev­er, are already forc­ing the banks to focus more on their main busi­ness — lend­ing to local com­pa­nies. Lan­des­banks account for about a quar­ter of all com­mer­cial lend­ing in Ger­many, more than Deutsche Bank and the oth­er big pri­vate banks com­bined.

    In recent years, insti­tu­tions like Bay­ernLB and West­LB opened branch­es over­seas and moved into invest­ment bank­ing, with dis­as­trous results. “Those times are over,” said Peter Alt­miks, an econ­o­mist at the Friedrich Nau­mann Foun­da­tion, a research group in Pots­dam with ties to the pro-busi­ness FDP par­ty. “The major­i­ty of state gov­ern­ments have no ambi­tions to build these big banks any­more.”

    Com­mer­cial bankers say the state-sup­port­ed banks have an unfair advan­tage because they face less pres­sure to be prof­itable and, with the state as own­ers, enjoy bet­ter cred­it rat­ings than their bal­ance sheets would nor­mal­ly jus­ti­fy.

    While con­ced­ing that some reforms are need­ed, Lan­des­bank rep­re­sen­ta­tives argue that the insti­tu­tions are essen­tial, espe­cial­ly in hard times, because they pro­vide cap­i­tal to the mid­size com­pa­nies that dri­ve the Ger­man econ­o­my. “One Lan­des­bank wouldn’t be enough,” said Stephan Rabe, a spokesman for the Asso­ci­a­tion of Ger­man Pub­lic Sec­tor Banks. Advo­cates also point out that pri­vate-sec­tor insti­tu­tions like Hypo Real Estate Hold­ing and Com­merzbank have required gov­ern­ment aid.

    Pres­sure on the Lan­des­banks is also com­ing from Euro­pean Union antitrust author­i­ties. Reg­u­la­tors set harsh terms in return for approv­ing a res­cue plan for West­LB, oblig­at­ing the bank to unload risky assets and cut its bal­ance sheet in half to about 140 bil­lion euros.

    ...

    Keep in mind that the reduced need for prof­itabil­i­ty is some­thing the OECD and IMF are cur­rent­ly express­ing a desire to change when your read things like:

    “Rivals, econ­o­mists and Euro­pean Union antitrust reg­u­la­tors have long com­plained that the state banks enjoy unfair advan­tages over com­mer­cial banks because they can raise mon­ey more cheap­ly, because of their implic­it gov­ern­ment back­ing. The pub­lic-sec­tor insti­tu­tions are a major rea­son Germany’s big banks have the low­est prof­it mar­gins, on aver­age, in West­ern Europe, even though Ger­many is the largest econ­o­my.

    ...
    Com­mer­cial bankers say the state-sup­port­ed banks have an unfair advan­tage because they face less pres­sure to be prof­itable and, with the state as own­ers, enjoy bet­ter cred­it rat­ings than their bal­ance sheets would nor­mal­ly jus­ti­fy”.

    ...

    So, while the role the Lan­des­banks played in fuel­ing bub­bles out­side of Ger­many is clear­ly some­thing that should­n’t be repeat­ed, it’s look­ing more and more like pub­lic bank­ing, even for domes­tic lend­ing, is about to under­go a strange pro-prof­it public/private assault in the new EU. Is that in the pub­lic inter­est?

    Posted by Pterrafractyl | September 18, 2014, 2:26 pm
  5. Back in the spring of 2014, a hint of despair was in the air. Every­where. At least every­where that counts. Would the boom years of finan­cial trad­ing ever return? Maybe, but maybe not. You don’t see a finan­cial public/private bub­ble-nan­za clusterf#ck like what took place in the lead up to the 2008 finan­cial melt­down every­day. That was a spe­cial kind of finan­cial public/private bub­ble-nan­za clusterf#ck. And maybe one of the kind. The “good times” for the big banks and trad­ing hous­es that prof­it for volatil­i­ty and vol­ume (defined as the times right before and right after the 2008 bub­ble burst in this case) might nev­er return. At least, that was the fear last year:

    Reuters
    Boom times for bank trad­ing have gone, and may nev­er come back

    LONDON | By Jamie McGeev­er
    Mon May 12, 2014 5:33pm IST

    The boom years of finan­cial mar­ket trad­ing, when banks made unprece­dent­ed prof­its from bonds, cur­ren­cies and com­modi­ties, may be over for good as finan­cial firms realise there will be no cycli­cal upswing on their deal­ing desks.

    Even though it’s tak­en West­ern economies sev­er­al years to regain pre-cri­sis nation­al out­put lev­els, many doubt banks will ever revis­it the pre-cri­sis high water­mark of their trad­ing activ­i­ties.

    Rev­enues from fixed income, cur­ren­cies and com­modi­ties — the so-called ‘FICC’ uni­verse — con­tin­ued to tum­ble for most major U.S. and Euro­pean banks dur­ing the first quar­ter of 2014, increas­ing the pres­sure on them to rethink busi­ness mod­els.

    Thanks to a more strin­gent reg­u­la­to­ry envi­ron­ment and a poten­tial turn­ing point in the 20-year cycle of falling glob­al inter­est rates, the twin peaks of just before and after the 2008 glob­al finan­cial cri­sis look unlike­ly to be revis­it­ed.

    Rev­enue from FICC amd equi­ty trad­ing, which crit­ics some­times dub “casi­no bank­ing” and dis­tin­guish from tra­di­tion­al invest­ment bank­ing ser­vices like under­writ­ing share issues or arrang­ing merg­ers and acqui­si­tions, still accounts for over 70 per­cent of banks’ over­all income from invest­ment bank­ing, accord­ing to research by Free­man Con­sult­ing.

    FICC and equi­ty trad­ing income at Gold­man Sachs last year was 72 per­cent of the bank’s over­all rev­enue from invest­ment bank­ing, com­pared with 82 per­cent in 2010. Mor­gan Stan­ley’s FICC and equi­ty trad­ing rev­enue was 70 per­cent of its total invest­ment bank­ing rev­enue, well down from 82 per­cent in 2003.

    The FICC share of these trad­ing rev­enues is shrink­ing. In 2007 around 70 per­cent of Gold­man’s $22.89 bil­lion over­all trad­ing rev­enue came from FICC. Last year, bare­ly half its $15.72 bil­lion of such rev­enue was from FICC, accord­ing to Free­man.

    In 2006 FICC income account­ed for just over 60 per­cent of Mor­gan Stan­ley’s $15.9 bil­lion over­all trad­ing rev­enue, com­pared to just 35 per­cent of the $10.1 bil­lion pie last year, the con­sul­tan­cy said.

    As new reg­u­la­tion bites and extra­or­di­nary mon­e­tary and eco­nom­ic poli­cies smoth­er extreme mar­ket swings, the trad­ing vol­umes and price volatil­i­ty that mid­dle­men bank­ing traders thrive off has ebbed.

    And it looks like a struc­tur­al shift rather than a cycli­cal or tem­po­rary lull.

    “The rev­enues have gone. The world has changed from 2007, 2008,” said Grant Peterkin, head of absolute bond returns at Lom­bard Odi­er in Gene­va.

    “The reg­u­la­to­ry aspect is the biggest aspect.”

    Reg­u­la­tion after the 2007-08 cri­sis such as ‘Dodd-Frank’ and ‘Vol­ck­er Rule’ leg­is­la­tion in the Unit­ed States and Basel III bank­ing reforms glob­al­ly, effec­tive­ly restrict banks’ abil­i­ty to hold, trade and spec­u­late on fixed income and deriv­a­tives.

    This reduces liq­uid­i­ty, but oth­er tra­di­tion­al liq­uid­i­ty providers like hedge funds have been unable to fill the gap because their busi­ness­es are also under pres­sure.

    IN A FICC

    The pres­sure on banks’ FICC oper­a­tions was brought into sharp focus by the broad-based slump in first-quar­ter earn­ings.

    British bank Bar­clays grabbed the head­lines, post­ing a 41 per­cent plunge in trad­ing rev­enue com­pared with the same peri­od in 2013, then announc­ing 7,000 of its 26,000 invest­ment bank­ing jobs will be cut.

    “Some of the pres­sures we saw on the busi­ness towards the end of last year are clear­ly struc­tur­al as well as cycli­cal,” Bar­clays Chief Exec­u­tive Antony Jenk­ins told CNBC on Thurs­day.

    Oth­er bank chief exec­u­tives are like­ly to fol­low Jenk­ins in terms of direc­tion if not mag­ni­tude, and reduce the size of their FICC trad­ing desk oper­a­tions, ana­lysts say.

    They are expect­ed to con­tin­ue cut­ting costs, trim­ming head­count, and in some cas­es, exit par­tic­u­lar mar­kets.

    ...

    The col­lapse in mar­ket volatil­i­ty has also con­tributed to the decline. This may be a relief for risk-averse investors but it also makes them less like­ly to use mar­ket hedg­ing instru­ments sold by the banks.

    It also reduces the arbi­trage oppor­tu­ni­ties that nim­ble banks and bro­kers feed off for in-house trad­ing prof­its.

    Implied volatil­i­ty, which mea­sures the poten­tial for asset price swings over a spe­cif­ic peri­od, is at or close to record lows in deeply liq­uid and high­ly-trad­ed assets like U.S. Trea­suries, euro/dollar and dollar/yen.

    Ana­lysts also say the whiff of scan­dal result­ing from glob­al inves­ti­ga­tions into alleged rig­ging of bench­mark for­eign exchange rates and Libor inter­est rates is cloud­ing the FICC envi­ron­ment, and forc­ing banks to set aside bil­lions of dol­lars for poten­tial lit­i­ga­tion costs.

    The final nail in the FICC cof­fin, ana­lysts say, is that the world on the cusp of ris­ing inter­est rate cycle, led by the U.S. Fed­er­al Reserve’s reduc­tion — or “taper­ing” — of its extra­or­di­nary post-cri­sis stim­u­lus.

    It’s com­plete­ly unchart­ed ter­ri­to­ry for banks and traders, and not con­ducive to mak­ing easy mon­ey.

    “We’ve had the most enor­mous change,” said Chris Wheel­er, bank­ing ana­lyst at Medioban­ca in Lon­don. “And there’s more to come as the full impact of taper­ing is felt.”

    Yes, as of the spring of 2014, the prof­its from “FICC” (fixed income, cur­ren­cies and com­modi­ties) were well off their bub­bly highs as new reg­u­la­tions began clip­ping bankster wings a bit, lead­ing many to won­der if a new era was upon us where the FIC­C’s frac­tion of the finan­cial sec­tor’s bot­tom line is per­ma­nent­ly shrunk:

    ...

    Thanks to a more strin­gent reg­u­la­to­ry envi­ron­ment and a poten­tial turn­ing point in the 20-year cycle of falling glob­al inter­est rates, the twin peaks of just before and after the 2008 glob­al finan­cial cri­sis look unlike­ly to be revis­it­ed.

    Rev­enue from FICC amd equi­ty trad­ing, which crit­ics some­times dub “casi­no bank­ing” and dis­tin­guish from tra­di­tion­al invest­ment bank­ing ser­vices like under­writ­ing share issues or arrang­ing merg­ers and acqui­si­tions, still accounts for over 70 per­cent of banks’ over­all income from invest­ment bank­ing, accord­ing to research by Free­man Con­sult­ing.
    ...

    Only 70 per­cent. Will the good times ever return? Maybe, but not yet:

    Reuters
    Banks’ ‘FICC’ mar­ket trad­ing in sec­ond-quar­ter points to ongo­ing squeeze

    By Jamie McGeev­er, Reuters
    July 30, 2015

    LONDON — Hopes the worst is over for big banks’ finan­cial mar­ket trad­ing look pre­ma­ture, with the lat­est snap­shot of earn­ings and vol­umes sug­gest­ing the pres­sure on these oper­a­tions remains intense.

    With post-cri­sis reg­u­la­to­ry changes forc­ing them to hold more cap­i­tal and liq­uid­i­ty, effec­tive­ly mean­ing they are less able to trade, banks’ fixed income, cur­ren­cy and com­mod­i­ty (FICC) trad­ing desks are unlike­ly to be expand­ed any time soon.

    The first quar­ter is tra­di­tion­al­ly the most active and prof­itable for banks’ FICC trad­ing, as clients put cash to work at the start of the year.

    Even so, FICC rev­enues trend­ed down as much as 5 per­cent in the sec­ond quar­ter from the same peri­od a year ago, and were 25–30 per­cent low­er than in the first quar­ter, accord­ing to finan­cial indus­try ana­lyt­ics firm Coali­tion.

    “FICC rev­enues for the Coali­tion Index will decline in Q2 this year ver­sus Q2 last year, and the first half ver­sus the first half last year,” said George Kuznetsov, head of research and ana­lyt­ics at Coali­tion.

    “We don’t see any sig­nif­i­cant hir­ing sprees this year as the rev­enue growth sim­ply isn’t there. Banks have an inter­est­ing deci­sion to make giv­en low­er rev­enues and sta­ble costs.”

    This comes on the back of a rel­a­tive­ly strong per­for­mance in the first three months of the year, which had giv­en cause for cau­tious opti­mism that the tide might be turn­ing.

    The Coali­tion Index tracks the per­for­mance of the world’s 10 largest invest­ment banks, and unlike the banks them­selves, it breaks down FICC rev­enues into their cat­e­gories. The ful­ly updat­ed index will be pub­lished on Sept. 4.

    Coali­tion’s Kuznetsov said the weak­ness was pre­dom­i­nant­ly in G10 inter­est rates trad­ing, as the “sig­nif­i­cant” growth trig­gered by the Euro­pean Cen­tral Bank’s 1 tril­lion euro bond-buy­ing stim­u­lus pro­gram in the first quar­ter evap­o­rat­ed.

    U.S. VS EUROPE

    The three months to June was a par­tic­u­lar­ly volatile peri­od. Greece lurched per­ilous­ly close to crash­ing out of the euro, a “flash crash” in the Ger­man gov­ern­ment bond mar­ket sent glob­al bond yields soar­ing, and Chi­na’s stock mar­ket fell sharply.

    Yet rather than boost­ing trad­ing activ­i­ty, as ris­ing volatil­i­ty often does, traders and investors drew in their horns.

    “This uncer­tain­ty slowed the momen­tum we saw in the first quar­ter and kept clients on the side­lines in cur­ren­cies and emerg­ing mar­kets,” JP Mor­gan chief finan­cial offi­cer Mar­i­anne Lake said on a call with ana­lysts after the bank’s Q2 results ear­li­er this month.

    Rev­enue from the bank’s FICC busi­ness fell 10 per­cent on an adjust­ed basis, not a great result but not as bad as some of its peers — Gold­man Sach­s’s net rev­enue from FICC trad­ing fell 28 per­cent to $1.60 bil­lion.

    Yet U.S. banks con­tin­ue to increase mar­ket share at the expense of their Euro­pean coun­ter­parts.

    The Euro­pean earn­ings sea­son is a few weeks behind the U.S. equiv­a­lent, and not all the con­ti­nen­t’s major banks have report­ed yet.

    Bar­clays PLC , one of Europe’s biggest banks and the third largest for­eign exchange bank in the world, this week said its FICC income fell 11 per­cent in the sec­ond quar­ter to 554 mil­lion pounds. Its cred­it and equi­ties trad­ing held up bet­ter.

    ...

    Flash for­ward to today and the FICC squeeze for the banks con­tin­ues as reg­u­la­tions man­dat­ing high­er cap­i­tal require­ments take hold. Will there ever be any relief for the peo­ple of the FICC?

    Well, while the FICC activ­i­ty may still be con­tract­ing for a num­ber of banks, it’s not always con­tract­ing, as the arti­cle hint­ed:

    ...
    The three months to June was a par­tic­u­lar­ly volatile peri­od. Greece lurched per­ilous­ly close to crash­ing out of the euro, a “flash crash” in the Ger­man gov­ern­ment bond mar­ket sent glob­al bond yields soar­ing, and Chi­na’s stock mar­ket fell sharply.
    ...

    Yes, when­ev­er a cri­sis breaks out, it’s always a lit­tle tempt­ing to says some­thing like “well, the Chi­nese word for ‘cri­sis’ is ‘oppor­tu­ni­ty’! It’s all good!” At least, it’s always a lit­tle tempt­ing to say if you don’t speak Man­darin and don’t real­ize that the word for ‘cri­sis’ isn’t actu­al­ly ‘oppor­tu­ni­ty’. But that does­n’t mean a cri­sis can’t also be an oppor­tu­ni­ty. Like an oppor­tu­ni­ty to reverse the reg­u­la­to­ri­ly man­dat­ed pledges you recent­ly took to reduce your FICC expo­sure:

    Bloomberg View
    Greece is a God­send for Traders

    Jul 31, 2015 6:24 AM EDT
    By Mark Gilbert

    The tur­moil in Greece has been a god­send for traders, who strug­gle to make mon­ey when prices in finan­cial mar­kets are flatlin­ing and have a much more lucra­tive exis­tence when they swing freely between highs and lows. That’s been boost­ing prof­its at the secu­ri­ties divi­sions of Europe’s invest­ment banks — at the very time when they’ve com­mit­ted to scal­ing back trad­ing to take few­er risks and rein­force their cap­i­tal bases.

    On Fri­day, France’s BNP Paribas post­ed its best quar­ter­ly prof­it since 2012, with a 22 per­cent improve­ment in equi­ties rev­enue, and 4 per­cent in fixed-income sales and what it calls “good growth” in cur­ren­cies and com­modi­ties. Ear­li­er this week, Ger­many’s Deutsche Bank said rev­enue from trad­ing bonds and cur­ren­cies climbed 16 per­cent in the sec­ond quar­ter, while Bar­clays in the U.K. said its rates and forex busi­ness expand­ed by 10 per­cent.

    After years of watch­ing mar­ket volatil­i­ty decline, damped by a com­bi­na­tion of unchanged near-zero inter­est rates from the world’s biggest cen­tral banks and banks com­mit­ting less mon­ey to buy­ing and sell­ing secu­ri­ties, traders have been grant­ed a new lease on life by Greece’s woes. Here’s a chart show­ing how volatil­i­ty in the inter­est-rate mar­ket has been increas­ing since the begin­ning of the year:

    ...

    The prospect of Greece exit­ing the euro did­n’t fuel con­ta­gion, in the sense of investors bet­ting that Por­tu­gal, Italy or oth­er coun­tries would fol­low. But it has made prices in the finan­cial mar­kets jump around — cre­at­ing prof­it and rev­enue oppor­tu­ni­ties. Euronext, which oper­ates stock mar­kets in France, the Nether­lands, Bel­gium and Por­tu­gal, says the sec­ond quar­ter brought its high­est trad­ing vol­umes in half a decade, with aver­age dai­ly vol­umes climb­ing more than 40 per­cent from a year ear­li­er. Here’s how volatil­i­ty has increased in the Ger­man stock mar­ket in recent quar­ters:

    ...

    The jump in volatil­i­ty and the par­al­lel gain in prof­it  pos­es a dilem­ma for banks that have pledged to curb trad­ing. But since the risk that Greece will imper­il the euro has sub­sided this month, volatil­i­ty has swift­ly become sub­dued. As Greek Prime Min­is­ter Alex­is Tsipras strug­gles to keep his gov­ern­ment togeth­er amid domes­tic oppo­si­tion to Europe’s bailout agree­ment, traders may be pray­ing that he fails.

    Ok, so the Greek cri­sis this year intro­duced so much volatil­i­ty into the finan­cial mar­kets, expe­cial­ly the bond mar­kets, that the big banks like Deutsche Bank and Bar­clays are going back on their pledges to reduce their fixed-income risks because it’s just too prof­itable not to do.

    ...
    The prospect of Greece exit­ing the euro did­n’t fuel con­ta­gion, in the sense of investors bet­ting that Por­tu­gal, Italy or oth­er coun­tries would fol­low. But it has made prices in the finan­cial mar­kets jump around — cre­at­ing prof­it and rev­enue oppor­tu­ni­ties. Euronext, which oper­ates stock mar­kets in France, the Nether­lands, Bel­gium and Por­tu­gal, says the sec­ond quar­ter brought its high­est trad­ing vol­umes in half a decade, with aver­age dai­ly vol­umes climb­ing more than 40 per­cent from a year ear­li­er...
    ...

    Men­tal note: Big Banks LOVE the euro­zone’s dance with death.

    But as the arti­cle also point­ed out, now that the Greece cri­sis has lulled a bit (for the moment), all that volatil­i­ty that was dri­ving this sud­den surge is at risk of with­er­ing away.

    What’s a large bank that’s reliant on mar­ket volatil­i­ty for its prof­it mar­gins to do? Here’s an option: do noth­ing. And just wait for who’s ‘Netx­it’:

    For­eign Pol­i­cy
    Who’s Nex­it?

    As many as five oth­er euro­zone coun­tries are flirt­ing with trou­ble. Could one of them be the first to leave the com­mon cur­ren­cy?

    By Daniel Alt­man
    July 30, 2015

    Which will be the next euro­zone domi­no to fall? With Greece enjoy­ing a tem­po­rary lull in its appar­ent­ly per­ma­nent cri­sis, we can take a moment to look around its neigh­bor­hood at oth­er can­di­dates for trou­ble. There are sev­er­al — and the euro’s future looks far from bright.

    Greece ran into trou­ble main­ly because it should nev­er have been in the euro­zone in the first place. Its gov­ern­ments couldn’t bal­ance their bud­gets, and its eco­nom­ic cycle was far out of sync with those of the eurozone’s lead­ing lights. When Ger­many grew, Greece shrank, and vice ver­sa. Using the same mon­e­tary pol­i­cy in both coun­tries made no sense at all.

    The more prox­i­mate cause of the Greek cri­sis was its inabil­i­ty to ser­vice its debts on time. In the midst of a deep depres­sion, tax­es and oth­er gov­ern­ment rev­enue start­ed to slip away, even­tu­al­ly falling 15 per­cent between 2007 and 2014. With­out con­trol of the cur­ren­cy, the gov­ern­ment couldn’t print mon­ey to stim­u­late the econ­o­my and deval­ue its debts. It had to choose between repay­ing its lenders and doing every­thing else: pay­ing pen­sions, pro­vid­ing pub­lic ser­vices, pro­tect­ing its cit­i­zens, etc.

    What oth­er coun­tries in the euro­zone might soon face this choice? To hear the cred­it-rat­ing agen­cies tell it, the first in line are Por­tu­gal, whose gov­ern­ment bonds are rat­ed as junk by Stan­dard & Poor’s, and Italy, which receives the low­est invest­ment-grade rat­ing of BBB-. Each country’s gov­ern­ment is car­ry­ing a debt big­ger than its GDP, some­thing the IMF doesn’t expect to change any time in the next five years. Spain, whose debt-to-GDP ratio is below 70 per­cent but may rise in the com­ing years, is rat­ed BBB.

    Not far behind are Ire­land, whose debt bur­den of 86 per­cent of GDP is sup­posed to decline rapid­ly now that eco­nom­ic growth has resumed, and France, at 89 per­cent, where growth rates may strug­gle to crack 2 per­cent in the com­ing years. Both of them receive rea­son­able grades from Stan­dard & Poor’s — AA for France and A+ for Ire­land, with AAA being the safest of all.

    But it’s impor­tant to take these rat­ings with a grain of salt. After all, Stan­dard & Poor’s gave Greece’s debt a grade of A- until Decem­ber 2009, when the fis­cal writ­ing was already on the wall. Part­ly because of the rat­ing, Greece had no trou­ble bor­row­ing at rea­son­able inter­est rates as late as Novem­ber of that year, just as Por­tu­gal can today. Yet at the end of 2009, all of the coun­tries above except France were once again being called by their pejo­ra­tive acronym: the PIIGS.

    Going for­ward, the pri­ma­ry risks for these coun­tries are dips in gov­ern­ment rev­enue (most­ly like­ly stem­ming from dis­ap­point­ing eco­nom­ic growth) and the buildup of oth­er fis­cal oblig­a­tions. Either one could force a deci­sion like the one that faced Greece: to pay or not to pay.

    Gov­ern­ment rev­enue in France and Italy has trend­ed gen­tly upward ever since the intro­duc­tion of the euro in 1999, with few fluc­tu­a­tions along the way. By con­trast, rev­enue in Ire­land and Spain spiked dra­mat­i­cal­ly just before the glob­al finan­cial cri­sis, sug­gest­ing that their gov­ern­ments relied more on volatile sources like cor­po­rate income tax­es. (Because com­pa­nies pay tax­es only when they’re prof­itable — as opposed to house­holds, which pay them when they have rev­enue — col­lec­tions from cor­po­rate income tax­es tend to be much more cor­re­lat­ed with the ups and downs of the eco­nom­ic cycle.) Por­tu­gal land­ed some­where in between:

    Of course, col­lect­ing rev­enue is one thing; what a gov­ern­ment choos­es to do with it is anoth­er. Dur­ing those heady high-rev­enue years from 2005 through 2007, Ire­land paid down almost 30 per­cent of its debt, but Spain shrank its lia­bil­i­ties by only about 13 per­cent. Yet Por­tu­gal took the brass ring for most prof­li­gate fis­cal pol­i­cy, with its debt load ris­ing sharply every year — despite a grow­ing econ­o­my and ris­ing tax rev­enue — for a total increase of 36 per­cent. If any of these events reflects long-term ten­den­cies, then Por­tu­gal is one to watch.

    Anoth­er risk for these coun­tries is the pos­si­bil­i­ty that their eco­nom­ic cycles will fall out of sync with the rest of the euro­zone or, more per­ti­nent­ly, with Ger­many. The PIIGS and France rely much more on tourism, for instance, than Ger­many; as a result, trends in their exports may depend on demand from wealthy house­holds in Chi­na, Japan, South Korea, and the Unit­ed States more than on indus­tri­al activ­i­ty in the euro­zone.

    If the coun­tries at risk fall out of sync, then the Euro­pean Cen­tral Bank (ECB) will be rais­ing inter­est rates when they’re already in reces­sion or low­er­ing rates when the coun­tries are grow­ing apace. In this sit­u­a­tion, mon­e­tary pol­i­cy will have the oppo­site of its intend­ed pur­pose; it will only serve to ampli­fy the coun­tries’ booms and busts.

    ...

    What are the big risks that might deter­mine who’s ‘Nex­it’ in the ‘-exit’ queue? Let’s see...

    ...
    Going for­ward, the pri­ma­ry risks for these coun­tries are dips in gov­ern­ment rev­enue (most­ly like­ly stem­ming from dis­ap­point­ing eco­nom­ic growth) and the buildup of oth­er fis­cal oblig­a­tions. Either one could force a deci­sion like the one that faced Greece: to pay or not to pay.

    ...
    Anoth­er risk for these coun­tries is the pos­si­bil­i­ty that their eco­nom­ic cycles will fall out of sync with the rest of the euro­zone or, more per­ti­nent­ly, with Ger­many. The PIIGS and France rely much more on tourism, for instance, than Ger­many; as a result, trends in their exports may depend on demand from wealthy house­holds in Chi­na, Japan, South Korea, and the Unit­ed States more than on indus­tri­al activ­i­ty in the euro­zone.
    ...

    So events like dis­ap­point­ing eco­nom­ic growth (a reces­sion) or grow­ing fis­cal oblig­a­tions (which one would expect in any nation with an aging pop­u­la­tion and/or reces­sions) might be desta­bi­liz­ing enough to the Por­tu­gal, Ire­land, Spain (three aus­ter­i­ty poster-chil­dren), Italy, and maybe even France, to force these coun­tries into a ‘Nex­it’ sit­u­a­tion. Or maybe the euro­zone economies become decou­pled for what­ev­er rea­son and the ECB ends up imple­ment­ing a pol­i­cy that’s the oppo­site of what need­ed for the weak­est econ­o­mist (those on the ‘Nexit’-list need)? Either way, the ‘Nex­it’ can­di­dates just might end up in a sit­u­a­tion where they either have to choose to pay their debts or pay their peo­ple. Or leave the euro­zone alto­geth­er so they have a chance to both pay their debts, pay their peo­ple, and actu­al­ly stim­u­late growth but at the bru­tal cost of sud­den eco­nom­ic dis­lo­ca­tion.

    A reces­sion, aging, or just a decou­pling of the nation­al busi­ness cycles...that’s all part of what could bring on a ‘Nex­it’. It’s a rather alarm­ing assess­ment con­sid­er­ing that all of these poten­tial­ly dire sce­nar­ios are also pret­ty inevitable. If the reg­u­lar cycles of busi­ness hap­pen or soci­eties age, a vari­ety of euro­zone mem­ber states just might find them­selves caught in Greek Tragedy. And giv­en the deep flaws in the euro­zone’s struc­ture and the demon­strat­ed polit­i­cal will to do noth­ing to alle­vi­ate those flaws, that means it may not be the worst time to famil­iar­ize your­self with euro­zone cri­sis trad­ing and invest­ing strate­gies.

    Invest­ing in your own future might be a rather dif­fi­cult in coun­tries across the euro­zone, espe­cial­ly if you have a lot of your future ahead of you, but at least FICC vol­ume should pick up again every time one of the euro­zone mem­ber states is thrust into a “pay or not to pay, or exit” sit­u­a­tion. Hooray.

    Posted by Pterrafractyl | August 3, 2015, 11:13 pm
  6. Here’s anoth­er reminder that the struc­tur­al prob­lems with the euro­zone due to a lack of mon­e­tary sov­er­eign­ty aren’t lim­it­ed to a lack of free­dom to set cen­tral bank­ing inter­est rates. If you’re a coun­try like Greece fac­ing a major cri­sis, you also lose the guar­an­tee that your new shared cen­tral bank will even per­form basic cen­tral banks oblig­a­tions like being a lender of last resort:

    The Wash­ing­ton Post
    Greece’s banks are dying, and fast
    By Matt O’Brien August 6 at 7:00 AM

    Greece is find­ing out that you can’t have an econ­o­my with­out banks, but you can’t have banks with­out an econ­o­my, either. Or at least one where busi­ness­es aren’t allowed to buy the things they need to stay in busi­ness.

    Now, Greece’s banks have fall­en vic­tim to a clas­sic blun­der. The most famous of which is “nev­er start a land war in Asia,” but only slight­ly less well-known is this: “nev­er set up shop in a coun­try that’s been forced into mega-aus­ter­i­ty and cap­i­tal con­trols as a result of the cur­ren­cy union it’s a part of.” In oth­er words, they did­n’t lend mon­ey to peo­ple they should­n’t have or lose mon­ey on their own bad bets. Greece’s banks just made the mis­take of being banks in Greece.

    Part of it is the fear that Greece will get kicked out of the com­mon cur­ren­cy, and every­body’s euros will get turned into drach­mas that aren’t worth any­where near as much. That’s set off a slow-motion bank run—a bank jog, really—that picked up the pace the past few months when it looked like there might not actu­al­ly be a deal. But that was a man­age­able prob­lem as long as the Euro­pean Cen­tral Bank did its job as a lender-of-last-resort, and loaned Greece’s banks cash in return for hard-to-sell assets. The ECB stopped doing that, though, and Greece’s banks had no choice but to close for a few weeks or else close for good. Not only that, but the gov­ern­ment has had to pre­vent peo­ple from mov­ing their mon­ey out of the coun­try, what econ­o­mists call cap­i­tal con­trols, so that the run on the banks would­n’t turn into a run on Greece.

    It’s only a slight exag­ger­a­tion to say that this has made Greece go from hav­ing not much of an econ­o­my to hav­ing not one at all. Greek com­pa­nies haven’t been able to pay for­eign sup­pli­ers since they can’t send mon­ey out of the coun­try, so their fac­to­ries have run out of sup­plies. Every­thing has come to a stand­still. Greece’s Pur­chas­ing Mangers Index, which mea­sures man­u­fac­tur­ing activ­i­ty, just col­lapsed from a sick­ly 46.9 to a death­ly 30.2. Any­thing less than 50 means that the man­u­fac­tur­ing sec­tor is shrink­ing.

    That, in turn, means that Greek busi­ness­es that should have been able to pay back what they owed won’t be any­more. And so the Greek banks that loaned them money—which, at the time, was a per­fect­ly rea­son­able thing to do—are in line for a lot more loss­es. How many more? Well, enough that, as you can see below, their stocks have fall­en by the max­i­mum 30 per­cent almost every day since the coun­try’s mar­kets re-opened. Add it all up, and Greece’s four-biggest banks have plunged between 80 and 90 per­cent since last Octo­ber. At this rate, it won’t be long until they need the 10 to 25 bil­lion euro bailout that Greece’s cred­i­tors think it will take to recap­i­tal­ize them.

    ...

    Now that we’re look­ing at a sit­u­a­tion where Greece is being forced to imple­ment an aus­ter­i­ty pack­age that’s just more of the same and that basi­cal­ly every­one thinks can’t work, this real­ly can’t be empha­sized enough: The troi­ka cre­at­ed a bank run and col­lapsed Greece’s econ­o­my when the ECB decid­ed to stop act­ing like a nor­mal cen­tral bank in order to squeeze the Greeks dur­ing the nego­ti­a­tions:

    ...
    Part of it is the fear that Greece will get kicked out of the com­mon cur­ren­cy, and every­body’s euros will get turned into drach­mas that aren’t worth any­where near as much. That’s set off a slow-motion bank run—a bank jog, really—that picked up the pace the past few months when it looked like there might not actu­al­ly be a deal. But that was a man­age­able prob­lem as long as the Euro­pean Cen­tral Bank did its job as a lender-of-last-resort, and loaned Greece’s banks cash in return for hard-to-sell assets. The ECB stopped doing that, though, and Greece’s banks had no choice but to close for a few weeks or else close for good. Not only that, but the gov­ern­ment has had to pre­vent peo­ple from mov­ing their mon­ey out of the coun­try, what econ­o­mists call cap­i­tal con­trols, so that the run on the banks would­n’t turn into a run on Greece.

    It’s only a slight exag­ger­a­tion to say that this has made Greece go from hav­ing not much of an econ­o­my to hav­ing not one at all...

    “But that was a man­age­able prob­lem as long as the Euro­pean Cen­tral Bank did its job as a lender-of-last-resort, and loaned Greece’s banks cash in return for hard-to-sell assets. The ECB stopped doing that, though, and Greece’s banks had no choice but to close for a few weeks or else close for good.”
    Yes, the show­down between Greece and the troi­ka was a man­age­able show­down. But then the ECB decid­ed that slow­ly stran­gling the Greek econ­o­my was an appro­pri­ate use of its cen­tral bank­ing inde­pen­dence in stark con­trast to pri­or pledges to “do what­ev­er it takes” to keep the euro­zone held togeth­er.

    Hmmm...something must have strong­ly influ­ence that inde­pen­dent ECB think­ing. What could it be? It’s a total mys­tery.

    Posted by Pterrafractyl | August 6, 2015, 2:54 pm
  7. Some­thing hap­pened on the way to Greece’s smooth com­ple­tion of the Troika’s demands in order to release the funds need­ed to recap­i­tal­ize Greece’s banks. It’s some­thing that should sound famil­iar at this point: The Troi­ka made a demand that would make life a lot worse for a lot of peo­ple, Greece said “hey, this is insane,” and since the Troi­ka is also insane anoth­er Greek/Troikan show­down might be on the way:

    Reuters
    UPDATE 2‑Greece sets red line in mort­gage talks: no mass fore­clo­sures

    Fri Oct 23, 2015 9:02am EDT

    * Greece says will not tol­er­ate mass fore­clo­sures on homes

    * “We aren’t con­victs serv­ing time” PM says

    * Hol­lande sup­ports Greece on debt, fore­clo­sures (Updates through­out)

    By Renee Mal­te­zou and Jean-Bap­tiste Vey

    ATHENS, Oct 23 (Reuters) — Greek Prime Min­is­ter Alex­is Tsipras on Fri­day said his coun­try would ful­ly meet its oblig­a­tions under a mul­ti-bil­lion euro bailout but would not tol­er­ate mass fore­clo­sures on prob­lem mort­gage loans for thou­sands of indebt­ed peo­ple.

    Set­ting a red line in talks with the coun­try’s lenders now in Athens for con­sul­ta­tions, Tsipras said turn­ing the coun­try into an “are­na of con­fis­ca­tions” of homes was out of the ques­tion.

    Although he did not so direct­ly, he was implic­it­ly refer­ring to talks with cred­i­tors, which have hit a snag over pro­tec­tion of pri­ma­ry res­i­dences of home­own­ers who can­not afford to pay their mort­gages.

    “Some may be attempt­ing to revive a debate (on Greece exit­ing the euro) ... by delay­ing the imple­men­ta­tion of reviews and delay­ing the recap­i­tal­i­sa­tion of banks,” Tsipras told jour­nal­ists after talks with French Pres­i­dent Fran­cois Hol­lande.

    Rep­re­sen­ta­tives of Greece’s lenders are in Athens assess­ing com­pli­ance with reforms required under the 86 bil­lion-euro bailout. Athens wants the review con­clud­ed soon so it can pro­ceed with debt-relief talks and com­plete the recap­i­tal­i­sa­tion of its four main banks by the end of the year.

    Hol­lande, in Greece on a two-day vis­it, has sided with Tsipras’s call for debt rene­go­ti­a­tion. In a speech to par­lia­ment, he also said home­own­ers should be pro­tect­ed.

    HOMEOWNERS

    “It is very impor­tant for com­mit­ments to be met, and for there to be no doubts over fun­da­men­tal rights of fam­i­lies in Greece — the right for a roof over their heads — and here I’m speak­ing about con­fis­ca­tions of pri­ma­ry res­i­dences,” Hol­lande said.

    Greek offi­cials have said there are dis­agree­ments with lenders on a mech­a­nism to tack­le non-per­form­ing loans at banks. The ratio of non-per­form­ing loans at Greek banks was 35.6 per­cent in the first quar­ter, the high­est ratio in Europe bar Cyprus.

    A high rate of non-per­form­ing loans, after years of reces­sion and high unem­ploy­ment, is one of the main rea­sons cap­i­tal buffers of Greek banks are erod­ed. Lenders were also weak­ened by cap­i­tal flight ear­li­er this year when Greece teetered on the verge of top­pling out of the euro.

    Banks are in line to get a por­tion of bailout cash by the end of the year, but a high pro­por­tion of bad loans also mean banks are reluc­tant to extend cred­it, stunt­ing poten­tial growth.

    Athens wants pro­tec­tion from fore­clo­sures to cov­er prop­er­ty val­ues of at least 200,000 euros. Lenders insist the thresh­old should not exceed 120,000. Greece cal­cu­lates that would cov­er only 17 per­cent of mort­gage hold­ers.

    Tsipras said Greece would meet its bailout oblig­a­tions, though he said the coun­try had its lim­its.

    ...

    An esti­mat­ed 320,000 home­own­ers are behind on their mort­gages in the coun­try. About 130,000 of them have applied for fore­clo­sure pro­tec­tion under an exist­ing law, which sets a thresh­old of 300,000 euros.

    “Athens wants pro­tec­tion from fore­clo­sures to cov­er prop­er­ty val­ues of at least 200,000 euros. Lenders insist the thresh­old should not exceed 120,000. Greece cal­cu­lates that would cov­er only 17 per­cent of mort­gage hold­ers.”
    That appears to be the crux of the mat­ter: both sides agree that there should be a thresh­old lev­el below which Greeks are pro­tect­ed from fore­clo­sure on their pri­ma­ry res­i­dences. Greece was­n’t it at 200,000 euros, down from the exist­ing 300,000 euro lev­el, while the Troi­ka is insist­ing on a 120,000 thresh­old. So both sides agree that there should be some sort of pro­tec­tion for poor Greek home­own­ers, but it’s a ques­tion of how cheap their house should be in order to qual­i­fy for that pro­tec­tion.

    And note that when you read:

    ...
    A high rate of non-per­form­ing loans, after years of reces­sion and high unem­ploy­ment, is one of the main rea­sons cap­i­tal buffers of Greek banks are erod­ed. Lenders were also weak­ened by cap­i­tal flight ear­li­er this year when Greece teetered on the verge of top­pling out of the euro.
    ...

    keep in mind that the ECB’s repeat­ed deci­sions to sig­nif­i­cant­ly restrict the emer­gency lend­ing avail­able to Greece’s banks dur­ing the nego­ti­a­tions with the Troi­ka this spring and sum­mer did­n’t exact­ly help the lend­ing sit­u­a­tion either.

    Also note that when you read:

    ...
    Hol­lande, in Greece on a two-day vis­it, has sided with Tsipras’s call for debt rene­go­ti­a­tion. In a speech to par­lia­ment, he also said home­own­ers should be pro­tect­ed.

    HOMEOWNERS

    “It is very impor­tant for com­mit­ments to be met, and for there to be no doubts over fun­da­men­tal rights of fam­i­lies in Greece — the right for a roof over their heads — and here I’m speak­ing about con­fis­ca­tions of pri­ma­ry res­i­dences,” Hol­lande said.

    ...

    it’s nice that France is going to be make Greece’s case to the rest of the Troi­ka as this dis­pute unfold, but as with all tus­sles with the Troi­ka, hav­ing France on your side is nice, but prob­a­bly not nice enough, as evi­denced by today’s dec­la­ra­tion by the ‘Eurogroup’ of euro­zone finance min­is­ters that no funds will be released for the recap­i­tal­iza­tion of Greek banks until the fore­clo­sure laws (among oth­ers) are passed, which they expect Greece to do this week:

    Reuters
    Euro zone won’t release new mon­ey for Greece until reforms done
    BRUSSELS | By Jan Strupczews­ki and Francesco Guaras­cio

    Mon Nov 9, 2015 3:26pm EST

    The euro zone will release the next tranche of loans for Greece as well as mon­ey for bank recap­i­tal­iza­tion only after Athens imple­ments agreed reforms, euro zone finance min­is­ters said, not­ing a Greek pledge the con­di­tions would be met this week.

    A Euro­pean Cen­tral Bank Stress test showed at the end of Octo­ber that Greek banks need­ed a total of 14.4 bil­lion euros in addi­tion­al cap­i­tal if they were to sur­vive a sce­nario of adverse eco­nom­ic con­di­tions.

    Some of the need­ed total is like­ly to come from pri­vate investors, but the euro zone will have to pro­vide the rest, using all or part of the 10 bil­lion euros already ear­marked for that pur­pose in the euro zone’s bailout fund.

    “We await the final­iza­tion of all the mea­sures in the first set of mile­stones and the finan­cial sec­tor mea­sures which are essen­tial for a suc­cess­ful recap­i­tal­iza­tion process,” the min­is­ters said in a doc­u­ment at the end of a meet­ing on Greece.

    ...

    “We stand ready to sup­port the dis­burse­ment of the 2 bil­lion euros sub-tranche linked to the first set of mile­stones and the trans­fer to the HFSF of the funds need­ed for the recap­i­tal­iza­tion of the Greek bank­ing sec­tor out of the 10 bil­lion euros ear­marked for this pur­pose, pro­vid­ed that the agreed con­di­tion­al­i­ty is met,” the min­is­ters said.

    Prime among the dis­agree­ments for the Greeks is pro­tec­tion for poor­er fam­i­lies in dan­ger of los­ing their homes through fore­clo­sure.

    Dijs­sel­bloem said pass­ing the fore­clo­sures law was key before banks could be recap­i­tal­ized, because it had a direct impact on the num­ber of bad loans that banks would have to deal with through recap­i­tal­iza­tion.

    But Greek offi­cials note that repos­ses­sions are polit­i­cal­ly sen­si­tive at a time when Athens is under­tak­ing to pro­vide food and hous­ing for thou­sands of asy­lum-seek­ers under a plan to han­dle the Euro­pean Union’s migra­tion cri­sis.

    Offi­cials in the left­ist-led gov­ern­ment say a wave of evic­tions could boost sup­port for the far-right Gold­en Dawn par­ty.

    Dif­fer­ences between Athens and its euro zone part­ners also remain in how to treat tax­pay­ers who are late repay­ing over­due tax under a spe­cial scheme.

    There is also no agree­ment on the min­i­mum prices of med­i­cine and on a tax on pri­vate edu­ca­tion, offi­cial said.

    “We wel­comed the com­mit­ment by the Greek author­i­ties that this con­di­tion­al­i­ty will be ful­filled in the course of the week,” the min­is­ters said.

    They said their deputies would meet at the start of next week at the lat­est to assess if the reforms have been imple­ment­ed as agreed, paving the way for any dis­burse­ment.

    Greece said on Mon­day it would need a polit­i­cal deci­sion to over­come a dis­pute, so that thou­sands of poor­er Greeks would not be at risk of los­ing their homes as banks repos­sess them.

    Greek Prime Min­is­ter Alex­is Tsipras and Euro­pean Com­mis­sion Pres­i­dent Jean-Claude Junck­er dis­cussed the bad loans issue by tele­phone on Sun­day. French Pres­i­dent Fran­cois Hol­lande and Ger­man Chan­cel­lor Angela Merkel also talked about it by phone.

    “Greece is mak­ing con­sid­er­able efforts. They are scrupu­lous­ly respect­ing the July agree­ment,” French Finance Min­is­ter Michel Sapin told reporters. “I want an agree­ment to be reached today. France wants an agree­ment today.”

    Greek offi­cials stress that Athens wants to ful­fill all the points of the bailout agree­ment, but for the reforms to fly, they have to have social cohe­sion, which means not mak­ing life more dif­fi­cult for poor­er cit­i­zens.

    “The Eurogroup will press Greece to find suf­fi­cient solu­tions till Wednes­day,” one euro zone offi­cial said.

    “There is always room for com­pro­mise but I don’t think the min­is­ters would accept rules that are much more favor­able for peo­ple not pay­ing their mort­gages than in any oth­er coun­try,” the offi­cial said.

    Yep, if Greece does­n’t pass the fore­clo­sure law soon (and all the oth­er Troikan demands), Greece’s banks won’t get the recap­i­tal­iza­tion funds that were a key part of the “bailout” agree­ment and, pre­sum­ably, its econ­o­my melts down since this whole bailout was about con­ced­ing aus­ter­i­ty reforms in exchange for urgent­ly need­ed bank recap­i­tal­iza­tions and pub­lic debt restruc­tur­ing.

    And when you read:

    ...
    “There is always room for com­pro­mise but I don’t think the min­is­ters would accept rules that are much more favor­able for peo­ple not pay­ing their mort­gages than in any oth­er coun­try,”
    ...

    keep in mind that France’s finance min­is­ter did at least stick up for Greece dur­ing the recent Eurogroup meet­ing when he point­ed out that actu­al­ly, oth­er euro­zone nations have sim­i­lar fore­clo­sure pro­tec­tion laws

    The Wall Street Jour­nal
    Euro­zone Finance Min­is­ters Press Greece to Move For­ward With Over­hauls
    About $2.15 bil­lion in finan­cial aid con­tin­gent on new fore­clo­sure, bank-gov­er­nance rules, among oth­ers

    By Gabriele Stein­hauser And Vik­to­ria Den­dri­nou
    Updat­ed Nov. 9, 2015 5:41 p.m. ET

    BRUSSELS—Eurozone finance min­is­ters on Mon­day said Greece needs to deliv­er on new fore­clo­sure rules and oth­er promised over­hauls with­in a week to get a delayed slice of finan­cial aid val­ued at €2 bil­lion ($2.15 bil­lion).

    The min­is­ters, at their month­ly meet­ing in Brus­sels, also urged Athens to deliv­er swift­ly on over­hauls to its finan­cial sys­tem, includ­ing mea­sures aimed at strength­en­ing bank gov­er­nance, in order to pro­ceed with the recap­i­tal­iza­tion of its banks.

    ...

    Thanks to recent stress tests that uncov­ered low­er-than-expect­ed cap­i­tal require­ments at Greece’s banks and new fore­casts that pre­dict the econ­o­my will shrink less than pre­vi­ous­ly expect­ed, pres­sure on the gov­ern­ment in Athens has eased in recent months.

    But the dis­agree­ment over over­hauls is also putting off talks on how to reduce the country’s debt load. At the same time, post­pon­ing pay­ments to gov­ern­ment employ­ees and con­trac­tors risks weigh­ing on Greece’s eco­nom­ic recov­ery.

    Under this summer’s agree­ment, Athens was meant to imple­ment a full set of over­hauls by mid-Octo­ber. But nation­al elec­tions in Sep­tem­ber and dis­agree­ments over some unpop­u­lar and painful mea­sures have held up talks with cred­i­tors.

    Key among these is a new set of rules for when banks can fore­close on home­own­ers who haven’t been pay­ing their mort­gages.

    Greece’s left-wing Syriza gov­ern­ment wants to pro­tect cit­i­zens at risk of los­ing their pri­ma­ry res­i­dence and had ini­tial­ly asked banks not to take pos­ses­sion of homes worth less than €300,000—an amount cred­i­tors have deemed too high.

    “It doesn’t make sense to recap­i­tal­ize the banks if bank­ing rules don’t allow the banks to col­lect their claims,” said Ger­man Finance Min­is­ter Wolf­gang Schäu­ble on his way to the meet­ing. “Non­per­form­ing loans are one of the main caus­es of prob­lems at the Greek banks.”

    In recent days, Athens has low­ered its pro­tec­tion thresh­old and drawn up strict cri­te­ria, such as a family’s annu­al income, that would lim­it the num­ber of homes shield­ed from fore­clo­sure, said offi­cials famil­iar with the nego­ti­a­tions between Greece and its cred­i­tors.

    But the two sides haven’t yet reached com­mon ground on a set of cri­te­ria that would guar­an­tee enough pro­tec­tion in the Greek government’s eyes and appease the cred­i­tors’ con­cerns that such mea­sures won’t encour­age the non­pay­ment of debts.

    “We must find the right bal­ance between pro­tec­tion of the sit­u­a­tion of the most vul­ner­a­ble but also the fact that some strate­gic default­ers could not ben­e­fit from these pro­tec­tions,” said Pierre Moscovi­ci, the EU’s eco­nom­ic-affairs chief.

    Still, some back­up for Athens came from French Finance Min­is­ter Michel Sapin, who said ear­li­er Mon­day that lim­its on fore­clo­sures also exist in oth­er euro­zone states. “Peo­ple shouldn’t make demands on Greece for some­thing that goes fur­ther than in their own coun­try,” he said.

    “Still, some back­up for Athens came from French Finance Min­is­ter Michel Sapin, who said ear­li­er Mon­day that lim­its on fore­clo­sures also exist in oth­er euro­zone states. “Peo­ple shouldn’t make demands on Greece for some­thing that goes fur­ther than in their own coun­try,” he said. ”

    So let’s com­pare and con­trast the state­ments com­ing from the eurogroup of finance min­is­ters:

    “There is always room for com­pro­mise but I don’t think the min­is­ters would accept rules that are much more favor­able for peo­ple not pay­ing their mort­gages than in any oth­er coun­try,” the offi­cial said.

    VS

    “Peo­ple shouldn’t make demands on Greece for some­thing that goes fur­ther than in their own coun­try,”

    At least Greece is get­ting a mass fore­clo­sure law imposed on it with at least a bit of ver­bal sup­port along the way (sol­i­dar­i­ty is com­pli­cat­ed in the euro­zone).

    And note the argu­ment made by Ger­many’s finance min­is­ter Wolf­gang Schaeu­ble, that the non-per­form­ing loans need to be fore­closed on because they’re the main cause of prob­lems at the Greek banks:

    ...
    “It doesn’t make sense to recap­i­tal­ize the banks if bank­ing rules don’t allow the banks to col­lect their claims,” said Ger­man Finance Min­is­ter Wolf­gang Schäu­ble on his way to the meet­ing. “Non­per­form­ing loans are one of the main caus­es of prob­lems at the Greek banks.”
    ...

    And now let’s relate that ratio­nale to that giv­en by eurogroup chief Jeo­ren Dijs­sel­bloem in the pre­vi­ous excerpt for why the eurogroup’s demands must be met: pass­ing the mass fore­clo­sure the law would have “a direct impact on the num­ber of bad loans that banks would have to deal with through recap­i­tal­iza­tion”:

    ...
    Dijs­sel­bloem said pass­ing the fore­clo­sures law was key before banks could be recap­i­tal­ized, because it had a direct impact on the num­ber of bad loans that banks would have to deal with through recap­i­tal­iza­tion.
    ...

    And, to some extent, Dijs­sel­bloem and Schaeu­ble do have a point. The few­er homes that are under fore­clo­sure pro­tec­tion, the more banks will know in terms of how much addi­tion­al cap­i­tal they’ll need, and get­ting those bad loans off the books would indeed help Greece’s banks and broad­er econ­o­my.

    But that’s also assum­ing that the process of forc­ing mass fore­clo­sures does­n’t simul­ta­ne­ous­ly tank the econ­o­my and cause even more bad loans. It’s a type con­cern that folks like Dijs­sel­bloem and Schaeu­ble have been large­ly unwill­ing to con­sid­er when it comes to the impact of vir­tu­al­ly all the aus­ter­i­ty mea­sures they have been demand­ing from one coun­try after anoth­er, but when the issue of fore­clo­sure pro­tec­tion came up in Greece two years ago, there was actu­al­ly one major group that you might not expect to cham­pi­on such poli­cies that did­n’t appear to mind the fore­clo­sure pro­tec­tions. And it was specif­i­cal­ly due to fears of what mass fore­clo­sures to do to both Greek banks’ bal­ance sheets and the broad­er Greek econ­o­my. And that group was, of course, the big Greek banks hold­ing all those bad loans:

    The Wall Street Jour­nal
    Greek Banks Win Exten­sion of Fore­clo­sure Ban
    Move Looks To Avoid Poten­tial­ly Dis­as­trous Asset Reval­u­a­tion
    By Alk­man Gran­it­sas and Mati­na Ste­vis
    Updat­ed Dec. 22, 2013 3:43 p.m. ET

    ATHENS—Greek banks got an unusu­al Christ­mas gift this year: a freeze on home fore­clo­sures in 2014, legal­ly shield­ing thou­sands of home­own­ers who owe them tens of bil­lions of euros.

    On Sat­ur­day, Greece’s Par­lia­ment sus­pend­ed, for one more year, most home repos­ses­sions. That will keep some 200,000 fam­i­lies off the streets, and their over­due prop­er­ty loans in a state of sus­pend­ed ani­ma­tion.

    The new leg­is­la­tion cov­ers only pri­ma­ry res­i­den­cies val­ued at up to €200,000 ($273,000) and house­holds with an annu­al net income of under €35,000. The total worth of a house­hold’s real estate and liq­uid assets can’t exceed €270,000, while bank deposits, shares and bonds can’t be val­ued at more than €15,000. Accord­ing to the Devel­op­ment Min­istry, 90% of Greek home­own­ers are pro­tect­ed.

    Greece’s big four banks— Nation­al Bank of Greece, Piraeus Bank, Alpha Bank and Eurobank, who con­trol more than 90% of the mar­ket between them—had been push­ing for the exten­sion, in a rever­sal of the way banks nor­mal­ly func­tion. Under nor­mal cir­cum­stances, lenders gen­er­al­ly want the free­dom to seize the col­lat­er­al of bor­row­ers who have default­ed.

    It is a mea­sure of how deeply trou­bled Greece’s bank­ing sys­tem remains that the indus­try has lob­bied, both in Athens and Brus­sels, to pre­serve the mora­to­ri­um, which began in 2008.

    After a deep, six-year reces­sion, the col­lapse of a prop­er­ty bub­ble, pan­ic among depos­i­tors and a €200 bil­lion ($275 bil­lion) sov­er­eign-debt restruc­tur­ing, Greece’s banks are in a world of hurt. This year, they were recap­i­tal­ized with the help of a Euro­pean Union loan, but togeth­er they still hold some €70 bil­lion in bad loans—a sum equal to a third of Greece’s gross domes­tic prod­uct.

    Some 24% of Greek mort­gages, or €17.4 bil­lion worth, are in default, accord­ing to Bank of Greece data. Greek real-estate prices are already down a third from their peak. A wave of repos­ses­sions, fol­lowed by wide­spread sales of the homes at dis­count­ed prices, could push prices down anoth­er 10% to 15%, ana­lysts say.

    That would force the banks to mark down the col­lat­er­al on their remain­ing prop­er­ty loans that haven’t gone sour, poten­tial­ly tear­ing a multi­bil­lion-euro hole in their bal­ance sheets.

    “The banks cer­tain­ly agree with extend­ing the ban and their efforts are aimed at mak­ing sure it’s not elim­i­nat­ed,” Paris Matza­vras, an ana­lyst at Pan­te­lakis Secu­ri­ties, said pri­or to the vote. “Extend­ing it is the best case for the banks, rather than a wave of fore­clo­sures that will depress the real-estate mar­ket fur­ther and weigh on their loan books.”

    The Greek gov­ern­ment, the banks and con­sumer groups all favor a go-slow approach. That would entail crack­ing down on the 10% to 20% of bor­row­ers who have the means to repay their loans but are choos­ing not to because of the mora­to­ri­um, while leav­ing gen­uine­ly trou­bled bor­row­ers untouched.

    “We have no inter­est or desire, or the admin­is­tra­tive capac­i­ty, to turn our banks into real-estate agen­cies,” said a senior banker at one of Greece’s Big Four lenders.

    Many home­own­ers also sup­port that approach. Andreas Papadopou­los, who owes mon­ey from a messy busi­ness bank­rupt­cy and has­n’t worked since 2009, says the fore­clo­sure ban should last for as long as Greece is in reces­sion.

    “I have always been a reli­able pay­er,” said the 60-year-old busi­ness­man, who owes €200,000 on a loan that is backed by his house. “But in the last three to four years, there has been no work, no cash, no oppor­tu­ni­ties. What else is there to take? Only our homes and our dig­ni­ty.”

    “After the cri­sis, I will find a job and pay off the loan,” he added.

    In oth­er wob­bling euro-zone coun­tries, banks have also been reluc­tant to rec­og­nize the full loss­es on their loan port­fo­lios. The prac­tice of “extend and pre­tend,” in which banks repeat­ed­ly restruc­ture loan terms to avoid hav­ing to rec­og­nize cost­ly loss­es, has been wide­spread in coun­tries such as Spain. But reg­u­la­tors in those coun­tries have pushed the banks to end what they regard as unre­al­is­tic for­bear­ance poli­cies.

    That prob­a­bly won’t hap­pen in Greece until 2015 at the ear­li­est. Reg­u­la­tors, the banks, the gov­ern­ment and the coun­try’s inter­na­tion­al cred­i­tors are all grap­pling with how to begin restruc­tur­ing the coun­try’s moun­tain of bad debt.

    ...

    Yes, almost two years this was the argu­ment from Greece’s own banks: mass fore­clo­sures will tank the econ­o­my and our bal­ance sheets. Please. Don’t:

    ...
    Some 24% of Greek mort­gages, or €17.4 bil­lion worth, are in default, accord­ing to Bank of Greece data. Greek real-estate prices are already down a third from their peak. A wave of repos­ses­sions, fol­lowed by wide­spread sales of the homes at dis­count­ed prices, could push prices down anoth­er 10% to 15%, ana­lysts say.

    That would force the banks to mark down the col­lat­er­al on their remain­ing prop­er­ty loans that haven’t gone sour, poten­tial­ly tear­ing a multi­bil­lion-euro hole in their bal­ance sheets.

    “The banks cer­tain­ly agree with extend­ing the ban and their efforts are aimed at mak­ing sure it’s not elim­i­nat­ed,” Paris Matza­vras, an ana­lyst at Pan­te­lakis Secu­ri­ties, said pri­or to the vote. “Extend­ing it is the best case for the banks, rather than a wave of fore­clo­sures that will depress the real-estate mar­ket fur­ther and weigh on their loan books.”
    ...

    Hmmm...so either the sit­u­a­tion has sub­stan­tial­ly improved in Greece’s econ­o­my over the last cou­ple of years to the point where mass fore­clo­sures won’t have a mas­sive­ly neg­a­tive impact on the Greek econ­o­my and social cohe­sion or this is just anoth­er exam­ple of the Troi­ka, well, being the Troi­ka.

    Regard­less, it’s look­ing like Greece’s is prob­a­bly about to face a wave of fore­clo­sures. And giv­en the urgency of the sit­u­a­tion, it’s prob­a­bly going to be fac­ing that wave soon. Why so urgent? Well, it isn’t just that those big banks need to be recap­i­tal­ized soon­er or lat­er. Thanks to new EU bank­ing union law, if Greece does­n’t resolve this impasse with the Troi­ka before Jan­u­ary, any future bank recap­i­tal­iza­tion schemes will hap­pen after these new laws take effect. And those laws, which impact the entire EU, means a Cyprus-style “bail-in” raid­ing of Greek bank deposits to help pay for recap­i­tal­iza­tion will sud­den­ly be required:

    Reuters
    Greece must recap­i­tal­ize its banks by year end: EU’s Dom­brovskis

    ATHENS | By Lef­t­eris Papadi­mas and Michele Kam­bas
    Tue Oct 27, 2015 4:39pm EDT

    Greece and inter­na­tion­al lenders must recap­i­tal­ize its banks by the end of the year and swift­ly final­ize an assess­ment of the coun­try’s bailout-man­dat­ed eco­nom­ic reforms, EU Com­mis­sion Vice-Pres­i­dent Vald­is Dom­brovskis said on Tues­day.

    Unless Greece’s four biggest banks are recap­i­tal­ized before leg­is­la­tion takes effect in Jan­u­ary, depos­i­tors will be liable for plug­ging cap­i­tal short­falls, he said.

    “Euro group con­clu­sions on this ques­tion are quite clear, that recap­i­tal­iza­tion of the banks is to take place after the first review, but no lat­er than the 15th of Novem­ber,” Dom­brovskis told Greece’s Skai TV in an inter­view.

    Dom­brovskis — in Athens to dis­cuss the reforms Greece needs to com­plete under terms of an 86-bil­lion-euro ($95-billion)bailout — said that things would get “more com­pli­cat­ed” if that did not hap­pen.

    “Then you need to apply the Bank Res­o­lu­tion and Recov­ery Direc­tive ... which may imply a bail-in,” he said, refer­ring to bank depos­i­tors being forced to con­tribute to recap­i­tal­iza­tion, sim­i­lar to a raid on deposits in Cyprus in 2013.

    Greece is talk­ing to the Euro­pean Com­mis­sion, the Euro­pean Cen­tral Bank (ECB), the euro zone’s Euro­pean Sta­bil­i­ty Mech­a­nism and the Inter­na­tion­al Mon­e­tary Fund (IMF) on reforms. But the IMF’s par­tic­i­pa­tion in stump­ing up cash is far from cer­tain.

    “IMF par­tic­i­pa­tion also, to a large extent, depends on the debt sus­tain­abil­i­ty analy­sis and a pos­si­ble debt repro­fil­ing,” Dom­brovskis said.

    Under the deal, Greece is set to receive up to 25 bil­lion euros of inter­na­tion­al mon­ey to recap­i­tal­ize its banks, three of which are major­i­ty-owned by Greece’s bank bailout fund HFSF.

    ...

    Dis­agree­ments emerged with rep­re­sen­ta­tives of lenders in Athens last week over Greece’s reform progress, need­ed to unlock a sub-tranche of 3 bil­lion euros.

    The biggest dis­agree­ment was over the mech­a­nism to tack­le non-per­form­ing loans at banks. Athens wants pro­tec­tion from fore­clo­sures to cov­er prop­er­ty val­ues of at least 200,000 euros. Lenders say the thresh­old should be about 120,000 euros.

    Com­ing up with an effec­tive mech­a­nism to cope with bad loans is impor­tant for Greek banks because of the impact of non-per­form­ing loans on cap­i­tal buffers.

    That’s right, under the EU’s new law, mod­eled after the Cyprus expe­ri­ence, Greek depos­i­tors could end up being “liable for plug­ging cap­i­tal short­falls” in the banks that are on the verge of col­lapse large­ly because the Greek econ­o­my col­lapsed. And that even­tu­al­i­ty could come about if Greece does­n’t pla­cate the Troi­ka by Novem­ber 15th:

    ...
    Unless Greece’s four biggest banks are recap­i­tal­ized before leg­is­la­tion takes effect in Jan­u­ary, depos­i­tors will be liable for plug­ging cap­i­tal short­falls, he said.

    “Euro group con­clu­sions on this ques­tion are quite clear, that recap­i­tal­iza­tion of the banks is to take place after the first review, but no lat­er than the 15th of Novem­ber,” Dom­brovskis told Greece’s Skai TV in an inter­view.

    Dom­brovskis — in Athens to dis­cuss the reforms Greece needs to com­plete under terms of an 86-bil­lion-euro ($95-billion)bailout — said that things would get “more com­pli­cat­ed” if that did not hap­pen.

    “Then you need to apply the Bank Res­o­lu­tion and Recov­ery Direc­tive ... which may imply a bail-in,” he said, refer­ring to bank depos­i­tors being forced to con­tribute to recap­i­tal­iza­tion, sim­i­lar to a raid on deposits in Cyprus in 2013.
    ...

    So it’s look­ing like, once again, there’s a busy week of nego­ti­a­tions ahead for Greece and its cred­i­tors. And, once again, Greece’s EU brethren are per­fect­ly will­ing to let Greece know that if it does­n’t rapid­ly accept the Troika’s poten­tial­ly high­ly dam­ag­ing demands even greater socioe­co­nom­ic dam­age will take place instead.

    In oth­er words, a num­ber of major ‘pro-busi­ness’ changes are head­ing towards the EU and espe­cial­ly Greece. And it looks like they’re going to fur­ther trash the place. Because it’s busi­ness as usu­al.

    At least France appears to be giv­ing Greece a smat­ter­ing of pub­lic sup­port. Could be worse!

    Posted by Pterrafractyl | November 9, 2015, 9:41 pm
  8. Part of what makes the ongo­ing Greek Tragedy so trag­ic is the hell­ish nature of the sit­u­a­tion the Troi­ka has imposed on Greece. Mean­ing­ful debt-relief is simul­ta­ne­ous­ly demand­ed by the IMF and refused by the EU and the one thing the two sides can agree on is that Greece imple­ment the self-rein­forc­ing aus­ter­i­ty regime. And there’s no real vision for a future econ­o­my that does­n’t involve wide­spread pover­ty and inse­cu­ri­ty. Just a neolib­er­al Field of Dreams sce­nario: if the Troika’s aus­ter­i­ty agen­da is imple­ment­ed, Greece will just start pros­per­ing under a eco­nom­ic growth will com­mence. That’s the only plan and it’s a doomed plan which is part of why it’s a hell­ish sit­u­a­tion.

    So, at this point, reduced inter­est pay­ments on Greece’s debt is the only pos­i­tive thing being dan­gled out there for Greece. At the same time, as the arti­cle below points out, plans for cap­ping the amount of gov­ern­ment debt euro­zone banks can hold and elim­i­nat­ing the “zero risk” account­ing rules for euro­zone gov­ern­ment debt are appar­ent­ly pro­ceed­ing ahead. And as the arti­cle also points out, that means a big sell off in euro­zone gov­ern­ment debt is prob­a­bly on the way over the next decade. And that means the weak­er coun­tries like Greece could end up pay­ing a lot more in inter­est as banks are forced to dump gov­ern­ment bonds that are sud­den­ly declared riski­er and worth less than before. So, to put it anoth­er way, Greece had bet­ter get at least some sig­nif­i­cant reduc­tions in debt inter­est rates just to avoid see­ing itself in a new debt-death spi­ral because the euro­zone has found a new way to imple­ment its hell­ish sup­ply-side rev­o­lu­tion across the con­ti­nent: force the pub­lic to pay high­er inter­est on gov­ern­ment debt:

    The Wall Street Jour­nal

    Euro­zone Could Ease Greek Debt in Future, Not Now, Eurogroup Head Says
    Such action in the future would depend on Athens keep­ing a pri­ma­ry bud­get sur­plus, says Dijs­sel­bloem

    By Gabriele Stein­hauser
    Updat­ed Jan. 22, 2016 11:24 a.m. ET

    DAVOS, Switzerland—A planned deal to light­en Greece’s debt bur­den could see euro­zone gov­ern­ments promise to ease peak pay­ments in the future—but take action only once Athens has proven its com­mit­ment to run­ning a tight bud­get, the pres­i­dent of the Eurogroup of finance min­is­ters said.

    The com­ments, made in an inter­view on the side­lines of the World Eco­nom­ic Forum here, her­ald a like­ly fight in the com­ing months between Greece’s cred­i­tors, the oth­er 18 euro coun­tries and the Inter­na­tion­al Mon­e­tary Fund.

    The Inter­na­tion­al Mon­e­tary Fund, which financed Greece’s first two bailouts along with the euro­zone, has made aggres­sive action to reduce the country’s debt a pre­con­di­tion for par­tic­i­pat­ing in a third res­cue agreed last sum­mer. But the cur­ren­cy union’s gov­ern­ments remain reluc­tant to take imme­di­ate steps on Greece’s debt—such as giv­ing it more time to repay euro­zone loans or pro­long­ing inter­est-rate holidays—amid doubts over Athens’ will­ing­ness to imple­ment fur­ther aus­ter­i­ty poli­cies.

    One poten­tial solu­tion to this dilem­ma is a promise by the euro­zone to reduce peaks in Greece’s pay­ment sched­ule fur­ther down the line, said Jeroen Dijs­sel­bloem, the Dutch finance min­is­ter who pre­sides over the dis­cus­sions with his coun­ter­parts in the cur­ren­cy union.

    “One (option) is that we sim­ply promise each oth­er. They promise to their Euro­pean part­ners to main­tain the pri­ma­ry sur­plus, in oth­er words to run a good bud­get. And we promise that we stand ready to smooth out these peaks in the future,” Mr. Dijs­sel­bloem said.

    “That would actu­al­ly be a sen­si­ble solu­tion, because the first peak is in 10 or 15 years’ time and it’s very hard to pre­dict how siz­able it will be,” he added.

    The mag­ni­tude of debt relief will depend on how much Greece’s econ­o­my grows in the com­ing years, Mr. Dijs­sel­bloem said.

    Alter­na­tive­ly, the euro­zone could try to cal­cu­late now what mea­sures would be nec­es­sary and take imme­di­ate action to reduce pay­ment peaks, he said.

    Should the euro­zone opt for push­ing debt relief for Greece into the future it may strug­gle to get the IMF to get involved in the cur­rent bailout. The Wash­ing­ton-based fund says its own rules pre­vent it from help­ing the coun­try while its debt is unsus­tain­able. With­out relief, Greece’s debt is expect­ed to reach almost 200% of gross domes­tic prod­uct this year.

    ...

    Mr. Dijs­sel­bloem said that before euro­zone gov­ern­ments and the IMF can start talk­ing about Greece’s debt, the gov­ern­ment in Athens must imple­ment a promised over­haul of its pen­sion sys­tem and close gaps in its bud­get.

    Pro­pos­als sub­mit­ted by Greece ear­li­er this month still fall short of cred­i­tor demands, Mr. Dijs­sel­bloem said.

    “They’ve put a seri­ous pen­sion reform on the table. It doesn’t add up yet,” he said.

    Apart from the loom­ing talks on Greece’s debt, Mr. Dijs­sel­bloem said he would push for an agree­ment this year to cap the amount of gov­ern­ment bonds euro­zone banks are allowed to hold—a move that could lead to a major sell­off of these assets in the com­ing years.

    Once a deal has been found by euro­zone finance min­is­ters and the Euro­pean Par­lia­ment, lenders could then be giv­en eight years to cut down their hold­ings, with the lim­its to become bind­ing in 2024, he said.

    ...

    The ques­tion of so-called expo­sure lim­its for gov­ern­ment bonds has been thrown into the cen­ter of a broad­er tus­sle with­in the cur­ren­cy union over the cre­ation of a joint deposit-insur­ance sys­tem for all 19 mem­bers.

    Ger­many and oth­er fis­cal­ly hawk­ish states say curb­ing banks’ hold­ings of gov­ern­ment bonds—especially those of their home country–is nec­es­sary to sev­er the tox­ic link between banks and their gov­ern­ments and pre­vent future bailouts.

    Coun­tries such as Italy and France mean­while are wor­ried that a uni­lat­er­al move by Europe to intro­duce expo­sure lim­its could make it hard­er for some gov­ern­ments to sell their bonds and hurt their economies.

    Under inter­na­tion­al cap­i­tal rules, sov­er­eign bonds are con­sid­ered zero risk, allow­ing lenders to stash up on them with­out hold­ing any extra safe­ty buffers. In 2014, the aver­age euro­zone bank owned bonds from its home coun­try val­ued at 118% of total capital—much more than U.S. banks, whose aver­age expo­sure to U.S. bonds was 14% of equi­ty.

    The sell­off of gov­ern­ment bonds that would be trig­gered by caps on expo­sures could be cush­ioned by the Euro­pean Cen­tral Bank’s asset pur­chase pro­gram, Mr. Dijs­sel­bloem said.

    “At the moment there is this oppor­tu­ni­ty,” he said.

    Accord­ing to a 2014 analy­sis from Fitch Rat­ings, major euro­zone banks would have to shed around €1.1 tril­lion ($1.2 tril­lion) of gov­ern­ment bonds if they were required to reduce their hold­ings to 25% of capital—in line with expo­sure lim­its on oth­er assets. If expo­sure was capped at 50% of cap­i­tal, the sell­off could reach €800 bil­lion.

    Mr. Dijs­sel­bloem said the euro­zone would pre­fer an inter­na­tion­al rule on the treat­ment of sov­er­eign bonds on banks’ bal­ance sheets, but, he added, “where we don’t have standards…we will devel­op them on a region­al lev­el.”

    “Should the euro­zone opt for push­ing debt relief for Greece into the future it may strug­gle to get the IMF to get involved in the cur­rent bailout. The Wash­ing­ton-based fund says its own rules pre­vent it from help­ing the coun­try while its debt is unsus­tain­able. With­out relief, Greece’s debt is expect­ed to reach almost 200% of gross domes­tic prod­uct this year.”
    That’s the crux of the prob­lem for Greece. High debt and an aus­ter­i­ty regime that makes pay­ing it off basi­cal­ly impos­si­ble. So the crux of prob­lem is basi­cal­ly usury. And as we saw, as bad as things are for Greece now, the usury sched­ule isn’t set to peak for anoth­er 10 to 15 years and the most the euro­zone is offer­ing Greece at this point is a future reduc­tion in inter­est-rates because they’re con­cerned any imme­di­ate reduc­tions would reduce Greece’s com­mitt­ment to the aus­ter­i­ty pro­gram:

    ...
    The Inter­na­tion­al Mon­e­tary Fund, which financed Greece’s first two bailouts along with the euro­zone, has made aggres­sive action to reduce the country’s debt a pre­con­di­tion for par­tic­i­pat­ing in a third res­cue agreed last sum­mer. But the cur­ren­cy union’s gov­ern­ments remain reluc­tant to take imme­di­ate steps on Greece’s debt—such as giv­ing it more time to repay euro­zone loans or pro­long­ing inter­est-rate holidays—amid doubts over Athens’ will­ing­ness to imple­ment fur­ther aus­ter­i­ty poli­cies.

    One poten­tial solu­tion to this dilem­ma is a promise by the euro­zone to reduce peaks in Greece’s pay­ment sched­ule fur­ther down the line, said Jeroen Dijs­sel­bloem, the Dutch finance min­is­ter who pre­sides over the dis­cus­sions with his coun­ter­parts in the cur­ren­cy union.

    “One (option) is that we sim­ply promise each oth­er. They promise to their Euro­pean part­ners to main­tain the pri­ma­ry sur­plus, in oth­er words to run a good bud­get. And we promise that we stand ready to smooth out these peaks in the future,” Mr. Dijs­sel­bloem said.

    “That would actu­al­ly be a sen­si­ble solu­tion, because the first peak is in 10 or 15 years’ time and it’s very hard to pre­dict how siz­able it will be,” he added.

    The mag­ni­tude of debt relief will depend on how much Greece’s econ­o­my grows in the com­ing years, Mr. Dijs­sel­bloem said.

    ...

    “But the cur­ren­cy union’s gov­ern­ments remain reluc­tant to take imme­di­ate steps on Greece’s debt—such as giv­ing it more time to repay euro­zone loans or pro­long­ing inter­est-rate holidays—amid doubts over Athens’ will­ing­ness to imple­ment fur­ther aus­ter­i­ty poli­cies.”
    Yep, the euro­zone is tak­ing a “debt-relief only encour­ages dis­obe­di­ence” approach. And if Greece behaves for the fore­see­able future and imple­ments the insane aus­ter­i­ty that’s doom­ing a gen­er­a­tion of Greeks to pover­ty, the Toi­ka will con­sid­er cut­ting inter­est-rates and/or extend­ing the repay­ment sched­ule.

    But even if there’s no escape for Greece, things can obvi­ous get even worse with­in the the Troikan hell. So let’s hope Greece can at least get the reduced inter­est-rates set up for when its debt pay­ments peak 10–15 years from now, because it sounds like the new plan to remove the “zero-risk” sta­tus of gov­ern­ment bonds and cap bank hold­ings is going to Greece’s pub­lic financ­ing, along with the rest of the euro­zone’s, a lot more expen­sive:

    ...

    Apart from the loom­ing talks on Greece’s debt, Mr. Dijs­sel­bloem said he would push for an agree­ment this year to cap the amount of gov­ern­ment bonds euro­zone banks are allowed to hold—a move that could lead to a major sell­off of these assets in the com­ing years.

    Once a deal has been found by euro­zone finance min­is­ters and the Euro­pean Par­lia­ment, lenders could then be giv­en eight years to cut down their hold­ings, with the lim­its to become bind­ing in 2024, he said.

    “We will see whether we can get it done,” Mr. Dijs­sel­bloem said.

    The ques­tion of so-called expo­sure lim­its for gov­ern­ment bonds has been thrown into the cen­ter of a broad­er tus­sle with­in the cur­ren­cy union over the cre­ation of a joint deposit-insur­ance sys­tem for all 19 mem­bers.

    Ger­many and oth­er fis­cal­ly hawk­ish states say curb­ing banks’ hold­ings of gov­ern­ment bonds—especially those of their home country–is nec­es­sary to sev­er the tox­ic link between banks and their gov­ern­ments and pre­vent future bailouts.

    Coun­tries such as Italy and France mean­while are wor­ried that a uni­lat­er­al move by Europe to intro­duce expo­sure lim­its could make it hard­er for some gov­ern­ments to sell their bonds and hurt their economies.

    Under inter­na­tion­al cap­i­tal rules, sov­er­eign bonds are con­sid­ered zero risk, allow­ing lenders to stash up on them with­out hold­ing any extra safe­ty buffers. In 2014, the aver­age euro­zone bank owned bonds from its home coun­try val­ued at 118% of total capital—much more than U.S. banks, whose aver­age expo­sure to U.S. bonds was 14% of equi­ty.

    The sell­off of gov­ern­ment bonds that would be trig­gered by caps on expo­sures could be cush­ioned by the Euro­pean Cen­tral Bank’s asset pur­chase pro­gram, Mr. Dijs­sel­bloem said.
    ...

    “The sell­off of gov­ern­ment bonds that would be trig­gered by caps on expo­sures could be cush­ioned by the Euro­pean Cen­tral Bank’s asset pur­chase pro­gram, Mr. Dijs­sel­bloem said.”
    The ECB is going to be mop­ping up the gov­ern­ment bonds sold off by the euro­zone banks. At least that’s the plan, and it’s a plan that could involve play­ing out for a decade or longer. So it will be inter­est­ing to see how this plan for cap­ping gov­ern­ment bond pur­chas­es by banks and remov­ing “zero risk” poli­cies, which are things Jens Wei­d­mann at the Bun­des­bank has long been clam­or­ing for, impacts the resis­tance to the ECB’s QE pro­grams, some­thing Berlin has long opposed. Hmmm....how might Jens Wei­d­mann deal with the prospect of accept­ing an ECB action he’s opposed in order to achieve a gov­ern­ment-shrink­ing pol­i­cy he’s cham­pi­oned. Well, he might still oppose it

    Reuters

    Wei­d­mann warns ECB not to go too far with gov­ern­ment bond pur­chas­es

    BERLIN
    Thu Jan 28, 2016 1:04pm EST

    Euro­pean Cen­tral Bank Gov­ern­ing Coun­cil mem­ber Jens Wei­d­mann warned the ECB in a news­pa­per inter­view not to go too far with its bond-buy­ing pro­gram as this would have the same effect as buy­ing gov­ern­ment bonds direct­ly from issuer coun­tries.

    “If the pur­chase vol­ume becomes too large, the pur­chas­es will have an impact on the sec­ondary mar­ket sim­i­lar to that of direct pur­chas­es from the states that are for­bid­den for us,” Wei­d­mann told Frank­furter All­ge­meine Zeitung in an inter­view due to be pub­lished on Fri­day.

    So it’s look­ing like the euro­zone has a long-term plan to reduce gov­ern­ment spend­ing and min­i­mize the “sov­er­eign-bank­ing nexus” by imple­ment­ing a cap on the amount of gov­ern­ment debt banks can hold while simul­ta­ne­ous­ly declar­ing that debt to be riski­er and there­fore high­er inter­est. And in order to deal with inevitable sell-off of cur­rent­ly held gov­ern­ment debt, the ECB would prob­a­bly be the chief buy­er to cush­ion the mar­kets. Except this plan relies on the ECB being allowed to car­ry­ing out its QE poli­cies for years to come and, of course, Jens Wei­d­mann issued anoth­er warn­ing about how the the ECB bet­ter now keep buy­ing gov­ern­ment bond. And if Wei­d­mann or like-mind­ed euro­zone cen­tral bankers should man­age to derail the ECB’s bond buy­ing over this medi­um-term time frame, the euro­zone debt mar­kets for mem­bers like Greece could sud­den­ly get a lot more expen­sive. And even if things go smooth­ly, it’s look­ing like the euro­zone has found a new line of attack in its “death by a thou­sand cuts” war the Euro­pean pub­lic sec­tor.

    It is with­in this con­text that Greece is being made an offer of more aus­ter­i­ty, no debt-relief, but maybe some low­er inter­est rates. But only in the future and after Greece imple­ments all its man­dat­ed aus­ter­i­ty. So hope­ful­ly Greece man­ages to find some sort of light at the end of the tun­nel in these cru­cial upcom­ing debt-relief nego­ti­a­tions, but some­times the light is just the begin­ning of the well-lit sec­tion of the tun­nel where you can final­ly see writ­ing on the wall...“Lasciate ogne sper­an­za, voi ch’in­trate.”

    Posted by Pterrafractyl | February 29, 2016, 12:38 am
  9. Wow. So it turns out the Bun­des­bank recent­ly request­ed a bit of a tweak to the euro­zone a few weeks ago: The Euro­pean Sta­bil­i­ty Mech­a­nism (ESM), the spe­cial bailout fund basi­cal­ly run by the euro­zone’s Finan­cial Min­is­ters (which means it’s a group the Bun­des­bank would dom­i­nate), should replace the Troi­ka as the finan­cial cri­sis arbiter for euro­zone mem­ber states in future crises. The ESM is the new Troi­ka. With enhanced Troi­ka pow­ers because it’s sole­ly call­ing the shots. Uh oh:

    Bloomberg News

    Bun­des­bank Pro­pos­es Reform of Euro­pean Cri­sis Response Mech­a­nism

    Jana Randow

    July 18, 2016 — 5:02 AM CDT

    * ESM sug­gest­ed as the region’s lead­ing fis­cal author­i­ty
    * Cen­tral bank calls for new bond terms to ease restruc­tur­ing

    Germany’s Bun­des­bank pro­posed reforms to stream­line Europe’s response to future fis­cal crises.

    The cen­tral bank sug­gests turn­ing the Euro­pean Sta­bil­i­ty Mech­a­nism into the region’s lead­ing fis­cal author­i­ty with com­pe­tences encom­pass­ing those cur­rent­ly car­ried out by the Euro­pean Com­mis­sion and the Euro­pean Cen­tral Bank. It also wants a change in the terms of new gov­ern­ment-debt issues to allow eas­i­er restruc­tur­ing and a matu­ri­ty exten­sion should the coun­try enter an aid pro­gram.

    ...

    With con­sen­sus lack­ing for a fis­cal and polit­i­cal Euro­pean union, the region’s eco­nom­ic frame­work must be strength­ened with­in exist­ing treaties, the Bun­des­bank said in its month­ly bul­letin on Mon­day. “Fur­ther reforms should aim at anchor­ing a sta­bil­i­ty-ori­ent­ed fis­cal pol­i­cy in mem­ber states, lim­it­ing sys­temic con­ta­gion effects as much as pos­si­ble and strength­en­ing finan­cial sta­bil­i­ty over­all.”

    ESM Role

    The Frank­furt-based cen­tral bank sug­gest­ed that the ESM, whose com­pe­tences are cur­rent­ly large­ly lim­it­ed to issu­ing debt to finance loans to euro-area mem­ber states, could take the lead in assess­ing eco­nom­ic prospects, debt sus­tain­abil­i­ty and finan­cial needs of a coun­try ask­ing for a bailout. Those tasks have so far rest­ed with the so-called troi­ka of Euro­pean Com­mis­sion, ECB and Inter­na­tion­al Mon­e­tary Fund. The ESM would also over­see any aid pro­gram and nego­ti­ate between the gov­ern­ment and cred­i­tors if a restruc­tur­ing is unavoid­able.

    The Bun­des­bank also sug­gest­ed terms for new­ly issued bonds that would auto­mat­i­cal­ly extend their matu­ri­ties for the dura­tion of an assis­tance pro­gram with­out trig­ger­ing a cred­it event.

    Such a change would make it eas­i­er to deter­mine whether a coun­try suf­fers from a short-term liq­uid­i­ty squeeze or a more fun­da­men­tal debt-sus­tain­abil­i­ty prob­lem, while main­tain­ing the lia­bil­i­ties of investors. At the same time, the fire­pow­er of the ESM would be increased — bailout pro­grams could be small­er in size as aid wouldn’t be used to repay matur­ing debt.
    Faster Restruc­tur­ing

    A one-step major­i­ty require­ment for col­lec­tive-action claus­es could be anoth­er ben­e­fi­cial change, accord­ing to the Bun­des­bank. If a qual­i­fied major­i­ty of cred­i­tors can agree to a bind­ing cross-matu­ri­ty debt restruc­tur­ing, it would speed up the process, neu­tral­ize incen­tives for hold­outs and reduce the ben­e­fits of acquir­ing block­ing minori­ties, it said.

    The Bun­des­bank reform pro­pos­al “doesn’t present an imme­di­ate or sim­ple solu­tion for prob­lems relat­ed to part­ly still very high sov­er­eign indebt­ed­ness of mem­ber states, and dif­fi­cul­ties with a poten­tial restruc­tur­ing would only be reduced step by step in the inter­im peri­od,” the cen­tral bank said. “Gov­ern­ments have to use the time to imple­ment the agreed con­sol­i­da­tion mea­sures and make their finances more cri­sis resis­tant.”

    “The Frank­furt-based cen­tral bank sug­gest­ed that the ESM, whose com­pe­tences are cur­rent­ly large­ly lim­it­ed to issu­ing debt to finance loans to euro-area mem­ber states, could take the lead in assess­ing eco­nom­ic prospects, debt sus­tain­abil­i­ty and finan­cial needs of a coun­try ask­ing for a bailout. Those tasks have so far rest­ed with the so-called troi­ka of Euro­pean Com­mis­sion, ECB and Inter­na­tion­al Mon­e­tary Fund. The ESM would also over­see any aid pro­gram and nego­ti­ate between the gov­ern­ment and cred­i­tors if a restruc­tur­ing is unavoid­able.

    That’s right, the Bun­des­bank wants con­sti­tu­tion con­trol of the purse-strings in the event of a mem­ber state finan­cial cri­sis. What hap­pens dur­ing a euro­zone-wide cri­sis isn’t clear but it’s prob­a­bly not super great. So a month after the Brex­it, the Bun­des­bank just asked for the pow­ers to take Troikan pow­er. OMFG.

    Also:

    ...
    A one-step major­i­ty require­ment for col­lec­tive-action claus­es could be anoth­er ben­e­fi­cial change, accord­ing to the Bun­des­bank. If a qual­i­fied major­i­ty of cred­i­tors can agree to a bind­ing cross-matu­ri­ty debt restruc­tur­ing, it would speed up the process, neu­tral­ize incen­tives for hold­outs and reduce the ben­e­fits of acquir­ing block­ing minori­ties, it said.
    ...

    That sounds scary.

    What’s next? How about Bun­des­bank chief Jens Wei­d­mann whin­ing about tweak­ing the QE:

    Reuters

    Pos­si­bil­i­ties to adjust QE but must not alter design-ECB’s Wei­d­mann

    Thu Aug 4, 2016 2:51am EDT

    Aug 4 There are pos­si­bil­i­ties to adjust the Euro­pean Cen­tral Bank’s quan­ti­ta­tive eas­ing (QE) pro­gramme, but it is impor­tant not to alter the design, Bun­des­bank Pres­i­dent Jens Wei­d­mann said in an inter­view pub­lished on Thurs­day.

    “With a view to the pro­gramme, there are adjust­ment pos­si­bil­i­ties. But from my point of view we must be very care­ful with the con­fig­u­ra­tion,” Wei­d­mann told week­ly Die Zeit.

    The ECB cur­rent­ly buys bonds weight­ed to each coun­try’s con­tri­bu­tion to the cen­tral bank’s cap­i­tal. Ger­many is cur­rent­ly the biggest ben­e­fi­cia­ry there­fore, but changes would poten­tial­ly allow oth­er coun­tries to ben­e­fit.

    Wei­d­mann said an increase in buy­ing bonds from coun­tries with par­tic­u­lar­ly high indebt­ed­ness or bad cred­it rat­ings would dis­tance the ECB fur­ther from its core man­date.

    “If we grant indi­vid­ual coun­tries spe­cial con­di­tions or con­cen­trate increas­ing­ly on high­ly-indebt­ed coun­tries than we will blur the lines between mon­e­tary pol­i­cy and fis­cal pol­i­cy some­what fur­ther,” he told the paper.

    “This can lead to the inde­pen­dence of the cen­tral bank being called into ques­tion, which is, how­ev­er, the basis for sta­bil­i­ty-ori­en­tat­ed mon­e­tary pol­i­cy,” he said.

    He added this could increase the pres­sure in the end to keep inter­est rates low­er for longer than is nec­es­sary with a view to prices if high­ly indebt­ed states could not with­stand a rate rise.

    “If we grant indi­vid­ual coun­tries spe­cial con­di­tions or con­cen­trate increas­ing­ly on high­ly-indebt­ed coun­tries than we will blur the lines between mon­e­tary pol­i­cy and fis­cal pol­i­cy some­what fur­ther”

    Yes, beware the hor­rors of the ECB dis­tanc­ing from it’s man­date and blur­ring the lines between mon­e­tary pol­i­cy and fis­cal pol­i­cy some­what fur­ther by con­cen­trat­ing the QE pro­gram on the cri­sis-rid­den coun­tries instead of the cur­rent even dis­tri­b­u­tion (that cur­rent­ly ben­e­fits Ger­many the most). But it’s total­ly a great idea if the ESM gets to become the sole Troi­ka enti­ty in future crises. No pesky Troikan pol­i­tics to get in the way of raw Ordolib­er­al mal­prac­tice like what the Bun­des­bank nor­mal­ly advis­es in a cri­sis. That’s great. But don’t tweak the QE too much.

    The Troi­ka just because the less­er of two evils. That hap­pened. Wow.

    Posted by Pterrafractyl | August 5, 2016, 10:09 pm
  10. The EU’s bank­ing watch­dog, the Euro­pean Bank­ing Author­i­ty (EBA), weighed in on how the euro­zone should deal with the moun­tain of non-per­form­ing loans (NPLs) that con­tin­ue to weigh down the cri­sis-hit euro­zone economies: the EBA called for a a euro­zone ‘bad bank’, a pub­licly-fund­ed enti­ty set up to clean up over­whelmed finan­cial sec­tors in nations where the sit­u­a­tion has nev­er got­ten good enough to facil­i­tate an offload­ing of a mas­sive pile of cri­sis-era bad loans still on the books.

    The pro­posed ‘bad bank’ would buy non-per­form­ing loans and attempt to sell them for a peri­od, tak­ing a hit if it even­tu­al­ly can’t find a buy­er. It’s basi­cal­ly a finan­cial sys­tem bailout mech­a­nism for the euro­zone. And here’s the pro­vi­sion required to make it a pro­pos­al that might get Berlin’s sup­port: the bur­den of the cost for buy­ing up these NPLs is explic­it­ly not shared across between nations under the pro­pos­al. That’s what can poten­tial­ly get the aus­ter­i­ty-bloc on board. Avoid­ing turn­ing the euro­zone into a trans­fer union where the wealthy nations sub­si­dize the poor — which is like­ly nec­es­sary — is a key goal of Berlin and oth­er pro-aus­ter­i­ty cap­i­tals. Each euro­zone nation­al cen­tral bank will finance its own nation­al pro­gram to buy non-per­form­ing loans (while every­one ignores how many non-per­form­ing loans were due to aus­ter­i­ty imposed to pay back for­eign cred­i­tors).

    Keep in mind that the pro­pos­al’s non-intra-euro­zone-bur­den-shar­ing design does noth­ing to break the poten­tial pri­vate bank/sovereign bor­row­ing death spi­ral that a finan­cial cri­sis in small­er or weak­er mem­ber states are espe­cial­ly vul­ner­a­ble to in the euro­zone (in large part a con­se­quence of not hav­ing inde­pen­dent banks), but the design does pass polit­i­cal muster. At least that’s what it’s designed to do:

    Reuters

    EU watch­dog calls for EU bad bank to tack­le soured loans

    By Francesco Guaras­cio and Huw Jones | LUXEMBOURG/LONDON
    Mon Jan 30, 2017 | 10:43am EST

    The Euro­pean Union should cre­ate a pub­licly-fund­ed asset man­age­ment com­pa­ny to scoop up some of a tril­lion euro moun­tain of bad loans that has become a brake on eco­nom­ic growth, the bloc’s bank­ing watch­dog said on Mon­day.

    A decade since the start of a finan­cial cri­sis that forced tax­pay­ers to bail out lenders, the Euro­pean Bank­ing Author­i­ty (EBA) said deal­ing with so-called non-per­form­ing loans or NPLs was “urgent and action­able”.

    Ital­ian banks account for 276 bil­lion euros ($295 bil­lion) of the bloc’s bad loans, by far the largest of any EU bank­ing sec­tor, but 10 EU states have an aver­age bad loan ratio of 10 per­cent, well above the low sin­gle-dig­it fig­ures seen in the Unit­ed States and else­where.

    In a speech in Lux­em­bourg on Mon­day, EBA Chair­man Andrea Enria sketched out how banks could sell some of their bad loans to a new, pan-EU “asset man­age­ment com­pa­ny” or AMC.

    So far, the sale of NPLs has been ham­pered by the lack of a prop­er mar­ket for bad loans, which has result­ed in too low prices for NPLs, dis­cour­ag­ing banks from offload­ing them.

    Under the plan, loans would be priced at “real eco­nom­ic val­ue” — an assessed rather than a mar­ket price — and the AMC, a con­cept sim­i­lar to a “bad bank”, would have about three years to sell on the loans at that real eco­nom­ic val­ue.

    “If that val­ue is not achieved, the bank must take the full mar­ket price hit,” Enria said, adding EU rules on bank res­o­lu­tions, known as bail-in rules, would apply if state aid was required to recap­i­tal­ize ail­ing banks, hit­ting their cred­i­tors.

    PUBLIC SUPPORT

    Sup­port from the pub­lic sec­tor would, how­ev­er, be need­ed to launch the bad bank and who would pay is not clear yet.

    “Some sort of state inter­ven­tion to help start this process is use­ful,” Enria said, urg­ing the deploy­ment of pub­lic resources to cre­ate an effi­cient sec­ondary mar­ket for NPLs that could attract pri­vate cap­i­tal.

    Klaus Regling, who heads the Euro­pean Sta­bil­i­ty Mech­a­nism, the euro zone’s bailout fund, wel­comed Enri­a’s pro­pos­al and con­firmed state sup­port would be required.

    Regling said the new enti­ty should have a tar­get of acquir­ing up to 250 bil­lion euros of NPLs from EU banks.

    The EBA’s plan does not envis­age the shar­ing of bank risks among EU states, Enria and Regling said, because if bad loans were not sold and recap­i­tal­iza­tion were need­ed, the bill would be foot­ed only by the bank’s cred­i­tors and the home state of the lender.

    Ger­many, the EU’s largest econ­o­my, has long opposed plans to share bank risks, fear­ing its tax­pay­ers would end up pay­ing for bank res­cues in oth­er coun­tries.

    The EBA’s plan would com­ple­ment Euro­pean Cen­tral Bank pres­sure on euro zone banks to sell their NPLs and a Euro­pean Com­mis­sion pro­pos­al to amend nation­al insol­ven­cy regimes.

    While the ratio of bad loans to total loans fell slight­ly in the third quar­ter of last year to 5.4 per­cent, EU banks were still slow­er than their U.S. rivals in tack­ling soured loans.

    ...

    “The EBA’s plan does not envis­age the shar­ing of bank risks among EU states, Enria and Regling said, because if bad loans were not sold and recap­i­tal­iza­tion were need­ed, the bill would be foot­ed only by the bank’s cred­i­tors and the home state of the lender.”

    A nation­al­ly-fund­ed, no-bur­den-shar­ing euro­zone pro­gram to deal with a heap a non-per­form­ing loans. That’s what the EU’s bank­ing watch­dog said is need­ing to address the ongo­ing non-per­form­ing loans prob­lem in coun­tries like Greece or Ire­land. And while the ‘bad bank’ plan may not be opti­mal­ly designed from an eco­nom­ic stand­point due to a lack of bur­den-shar­ing, it’s clear­ly got a polit­i­cal for­mu­la that could work and get Berlin’s approval due to a lack of bur­den-shar­ing. Or not:

    Reuters

    Ger­many throws cold water on EU ‘bad bank’ plan to tack­le soured loans

    Tue Jan 31, 2017 | 11:17am EST

    Ger­many sees no ben­e­fit in set­ting up a Euro­pean ‘bad bank’ to help ail­ing lenders in some EU coun­tries to offload their soured loans, a Ger­man gov­ern­ment offi­cial said on Tues­day, pour­ing cold water on a plan pre­pared by the EU bank­ing agency.

    The chair­man of the Euro­pean Bank­ing Author­i­ty (EBA), Andrea Enria, pro­posed on Mon­day to cre­ate a pub­licly-fund­ed asset man­age­ment com­pa­ny to scoop up some of a tril­lion-euro-moun­tain of non-per­form­ing loans (NPLs). The NPLs have become a brake on the euro zone’s eco­nom­ic growth.

    The plan was quick­ly wel­comed by Klaus Regling, the head of the euro zone bailout fund, the Euro­pean Sta­bil­i­ty Mech­a­nism, as a way to address woes that have con­tributed to low­er euro zone bank lend­ing to com­pa­nies and house­hold­ers since the finan­cial cri­sis that hit Europe a decade ago.

    But Ger­many, the bloc’s largest econ­o­my, did not share that view.

    “It is not clear what the added val­ue of a Euro­pean bad bank would be,” a Ger­man gov­ern­ment source told Reuters, adding that NPLs are a prob­lem “only in cer­tain coun­tries”.

    Berlin has been tra­di­tion­al­ly reluc­tant to back projects intend­ed to share eco­nom­ic and finan­cial risks among euro zone nations, fear­ing they could result in high costs for Ger­man tax­pay­ers.

    More than one-quar­ter of all EU NPLs are stuck in Ital­ian banks, while in Greece and Cyprus NPLs account for near­ly half of all bank­ing loans. Por­tuguese and Sloven­ian lenders are also sad­dled with almost 20 per­cent of soured loans.

    But in Ger­many, only 2.6 per­cent of loans are con­sid­ered to be at risk of not being repaid, accord­ing to EBA fig­ures.

    Enri­a’s plan is meant to speed up the sale of bad loans by cre­at­ing a more effi­cient sec­ondary mar­ket where a pub­licly-fund­ed bad bank, or asset man­age­ment com­pa­ny, would buy the loans at high­er prices than their mar­ket val­ue and try to sell them for a lim­it­ed peri­od, like three years.

    Under the plan, if NPLs were not sold in the fore­seen peri­od, banks would need to write them off, and the result­ing loss­es would hit cred­i­tors and tax­pay­ers of the bank’s home coun­try in the case of pub­lic inter­ven­tion.

    ...

    “It is not clear what the added val­ue of a Euro­pean bad bank would be,” a Ger­man gov­ern­ment source told Reuters, adding that NPLs are a prob­lem “only in cer­tain coun­tries”.

    Yes, despite the fact that the pro­posed ‘bad bank’ was­n’t going to involve intra-euro­zone bur­den-shar­ing, Ger­many’s gov­ern­ment source shot down the idea a ‘bad bank’ any­way by mak­ing the point that only some nations have a prob­lem with non-per­form­ing loans. That appears to be the argu­ment.

    ...
    But Ger­many, the bloc’s largest econ­o­my, did not share that view.

    “It is not clear what the added val­ue of a Euro­pean bad bank would be,” a Ger­man gov­ern­ment source told Reuters, adding that NPLs are a prob­lem “only in cer­tain coun­tries”.

    Berlin has been tra­di­tion­al­ly reluc­tant to back projects intend­ed to share eco­nom­ic and finan­cial risks among euro zone nations, fear­ing they could result in high costs for Ger­man tax­pay­ers.

    More than one-quar­ter of all EU NPLs are stuck in Ital­ian banks, while in Greece and Cyprus NPLs account for near­ly half of all bank­ing loans. Por­tuguese and Sloven­ian lenders are also sad­dled with almost 20 per­cent of soured loans.

    But in Ger­many, only 2.6 per­cent of loans are con­sid­ered to be at risk of not being repaid, accord­ing to EBA fig­ures.
    ...

    Greece, Cyprus, Italy, Por­tu­gal, and Slove­nia. Those are the nations with a non-per­form­ing loan cri­sis that just got writ­ten off as a triv­i­al­i­ty. It’s a reminder that the euro­zone isn’t just a giant exper­i­ment in cur­ren­cy shar­ing. It’s more specif­i­cal­ly an exper­i­ment in cur­ren­cy shar­ing with no bur­den shar­ing. And tha means no ‘bad bank’, even a ‘bad bank’ that does­n’t involved bur­den shar­ing.
    So as we saw, that ‘bad bank’ idea was float­ed by the EU’s bank­ing watch­dog and imme­di­ate­ly shot down by Berlin at the end of Jan­u­ary. And then ECB float­ed the same idea a few days lat­er:

    Reuters

    ECB calls for nation­al bad banks to soak up unpaid loans

    Fri Feb 3, 2017 | 2:50pm GMT

    The Euro­pean Cen­tral Bank’s Vice Pres­i­dent called on Fri­day for the cre­ation of gov­ern­ment-backed bad banks to help buy some of the 1 tril­lion euros in unpaid loans that have weighed on euro zone banks since the finan­cial cri­sis.

    With lenders in Italy and oth­er weak­er economies strug­gling to find buy­ers for their bad cred­it, Vitor Con­stan­cio called for a Euro­pean Union “blue­print” for cre­at­ing asset-man­age­ment com­pa­nies (AMC) com­pli­ant with EU rules against bailouts.

    Less than a week ago, Ger­many shot down a pro­pos­al by the Euro­pean Bank­ing Author­i­ty to cre­ate an EU-wide bad bank on the grounds that bad loans are con­cen­trat­ed in just a few coun­tries, such as Italy, Cyprus and Por­tu­gal.

    “A true Euro­pean AMC, how­ev­er, faces dif­fi­cul­ties in the present envi­ron­ment,” Con­stan­cio said at an event in Brus­sels.

    “In more imme­di­ate terms, a way for­ward could be the cre­ation of a Euro­pean blue­print for AMCs to be used at nation­al lev­el,” he added, call­ing for a “flex­i­ble approach” to Euro­pean rules.

    The ECB has been ratch­et­ing up the pres­sure on banks to offload their soured cred­it, which it says ties up cap­i­tal and curbs fresh lend­ing.

    But the mar­ket for Euro­pean bank loans has not tak­en off, with trans­ac­tions totalling 200 bil­lion euros ($215 bil­lion) in the last three years even after includ­ing expo­sures that are being repaid.

    Con­stan­cio said there was scope for nation­al gov­ern­ments to step in and fire up that mar­ket by inject­ing cap­i­tal into banks, guar­an­tee­ing secu­ri­ties backed by the non-per­form­ing loans (NPLs) — as Italy is doing — or even buy­ing some of them.

    “Secu­ri­ti­sa­tion offers anoth­er way through which gov­ern­ments may jump-start the NPL mar­ket, for exam­ple by co-invest­ing, togeth­er with pri­vate investors, in junior or mez­za­nine tranch­es,” he said.

    “As with AMCs, of course, such invest­ment would need to be com­pli­ant with state aid require­ments.”

    ...

    “With lenders in Italy and oth­er weak­er economies strug­gling to find buy­ers for their bad cred­it, Vitor Con­stan­cio called for a Euro­pean Union “blue­print” for cre­at­ing asset-man­age­ment com­pa­nies (AMC) com­pli­ant with EU rules against bailouts.”

    It looks like the ECB called for pret­ty much what the EU’s bank­ing watch­dog called for, except with more “flex­i­bil­i­ty”, pre­sum­ably in the hopes that there’s some sort of quirky ‘bad bank’ set up that Berlin will agree to (not like­ly).

    And while there’s no indi­ca­tion that Berlin is going to be inter­est­ed in a ‘bad bank’ pro­pos­al any time soon, it’s worth not­ing that the rat­ings agency Fitch weight­ed in on the idea and point­ed to three prob­lems with the EU watch­dog’s non-bur­den-shar­ing ‘bad banks’ pro­pos­al: 1. First, EU rules don’t allow it (no bur­den shar­ing). 2. Sec­ond, Ger­man oppo­si­tion won’t allow it. And 3. the the non-bur­den-shar­ing ‘bad bank’ pro­pos­als are also going to poten­tial­ly make weak­en the cred­it rat­ings of the weak­est euro­zone mem­bers after the pub­lic takes on all that non-per­form­ing loan debt.

    So that’s some­thing else to keep in mind as the euro­zone wres­tles with set­ting up a euro­zone ‘bad bank’ to deal with present and future debt crises: whether or not the ‘bad bank’ pro­pos­al is a good way to deal with some­thing like a non-per­form­ing loan cri­sis, the non-bur­den-shar­ing ver­sion of the ‘bad bank’ is prob­a­bly a bad idea:

    Finan­cial Times
    myFT

    The prob­lem with an EU-wide ‘bad bank’ – Fitch

    by: Mehreen Khan
    Feb­ru­ary 15, 2017

    Senior Euro­pean offi­cials have recent­ly raised the prospect of an EU-wide “bad bank” as a com­pre­hen­sive way to clear a finan­cial sys­tem stran­gu­lat­ed by bad loans.

    Voic­es such as the head of the Euro­pean Bank­ing Author­i­ty, the vice pres­i­dent of the Euro­pean Cen­tral Bank and the head of the eurozone’s bailout fund have all pub­licly raised the prospect of cre­at­ing a bank that would help wipe lenders’ of their non-per­form­ing loans.

    A bad bank would buy up bil­lions of euros of tox­ic loans from nation­al lenders, aim­ing to break a vicious cir­cle of falling prof­its, squeezed lend­ing and weak eco­nom­ic growth.

    But rat­ing agency Fitch has wad­ed in on the debate over cre­at­ing “asset man­age­ment com­pa­nies” as they are known, warn­ing of a pletho­ra of legal and polit­i­cal hur­dles encoun­tered by a poten­tial EU-wide scheme.

    One of the biggest prob­lems will be nav­i­gat­ing the EU’s legal frame­work on bailouts and state aid, which pro­hib­it tax­pay­er mon­ey being used to off­set loss­es at fail­ing banks.

    Ana­lysts at Fitch admit that hiv­ing off non-per­form­ing loans into a bad bad would be “pos­i­tive for bank­ing sys­tems in coun­tries with large vol­umes of non-per­form­ing loans (NPLs), help­ing banks to clean up bal­ance sheets and reduc­ing earn­ings volatil­i­ty”.

    Europe’s NPL prob­lem is most acute in its low-growth economies. In Greece and Cyprus, around a half of all loans are non-per­form­ing, account­ing for a third of all bank­ing sec­tor assets. Italy mean­while accounts for a quar­ter of the bloc’s total bad loans at €276bn – the high­est ratio of fail­ing assets of any major econ­o­my in the sin­gle cur­ren­cy area.

    Fitch also point­ed to like­ly Ger­man oppo­si­tion to pool­ing EU-wide tax­pay­er funds to help out banks across the euro­zone. Berlin has also dis­missed any sug­ges­tions of euro­zone-wide deposit insur­ance until it has more robust safe­guards that its tax­pay­ers will not be foot­ing the bill for weak Euro­pean banks in the south­ern mem­ber states.

    Look­ing for­ward, Alan Adkins, group cred­it offi­cer at Fitch, said Euro­pean gov­ern­ments were more like­ly to set up “blue­print” bad banks at a nation­al, rather than EU wide lev­el.

    “Depend­ing on its size and nature, state sup­port could increase pres­sure on some sov­er­eigns’ finances, espe­cial­ly if it caus­es offi­cial debt sta­tis­tics to wors­en”, said Mr Adkins.

    ...

    “Ana­lysts at Fitch admit that hiv­ing off non-per­form­ing loans into a bad bad would be “pos­i­tive for bank­ing sys­tems in coun­tries with large vol­umes of non-per­form­ing loans (NPLs), help­ing banks to clean up bal­ance sheets and reduc­ing earn­ings volatil­i­ty”.”

    As Fitch points out, a ‘bad bank’ would of course help clean up over­whelmed finan­cial sec­tors. But when it’s nation­al ‘bad banks’ and not one big shared ‘bad bank’ you just might end up see­ing mem­ber states fac­ing a sov­er­eign debt-cri­sis of their own. Which, you’ll recall, is what hap­pened to Ire­land after it bailed out the cred­i­tors of its biggest pri­vate bank.

    So that non-bur­den-shar­ing ‘bad bank’ pro­pos­al designed to get around Ger­man objec­tions that Ger­many still shot down sug­gests anoth­er stress in store for the euro­zone’s aus­ter­i­ty-hit nations as the shared cur­ren­cy con­tin­ues its evolution/devolution jour­ney: there’s a good chance there’s not going to be a ‘bad bank’ for the euro­zone. At all. At least not for the cur­rent non-per­form­ing loan cri­sis. Those nations like Cyprus or Slove­nia or Por­tu­gal will have to fig­ure out a dif­fer­ent way to address the non-per­form­ing loans issue.

    Or maybe there will even­tu­al­ly be a euro­zone ‘bad bank’ pro­gram set up. But even then it’s prob­a­bly going to be a bunch of sep­a­rate nation­al ‘bad banks’ instead of one shared bad bank where the wealthy and poor­er states pool their resources and share the costs. And with­out that bur­den-shar­ing the clean­ing up those non-per­form­ing loans in the cri­sis-hit nations just might trig­ger a sov­er­eign debt cri­sis. Or at least lead to a spike in bor­row­ing costs and don’t expect any sym­pa­thy from the ECB when that bor­row­ing cost spike hap­pens. Because that’s how the euro­zone rolls when it comes to bur­den-shar­ing: the options are harm­ful help or no help at all and it’s not clear which is worse.

    Posted by Pterrafractyl | February 26, 2017, 10:51 pm
  11. Pret­ty much any cri­sis these days rais­es ques­tions about the via­bil­i­ty and future of the EU and espe­cial­ly the euro­zone. When some­thing goes wrong in a big way in Europe there’s a real ques­tions as to whether or not this will be the cri­sis that final­ly caus­es the whole thing to fall apart. It’s one of the symp­toms of many endur­ing fun­da­men­tal struc­tur­al prob­lems still plagu­ing Europe fol­low­ing the whol­ly inad­e­quate response to the 2008 finan­cial cri­sis. And yet all of those under­ly­ing fun­da­men­tal struc­tur­al prob­lems have at their core an insis­tence on ensur­ing the EU isn’t real­ly a union in an mean­ing­ful sense. There isn’t actu­al­ly sol­i­dar­i­ty. It’s when a cri­sis breaks out that we learn that the EU is more like an elab­o­rate trade agree­ment between neigh­bor­ing rivals. Both in law and in spir­it.

    Might the COVID-19 glob­al pan­dem­ic that has Italy and Spain as the cur­rent epi­cen­ter bring about a change in that lack of law and spir­it? Well, if the cur­rent debate of “coro­n­abonds” is any indi­ca­tion of what to expect, no, the coro­n­avirus pan­dem­ic will not trig­ger a counter-pan­dem­ic of Euro­pean sol­i­dar­i­ty. Quite the oppo­site it seems.

    “Coro­n­abonds” is the term get­ting thrown around for the bonds that would be issued to finance a euro­zone-wide fis­cal stim­u­lus effort to coun­ter­act that eco­nom­ic shock. In a big break from the pre­vail­ing rules, the coron­bonds would be joint­ly financed, so the wealth­i­er coun­tries like Ger­many would pay the most to finance them while the mon­ey would be spent rel­a­tive­ly more by the coun­tries like Italy and Spain that need the mon­ey the most. This would vio­late one of the fun­da­men­tal rules that the wealth­i­er North­ern Euro­pean euro­zone mem­ber states, led by Ger­many, have con­sis­tent­ly held most dear through­out the euro­zone project: that mem­ber states not finance each oth­er. The prospect of becom­ing a “trans­fer union” like the Unit­ed States — where wealth­i­er states rou­tine­ly trans­fer mon­ey to the poor­er states — has remained a top fear of the lead­er­ship and major­i­ty pop­u­lace of mem­ber states like Ger­many. A great fear than see­ing the whole thing unrav­el. The prin­ci­ple of each state ‘pay­ing its own way’ has been a core prin­ci­ple for the wealth­i­est mem­ber states and that prin­ci­ple is fun­da­men­tal­ly anti-sol­i­dar­i­ty. That anti-sol­i­dar­i­ty prin­ci­ple also hap­pens to be eco­nom­i­cal­ly insane and a divorced from the real­i­ties of pool­ing togeth­er nation­al cur­ren­cies and is a big rea­son each cri­sis begs the ques­tion of whether or not it’s the final euro­zone cri­sis that caus­es the whole thing to unrav­el. The anti-sol­i­dar­i­ty oppo­si­tion to mak­ing the euro­zone a “trans­fer union” dooms the whole project and the coro­n­abond pro­pos­al is the lat­est test to see if any­thing can over­come that oppo­si­tion.

    So what’s the lat­est sta­tus on the “coro­n­abond” debate? It’s exact­ly what we should expect: South­ern Europe is call­ing for them and North­ern Europe is say­ing no way. Same as always.

    What’s new is that we’re hear­ing the sug­ges­tion that the Euro­pean Sta­bil­i­ty Mech­a­nism (ESM) — the euro­zone’s bank bailout fund — will get used for the first time. The whol­ly inad­e­quate ESM that was whol­ly inad­e­quate by design to avoid the turn­ing the euro­zone into a trans­fer union. That’s where the fund­ing for the coro­n­avirus fis­cal response will come. It’s unclear where the mon­ey will come from if the ESM is spent and more fis­cal sup­port is required. The fund has now swelled up to around 450 bil­lion euros, which is a start but it’s also prob­a­bly not enough when com­pared to the unprece­dent­ed eco­nom­ic cri­sis.

    Keep in mind that if the ESM gets spent on coro­n­avirus fis­cal stim­u­lus and that ends up being inad­e­quate, the euro­zone econ­o­my still falls apart and the banks are pre­sum­ably going to require a bailout. That’s how much oppo­si­tion there is to even flirt­ing with the idea of turn­ing the euro­zone into a trans­fer union: instead of hav­ing joint­ly pooled bonds to deal with the great­est eco­nom­ic emer­gency in recent mem­o­ry, the euro­zone is spend­ing its inad­e­quate bank bailout fund instead. It’s like they’re try­ing to implode the thing:

    Asso­ci­at­ed Press

    Virus forces Euro­peans to ask: How unit­ed do we want to be?

    By JOSEPH WILSON and ANGELA CHARLTON
    2020-03-29 16:25:15 — Sun Mar 29 2020 11:25:15 GMT ‑0500 (Cen­tral Day­light Time)

    BARCELONA, Spain (AP) — Europe’s frac­tured union came under new pres­sure this week­end, as Italy and Spain plead­ed for urgent Euro­pean help to with­stand the virus ordeal but Ger­many showed reluc­tance to plunge into any rad­i­cal new solu­tions.

    The north-south divide that has dogged the Euro­pean Union for years has resur­faced as the virus has gal­loped across the con­ti­nent, claim­ing more deaths than any oth­er region in the world.

    “It is the most dif­fi­cult moment for the EU since its foun­da­tion, and it has to be ready to rise to the chal­lenge,” Span­ish Prime Min­is­ter Pedro Sanchez said in a tele­vised address Sat­ur­day night.

    Sánchez warned them that a lack of sol­i­dar­i­ty to share the enor­mous finan­cial bur­den of the health cri­sis and the immi­nent eco­nom­ic slow­down will put the future of the bloc in dan­ger.

    “Europe must pro­vide a unit­ed social and eco­nom­ic response. We must have evi­dence that Europe lis­tens and that Europe takes action.”

    Euro­peans have shown some signs of sol­i­dar­i­ty: Ger­many and Switzer­land are treat­ing the sick from Italy and France. Ger­many and France sent masks and hos­pi­tal shirts to Italy. And the EU has pledged bil­lions in aid, and threw one of its most sacred rules out the win­dow to help coun­tries weath­er the virus-dri­ven eco­nom­ic cri­sis.

    But giv­en the scale of this dra­ma, crit­ics say that’s not near­ly enough.

    Mean­while, Chi­na and Rus­sia have made a point of send­ing med­ical aid to Italy, mak­ing some Ital­ians ques­tion where their alle­giances should lie. Cuba and Alba­nia have sent med­ical teams too.

    ’’Europe must demon­strate that it is able to respond to this his­toric call,” Ital­ian Pre­mier Giuseppe Con­te said late Sat­ur­day. “I will fight until the last drop of sweat, until the last gram of ener­gy, to obtain a strong, vig­or­ous, cohe­sive Euro­pean response.”

    Spain and Italy alone account for more than half of the world’s death toll, with hun­dreds of new vic­tims every day.

    Sánchez warned that the bloc’s south­ern mem­bers can’t bear anoth­er round of the hard-love aus­ter­i­ty applied in the 2008 reces­sion, when coun­tries like Greece and Por­tu­gal were forced to request a bailout and slash their bud­gets and social ser­vices.

    “We must not repeat the mis­takes of past crises, oth­er­wise the next debt cri­sis risks com­ing right after coro­na,” Aus­tri­an Finance Min­is­ter Ger­not Bluemel told the Aus­tria Press Agency on Sun­day. “We should use the exist­ing instru­ments before we build new con­struc­tions that have long-term effects” on Euro­pean eco­nom­ic sta­bil­i­ty.

    This time, Spain, Italy, France and six oth­er EU mem­bers have asked the union to share the bur­den of Euro­pean debt, dubbed “coro­n­abonds,” to help fight the virus. But the idea has met resis­tance.

    Ger­man Finance Min­is­ter Olaf Scholz said Sun­day that it’s impor­tant to ensure that “coun­tries can bet­ter car­ry this dif­fi­cult task and the extra cred­it they have to take on.”

    Scholz said Euro­pean coor­di­na­tion is essen­tial, but dodged a ques­tion about coro­n­abonds. Instead, he stressed that coun­tries are dis­cussing mobi­liz­ing mon­ey from the euro­zone res­cue fund cre­at­ed amid Europe’s debt cri­sis a decade ago, the Euro­pean Sta­bil­i­ty Mech­a­nism.

    “That is a very con­crete con­tri­bu­tion to sol­i­dar­i­ty in this dif­fi­cult sit­u­a­tion,” he said.

    Euro­pean Com­mis­sion Pres­i­dent Ursu­la von der Leyen also appeared unen­thu­si­as­tic about coro­n­abonds, refer­ring to them as “just a slo­gan” in a week­end inter­view with Ger­man news agency dpa. That prompt­ed dis­may in Italy.

    But Ger­many is not alone in urg­ing cau­tion. The Nether­lands, Fin­land and Auave sim­i­lar reser­va­tions about unleash­ing new aid that would have long-term impact on Europe’s col­lec­tive finances. Some want to save mon­ey in case the cri­sis gets even worse, and fear a sys­tem where fru­gal north­ern­ers eter­nal­ly sub­si­dize debt-laden south­ern­ers.

    Amid con­cerns about how the EU will sur­vive this cri­sis, Scholz insist­ed it should lead to “more Europe.”

    In clos­ing bor­ders and retreat­ing into nation­al­ist poli­cies against the spread­ing virus, Euro­pean coun­tries have flout­ed the whole idea of the EU, cre­at­ed in the wake of World War II to avoid future con­flict via open trade, and even­tu­al­ly, open bor­ders.

    ...

    ———–

    “Virus forces Euro­peans to ask: How unit­ed do we want to be?” by JOSEPH WILSON and ANGELA CHARLTON
    ; Asso­ci­at­ed Press; 03/29/2020

    “It is the most dif­fi­cult moment for the EU since its foun­da­tion, and it has to be ready to rise to the chal­lenge,” Span­ish Prime Min­is­ter Pedro Sanchez said in a tele­vised address Sat­ur­day night.”

    The most dif­fi­cult moment for the EU since its foun­da­tion. That’s a good way for Span­ish Prime Min­is­ter Pedro Sanchez to describe it. And it’s extra dif­fi­cult thanks to the poor job the EU did at address­ing its ear­li­er dif­fi­cult moments, where avoid­ing mean­ing­ful sol­i­dar­i­ty was made the top pri­or­i­ty. Is anoth­er dif­fi­cult moment going to be met with an oppo­si­tion to sol­i­dar­i­ty? Well, since Sanchez is warn­ing that the euro­zone can’t take anoth­er round of harsh aus­ter­i­ty in response to a cri­sis it sure sounds like a lack of sol­i­dar­i­ty is on the way:

    ...
    Euro­peans have shown some signs of sol­i­dar­i­ty: Ger­many and Switzer­land are treat­ing the sick from Italy and France. Ger­many and France sent masks and hos­pi­tal shirts to Italy. And the EU has pledged bil­lions in aid, and threw one of its most sacred rules out the win­dow to help coun­tries weath­er the virus-dri­ven eco­nom­ic cri­sis.

    But giv­en the scale of this dra­ma, crit­ics say that’s not near­ly enough.

    ...

    Spain and Italy alone account for more than half of the world’s death toll, with hun­dreds of new vic­tims every day.

    Sánchez warned that the bloc’s south­ern mem­bers can’t bear anoth­er round of the hard-love aus­ter­i­ty applied in the 2008 reces­sion, when coun­tries like Greece and Por­tu­gal were forced to request a bailout and slash their bud­gets and social ser­vices.

    “We must not repeat the mis­takes of past crises, oth­er­wise the next debt cri­sis risks com­ing right after coro­na,” Aus­tri­an Finance Min­is­ter Ger­not Bluemel told the Aus­tria Press Agency on Sun­day. “We should use the exist­ing instru­ments before we build new con­struc­tions that have long-term effects” on Euro­pean eco­nom­ic sta­bil­i­ty.
    ...

    And note, when we hear Aus­tri­a’s hawk­ish Finance Min­is­ter Ger­not Bluemel tell tell the press that, “We should use the exist­ing instru­ments before we build new con­struc­tions that have long-term effects” on Euro­pean eco­nom­ic sta­bil­i­ty, that’s Blumel call­ing for using the ESM. The warn­ings bout long-term effects on Euro­pean eco­nom­ic sta­bil­i­ty is code for allud­ing to the idea that if the euro­zone pools its debt the prof­li­gate South­ern Euro­pean layabout spend­thrifts will just end up bank­rupt­ing North­ern Europe. That idea is why there’s no hope for sol­i­dar­i­ty. Nation­al­ist big­otries. And that’s the pri­mor­dial fear behind that state­ment by Aus­tri­a’s finance min­is­ter about long-term effects on Euro­pean eco­nom­ic sta­bil­i­ty and why there’s a push to fall back on the ESM instead of coro­n­abonds. The ESM was already set up to allow the euro­zone to car­ry­ing euro­zone-wide bank bailouts with­out risk­ing turn­ing the place into a trans­fer union...by lim­it­ing the size of the bailout each mem­ber state can get. And if a coun­try’s bank bailout needs exceed what’s avail­able for them in ESM they have forced aus­ter­i­ty to make up for it. That’s why there’s a call for using the ESM now instead of coro­n­abonds. The ESM was mold­ed in the spir­it of no sol­i­dar­i­ty specif­i­cal­ly so they could avoid pool­ing finances even in the mid­dle of a giant finan­cial cri­sis:

    ...
    This time, Spain, Italy, France and six oth­er EU mem­bers have asked the union to share the bur­den of Euro­pean debt, dubbed “coro­n­abonds,” to help fight the virus. But the idea has met resis­tance.

    Ger­man Finance Min­is­ter Olaf Scholz said Sun­day that it’s impor­tant to ensure that “coun­tries can bet­ter car­ry this dif­fi­cult task and the extra cred­it they have to take on.”

    Scholz said Euro­pean coor­di­na­tion is essen­tial, but dodged a ques­tion about coro­n­abonds. Instead, he stressed that coun­tries are dis­cussing mobi­liz­ing mon­ey from the euro­zone res­cue fund cre­at­ed amid Europe’s debt cri­sis a decade ago, the Euro­pean Sta­bil­i­ty Mech­a­nism.

    “That is a very con­crete con­tri­bu­tion to sol­i­dar­i­ty in this dif­fi­cult sit­u­a­tion,” he said.

    Euro­pean Com­mis­sion Pres­i­dent Ursu­la von der Leyen also appeared unen­thu­si­as­tic about coro­n­abonds, refer­ring to them as “just a slo­gan” in a week­end inter­view with Ger­man news agency dpa. That prompt­ed dis­may in Italy.

    But Ger­many is not alone in urg­ing cau­tion. The Nether­lands, Fin­land and Auave sim­i­lar reser­va­tions about unleash­ing new aid that would have long-term impact on Europe’s col­lec­tive finances. Some want to save mon­ey in case the cri­sis gets even worse, and fear a sys­tem where fru­gal north­ern­ers eter­nal­ly sub­si­dize debt-laden south­ern­ers.
    ...

    So it’s look­ing like the ESM is going to be the one financ­ing any “coro­n­abonds”. And that means all of the var­i­ous strings that come attached with ESM financ­ing is also going to be in play. Strings like a deter­min­ing whether or not the euro­zone mem­ber can finance the new coro­n­avirus debt its tak­ing on and deter­min­ing whether or not the coun­try needs to impose aus­ter­i­ty to make the new coro­n­avirus debt sus­tain­able. When a coun­try taps the ESM any bailout funds funds have to be paid back in 5 to 10 years. It’s a bailout loan that adds to the nation­al debt load. So if a coun­try need to tap the ESM to finance a bailout the ESM assess­es that coun­try’s finances and if the finances are in trou­ble the coun­try has to impose aus­ter­i­ty. Yep, that’s how the euro­zone’s bailout fund seri­ous­ly works. Mani­a­cal­ly.

    Or, at least in the­o­ry. It’s nev­er been used. For obvi­ous rea­sons. No coun­try wants to use it even if they need it because of those attached strings. But now the euro­zone hawks are leav­ing the ESM as the only option for coro­n­abonds. So we might final­ly see the ESM in action. Aus­ter­i­ty and all:

    Bloomberg

    Europe Weighs Using Bailout Fund Bazooka in Virus Cri­sis

    By Nikos Chrysoloras and Vik­to­ria Den­dri­nou
    March 16, 2020, 3:52 PM CDT
    Updat­ed on March 17, 2020, 3:29 AM CDT

    * Euro­pean Sta­bil­i­ty Mech­a­nism has $458 bil­lion unused fire­pow­er
    * EU liq­uid­i­ty guar­an­tees to com­pa­nies have reached 10% of GDP

    The euro area’s gigan­tic bailout fund is explor­ing how it can use its reserves to cush­ion the impact of a virus-induced reces­sion, in a move that could help reas­sure mar­kets after a spike in bor­row­ing costs for the region’s most vul­ner­a­ble economies.

    Klaus Regling, the head of the Euro­pean Sta­bil­i­ty Mech­a­nism, said Mon­day it has an unused lend­ing capac­i­ty of 410 bil­lion euros ($458 bil­lion).

    Orig­i­nal­ly built to bail out nations at the peak of the debt cri­sis, the ESM has been most­ly idle since Greece exit­ed its emer­gency assis­tance pro­gram in 2018. While sov­er­eign bond yields across the euro area are nowhere near their cri­sis-era highs, the prospect of a deep reces­sion caused by the coro­n­avirus has led to a sharp spike in bor­row­ing costs.

    “We have a num­ber of facil­i­ties and sev­er­al of them have nev­er been used,” Regling said after a con­fer­ence call with Euro­pean Union finance min­is­ters.

    The poten­tial use of the ESM comes as pub­lic finances face increas­ing strain from cash injec­tions to strug­gling com­pa­nies and addi­tion­al spend­ing to sup­port bat­tered health­care sys­tems. EU gov­ern­ments have already announced fis­cal mea­sures of about 1% of out­put, on aver­age, for 2020, to sup­port their economies, and com­mit­ted to pro­vide liq­uid­i­ty facil­i­ties of at least 10% of the bloc’s GDP to help strug­gling com­pa­nies, accord­ing to finance min­is­ters.

    “These fig­ures could be much larg­er going for­ward,” min­is­ters said in a joint state­ment after their call.

    Accord­ing to a memo sent to nation­al gov­ern­ments by the EU’s exec­u­tive arm, and seen by Bloomberg, “GDP growth in 2020 might fall to well below zero or even be sub­stan­tial­ly neg­a­tive as a result of the COVID-19 out­break, and a coor­di­nat­ed eco­nom­ic response of Mem­ber States and EU insti­tu­tions is cru­cial to mit­i­gate these neg­a­tive reper­cus­sions on the EU econ­o­my.”

    Strings Attached

    Fund­ing from the ESM is tied to con­di­tions, such as struc­tur­al eco­nom­ic reforms and fis­cal belt-tight­en­ing. How­ev­er, all EU gov­ern­ments, includ­ing hawks such as Ger­many and the Nether­lands, have acknowl­edged that an expan­sion­ary fis­cal pol­i­cy is now nec­es­sary to help com­pa­nies deal with the liq­uid­i­ty crunch trig­gered by the viral out­break.

    “We were asked to look at what we can do, how we can con­tribute under these very dif­fer­ent cir­cum­stances,” Regling said, fol­low­ing a call in which finance chiefs pledged to use all avail­able resources to cush­ion the eco­nom­ic fall­out from the pub­lic-health emer­gency.

    ...

    ———-

    “Europe Weighs Using Bailout Fund Bazooka in Virus Cri­sis” by Nikos Chrysoloras and Vik­to­ria Den­dri­nou; Bloomberg; 03/16/2020

    Fund­ing from the ESM is tied to con­di­tions, such as struc­tur­al eco­nom­ic reforms and fis­cal belt-tight­en­ing. How­ev­er, all EU gov­ern­ments, includ­ing hawks such as Ger­many and the Nether­lands, have acknowl­edged that an expan­sion­ary fis­cal pol­i­cy is now nec­es­sary to help com­pa­nies deal with the liq­uid­i­ty crunch trig­gered by the viral out­break.”

    “Struc­tur­al eco­nom­ic reforms” and “fis­cal belt-tight­en­ing”. Those are the “con­di­tions” for tap­ping the bailout fund. It’s a bailout fund design to avoid to moral haz­ard of bailout out states that engaged in irre­spon­si­ble spend­ing which makes it a bailout fund designed to han­dle just of the many types of finan­cial and eco­nom­ic crises that can real­is­ti­cal­ly erupt. But that’s the bailout fund the euro­zone went with and that’s all they got. Because real pooled coro­n­abonds are off the table. Instead, the joint pooled fis­cal stim­u­lus is lim­it­ed to the EU-lev­el stim­u­lus of ~1% of nation­al GDPs. So basi­cal­ly a joke stim­u­lus:

    ...
    The poten­tial use of the ESM comes as pub­lic finances face increas­ing strain from cash injec­tions to strug­gling com­pa­nies and addi­tion­al spend­ing to sup­port bat­tered health­care sys­tems. EU gov­ern­ments have already announced fis­cal mea­sures of about 1% of out­put, on aver­age, for 2020, to sup­port their economies, and com­mit­ted to pro­vide liq­uid­i­ty facil­i­ties of at least 10% of the bloc’s GDP to help strug­gling com­pa­nies, accord­ing to finance min­is­ters.
    ...

    And that 1% joke EU-lev­el fis­cal stim­u­lus is part of the rea­son there’s so much clam­or for real pooled ‘coro­n­abonds’. There’s noth­ing else. But ESM-backed bonds and all those strings attached remain the only option left avail­able.

    And as the fol­low­ing arti­cle describes, the ESM has even announced that it’s already con­duct­ing debt-sus­tain­abil­i­ty assess­ments of each euro­zone mem­ber in case they decide to apply for funds. Because all those funds will have to be paid back and that might be aus­ter­i­ty.

    But there is one con­di­tion that might lim­it the amount of debt mem­ber states need to pay back. It’s not a great pro­vi­sion: the ESM will only pro­vide a cred­it line to a mem­ber state up to about 2% of its GDP for up to 12 months. This is poten­tial­ly the worst eco­nom­ic cri­sis in mod­ern his­to­ry and the ESM is offer­ing pal­try cred­it-lines with aus­ter­i­ty strings attached. Which is why Italy and Spain are so hes­i­tant about apply­ing for bailout funds despite being at the cur­rent glob­al epi­cen­ter of coro­n­avirus deaths:

    Reuters

    ESM bailout fund could issue “coro­na bonds” to finance cred­it for gov­ern­ments

    March 26, 2020 / 12:13 PM

    BRUSSELS, March 26 (Reuters) — The euro zone’s ESM bailout fund could issue “Social Sta­bil­i­ty Bonds” or “coro­na bonds” if it needs to raise mon­ey for stand­by cred­it that euro zone gov­ern­ments can tap to fight the coro­n­avirus epi­dem­ic, slides pre­pared by the fund showed on Thurs­day.

    ...

    The slides, pre­pared for a tele­con­fer­ence of EU lead­ers, showed that a cred­it line — should a gov­ern­ment choose to apply for one — could be worth up to 2% of a country’s GDP and be avail­able for 12 months, with a pos­si­bil­i­ty of extend­ing that to up to two years.

    If it is used, the mon­ey drawn would have to be repaid with­in an aver­age peri­od of five to 10 years, the slides showed.

    The cred­it line, which also opens the pos­si­bil­i­ty of unlim­it­ed bond pur­chas­es by the Euro­pean Cen­tral Bank, under its Out­right Mon­e­tary Trans­ac­tions scheme, would car­ry a small­er than usu­al ser­vice fee, nor­mal­ly set at 85 basis points.

    To get the stand­by cred­it, a gov­ern­ment would need to have its debt sus­tain­abil­i­ty assessed by the Euro­pean Com­mis­sion — a con­di­tion the high­ly indebt­ed Italy is not keen on.

    The slides showed that the Com­mis­sion would pre­pare a debt sus­tain­abil­i­ty analy­sis for all euro zone coun­tries by the end of March so that they can all apply for the cred­it, should they want to. (Report­ing by Jan Strupczews­ki; Edit­ing by Hugh Law­son)

    ————

    “ESM bailout fund could issue “coro­na bonds” to finance cred­it for gov­ern­ments”; Reuters; 03/26/2020

    “The slides, pre­pared for a tele­con­fer­ence of EU lead­ers, showed that a cred­it line — should a gov­ern­ment choose to apply for one — could be worth up to 2% of a country’s GDP and be avail­able for 12 months, with a pos­si­bil­i­ty of extend­ing that to up to two years.

    A whole 2% of a coun­try’s GDP for up to 12 months with the pos­si­bil­i­ty of extend­ing it for up to two years. That’s the extend of the coro­n­abond cred­it-line the ESM is offer­ing euro­zone mem­bers. And coun­tries like Spain and Italy aren’t get­ting any extra spe­cial treat­ment despite being extra spe­cial­ly-screwed by COVID-19. It’s part of the patho­log­i­cal­ly ‘rules based’ approach to evolv­ing the euro­zone that makes it more like forced liv­ing arrange­ment than an actu­al union. And in order to even qual­i­fy for that 2% mini-stim­u­lus, the ESM will have to con­duct a debt-sus­tain­abil­i­ty assess­ment because that 2% will have to be paid back. And if debt-lev­els are deemed to be exces­sive­ly “struc­tur­al reforms” (aus­ter­i­ty) could be imposed. It real­ly is a bailout fund designed to not be used because the ‘cure’ just makes the bad sit­u­a­tion worse:

    ...
    If it is used, the mon­ey drawn would have to be repaid with­in an aver­age peri­od of five to 10 years, the slides showed.

    ...

    To get the stand­by cred­it, a gov­ern­ment would need to have its debt sus­tain­abil­i­ty assessed by the Euro­pean Com­mis­sion — a con­di­tion the high­ly indebt­ed Italy is not keen on.

    The slides showed that the Com­mis­sion would pre­pare a debt sus­tain­abil­i­ty analy­sis for all euro zone coun­tries by the end of March so that they can all apply for the cred­it, should they want to.
    ...

    And now that debt sus­tain­abil­i­ty analy­sis is under­way by the ESM. We’ll see what kind of debt sus­tain­abil­i­ty issues the ESM dis­cov­ers in the mid­dle of a his­toric glob­al eco­nom­ic lock­down. But that’s how the euro­zone is han­dling this eco­nom­ic emer­gency: by falling back on the inad­e­quate ESM bank bailout fund that requires aus­ter­i­ty to use. It’s a reminder that aus­ter­i­ty real­ly is seen as the cure-all for every­thing in the euro­zone. Includ­ing COVID-19 appar­ent­ly.

    Posted by Pterrafractyl | March 29, 2020, 9:04 pm
  12. Here’s a quick update on the push cre­ate joint­ly financed ‘coro­n­abonds’ to help finance some sort of eco­nom­ic response to the COVID-19 inflict­ed euro­zone economies, espe­cial­ly for Italy. As we already saw, it’s a push strong­ly backed by the South­ern Euro­pean mem­ber states, along with France, and strong­ly opposed by Ger­many and the North­ern Euro­pean mem­ber states. Instead, the oppo­nents of the coro­n­abonds idea are sug­gest­ing that the bailout fund set up to deal with bank bailouts, the Euro­pean Sta­bil­i­ty Mech­a­nism (ESM), should be used instead of set­ting up a whole new joint fund­ing mech­a­nism. The ESM, of course, comes with strings attached. Aus­ter­i­ty strings. Any coun­try that signs up for an ESM cred­it-line is going to be forced to have its debt sus­tain­abil­i­ty assessed (because those ESM funds need to be paid back) and if its debt-lev­el is deemed to be too high it could be forced to impose some sort of aus­ter­i­ty by the ESM.

    So now we’re hear­ing from the head of the ESM, Klaus Regling, about his views on the coro­n­abond pro­pos­al and whether or not he thinks the ESM could ful­fill that role. The way Regling puts it, the euro­zone and broad­er EU have a vari­ety of viable options already avail­able. The ESM could be used as pro­posed for the euro­zone. The Euro­pean Union could also finance an EU-wide ‘coro­n­abond’ through the Euro­pean Com­mis­sion which can raise mon­ey against the EU bud­get. Anoth­er option is the Euro­pean Invest­ment Bank (EIB). All of those options are ready to go now, accord­ing to Regling.

    Set­ting up a new joint­ly fund­ed ‘coro­n­abond’ financ­ing mech­a­nism, how­ev­er, would take two to three years. That’s how Regling sees it. If if Regling is cor­rect, that means ‘coro­n­abond’ are basi­cal­ly off the table.

    Regling also had a rather omi­nous state­ment about the prospect of the ESM impos­ing some sort of aus­ter­i­ty on coun­tries like Italy or Spain that would be the obvi­ous states to tap the ESM if that’s the only avail­able option: Regling sug­gest­ed that, giv­en the cir­cum­stances, any con­di­tions for tap­ping that cred­it line would be min­i­mal. As Regling puts it, “There should also be a com­mit­ment to respect EU sur­veil­lance frame­works (but)... it would be no more than that.” So no more than “respect­ing EU sur­veil­lance frame­works” would be expect­ed and yet it’s the EU sur­veil­lance frame­work that impos­es the aus­ter­i­ty! So if we inter­pret Regling’s state­ment with the appro­pri­ate lev­el of cyn­i­cism (a require­ment for euro­zone crises), Regling was basi­cal­ly promis­ing that there would­n’t be any extra aus­ter­i­ty. Just the nor­mal “EU sur­veil­lance frame­work” aus­ter­i­ty.
    So that was the input about coro­n­abonds from the head of the ESM. It sounds like euro­zone lead­ers have giv­en their finance min­is­ters up to April 9th to come up with some sort of financ­ing mech­a­nism. So some time over the next cou­ple of weeks we might have an idea of how the euro­zone is plan­ning on mak­ing its lat­est eco­nom­ic dis­as­ter worse:

    Reuters

    New euro zone ‘coro­n­abonds’ body might take 3 years to set up- bailout fund head

    March 31, 2020 / 3:14 AM / Updat­ed

    BRUSSELS, March 31 (Reuters) — A new mech­a­nism to enable the issuance of joint euro zone debt to counter eco­nom­ic fall­out from the coro­n­avirus epi­dem­ic — as rec­om­mend­ed by nine Euro­pean lead­ers — could take up to three years to set up, the head of the bloc’s bailout fund said.

    How­ev­er, com­mon ‘coro­n­abonds’ could in the­o­ry be issued imme­di­ate­ly if the bloc’s exist­ing fund­ing insti­tu­tions were used, Euro­pean Sta­bil­i­ty Mech­a­nism (ESM) head Klaus Regling told the Finan­cial Times.

    ...

    Ger­many and the Nether­lands strong­ly opposed such a mech­a­nism and the nine who sup­port­ed it did not spec­i­fy how it would work. Lead­ers gave the bloc’s finance min­is­ters until April 9 to come up with ideas on sup­port­ing the econ­o­my.

    Regling said the euro zone was already issu­ing com­mon debt when the ESM was bor­row­ing on the mar­ket to lend on to gov­ern­ments.

    The Euro­pean Union could also bor­row joint­ly through the Euro­pean Com­mis­sion, which raised mon­ey against the EU bud­get, and through the Euro­pean Invest­ment Bank, owned joint­ly by EU gov­ern­ments.

    “If you use exist­ing insti­tu­tions... the EIB could do it imme­di­ate­ly. The ESM is there. They can all issue mutu­alised Euro­pean debt,” Regling said.

    “...Of course, one can also cre­ate a new insti­tu­tion if that is what the mem­ber states want. It would take one two or three years, and mem­ber states have to come up with cap­i­tal or guar­an­tees, or assign future rev­enue.”

    Euro zone finance min­is­ters had sug­gest­ed that gov­ern­ments use a pre­cau­tion­ary cred­it line (ECCL) from the bailout fund worth up to 2% of GDP to fight the cri­sis, a move that would also pave the way for unlim­it­ed Euro­pean Cen­tral Bank bond pur­chas­es if need­ed.

    Lead­ers did not reject that sug­ges­tion last week, but did not clear­ly endorse it either.

    Regling said that, to cov­er com­mon short-term financ­ing needs stem­ming from the out­break, “I think the only way is to use exist­ing insti­tu­tions with exist­ing instru­ments.”

    To get an ECCL, a coun­try has to sub­mit to a Euro­pean Com­mis­sion analy­sis if its debt is sus­tain­able, some­thing that heav­i­ly indebt­ed Italy is reluc­tant to do.

    How­ev­er, Regling said that, giv­en the cir­cum­stances, con­di­tions attached to such a cred­it line could be min­i­mal. “There should also be a com­mit­ment to respect EU sur­veil­lance frame­works (but)... it would be no more than that,” he was quot­ed as say­ing. (Report­ing by Jan Strupczews­ki; edit­ing by John Ston­estreet)

    ————

    “New euro zone ‘coro­n­abonds’ body might take 3 years to set up- bailout fund head”; Reuters; 03/31/2020

    “How­ev­er, com­mon ‘coro­n­abonds’ could in the­o­ry be issued imme­di­ate­ly if the bloc’s exist­ing fund­ing insti­tu­tions were used, Euro­pean Sta­bil­i­ty Mech­a­nism (ESM) head Klaus Regling told the Finan­cial Times.”

    As we can see, address­ing the COVID-19 eco­nom­ic shock with the kind of over­whelm­ing finan­cial fire­pow­er the cri­sis needs and address­ing it in a time­ly man­ner are mutu­al­ly exclu­sive options. At least for the euro­zone. If they want to some sort of ‘coro­n­abond’ joint response soon they’re going to have to rely on an insti­tu­tion like the ESM that’s already set up and ready to go. An insti­tu­tion like the ESM that was specif­i­cal­ly designed to ensure man­date aus­ter­i­ty on mem­ber state unfor­tu­nate enough to have to use it. And with a pro­posed 2% nation­al GDP cap for the ESM cred­it line it won’t be enough to make a dif­fer­ence any­way. A min­i­mal fis­cal boost and aus­ter­i­ty. That’s what’s awaits coun­tries like Spain and Italy if they have to go down that path.

    Now, Regling also sug­gest­ed pos­si­bly rais­ing funds via the Euro­pean Com­mis­sion that would draw from the EU bud­get. But that’s kind of a hard to imag­ine hap­pen­ing giv­en that Ger­many’s Ursu­la Von der Leyen is the cur­rent Com­mis­sion Pres­i­dent. At least not a sub­stan­tial fis­cal response.

    The pro­pos­al of using the Euro­pean Invest­ment Bank (EIB) is an inter­est­ing pos­si­bil­i­ty. The EIB, which was found­ed in 1958 as one of the first pan-Euro­pean insti­tu­tions, plays the role of a financier offer cheap loans for projects that might not oth­er­wise get fund­ing, like infra­struc­ture or cli­mate change relat­ed projects. As of 2019 it had around 560 bil­lion euros, which prob­a­bly isn’t enough to address to the cur­rent cri­sis on its own but is still mean­ing­ful. But the EIB is also known for only mak­ing very con­ser­v­a­tive invest­ments with lit­tle risk of not being paid back, which rais­es the ques­tion of what kind of terms it might demand in this sit­u­a­tion. Loan­ing to COVID-strick­en nations in a time of a glob­al eco­nom­ic emer­gency isn’t exact­ly low risk.

    And that’s all why it’s look­ing increas­ing­ly like the ESM is going to be the only option offered. It’s clear­ly the pre­ferred insti­tu­tion of Ger­many and the oth­er hawks and with just a cou­ple weeks to decide on some­thing it’s hard to imag­ine there being some sort of break­through with one of the oth­er avail­able options. And that’s what makes Regling’s ambigu­ous assur­ances about min­i­mal con­di­tions being attached to an ESM cred­it lines are so omi­nous: Spain and Italy aren’t being giv­en any oth­er real­is­tic option. And once they sub­mit to that “EU sur­veil­lance” that Regling dis­miss­es as min­i­mal it’s just a mat­ter of time before the aus­ter­i­ty is demand­ed. These ESM loans get paid back over a peri­od of years. That EU “sur­veil­lance” is pre­sum­ably going to be in place dur­ing that peri­od. That’s a long time for a coun­try to spend in the aus­ter­i­ty dan­ger zone:

    ...
    To get an ECCL, a coun­try has to sub­mit to a Euro­pean Com­mis­sion analy­sis if its debt is sus­tain­able, some­thing that heav­i­ly indebt­ed Italy is reluc­tant to do.<

    How­ev­er, Regling said that, giv­en the cir­cum­stances, con­di­tions attached to such a cred­it line could be min­i­mal. “There should also be a com­mit­ment to respect EU sur­veil­lance frame­works (but)... it would be no more than that,” he was quot­ed as say­ing.
    ...

    So like most euro­zone crises, the euro-coro­na-cri­sis is start­ing to look extra bad ear­ly on. Extra avoid­ably bad. And this lat­est oppor­tu­ni­ty to actu­al­ly cre­ate a mean­ing­ful union and go ‘all in’ togeth­er with joint­ly fund­ed pan-euro­zone bonds is going to be wast­ed. Because it would take two to three years to actu­al­ly ham­mer out the details. Two to three years that would no doubt be spent ensur­ing some sort of struc­ture like the ESM that ensure the coro­n­abonds come with so many con­di­tions no mem­ber state wants to risk using them.

    Of course, giv­en the euro­zone’s remark­able abil­i­ty to make bad sit­u­a­tions worse, it’s entire­ly pos­si­ble the euro­zone is still going to stuck in COVID-induced eco­nom­ic funk two to three years from now. Based on his­to­ry it would almost be sur­pris­ing if that was­n’t the case. So whether or not the euro­zone ends up going with one of the more expe­di­ent options like the ESM, they should prob­a­bly start get­ting to work on that ‘coro­n­abond’ option any­way. The coro­n­abonds will be extra nec­es­sary two to three years from after all the upcom­ing avoid­able dam­age is done.

    Posted by Pterrafractyl | March 31, 2020, 8:18 pm
  13. The EU appears to have arrived at some sort of joint coro­n­avirus eco­nom­ic res­cue pack­age. And it turns out to be almost as awful as the hawks have been demand­ing all along and there def­i­nite­ly won’t be any joint­ly-issued “coro­n­abonds”. At least not now. That nego­ti­a­tion has again been kicked down the road and all of the hawk­ish mem­bers con­tin­ue to voice their oppo­si­tion to joint­ly-issued debt so there’s no indi­ca­tion those ongo­ing “coro­n­abond” nego­ti­a­tions are going to end well. It’s just going to be a bunch of half-assed half mea­sures and procla­ma­tions of “sol­i­dar­i­ty”. Sur­prise!

    The plan ham­mered out by the EU lead­ers includes 100 bil­lion euros to be used for sub­si­diz­ing wages so that firms can cut hours with­out lay­offs (good, but not enough). Anoth­er 200 bil­lion from the Euro­pean Invest­ment Bank (EIB) would go towards pro­vid­ing cheap lend­ing to com­pa­nies (recall how the EIB is known for only ultra-con­ser­v­a­tive lend­ing which would be prob­lem­at­ic in this sit­u­a­tion). And the Euro­pean Sta­bil­i­ty Mech­a­nism (ESM) — the joint­ly fund­ed bank bailout fund — could make avail­able anoth­er 240 bil­lion euros in cheap cred­it for gov­ern­ments. So it’s around half a tril­lion euros in total, which is bet­ter than noth­ing but not near­ly enough to address the eco­nom­ic col­lapse. Keep in mind that the ESM caps its cred­it line at 2% of the GDP of a mem­ber state so even if a coun­try does tap it that prob­a­bly won’t be enough to real­ly make a dif­fer­ence in terms of financ­ing a fis­cal stim­u­lus pro­gram to pull out of this sud­den eco­nom­ic chasm. Japan, for exam­ple, just unveiled a stim­u­lus pro­gram that’s at about 20% of Japan’s GDP. The ESM cred­it line is capped at a tenth of that and that’s set up to be the the main source of emer­gency spend­ing fund­ing for COVID-hit mem­ber states.

    But if a coun­try does end up tap­ping the ESM any­way, what about the fears that that tap­ping the ESM cred­it line would come with “con­di­tions” (aus­ter­i­ty) for the coun­tries unfor­tu­nate enough to be forced into that sit­u­a­tion? Well, that’s where the big con­ces­sion from the hawks took place. The Nether­lands had been demand­ing that any coun­tries tap­ping the ESM need to have “eco­nom­ic con­di­tions” (aus­ter­i­ty) imposed. Angela Merkel appar­ent­ly con­vinced the Nether­lands to back down from that demand. As long as the ESM cred­it is used for med­ical needs there won’t be any aus­ter­i­ty. But aus­ter­i­ty can still be imposed if a coun­try uses the ESM for oth­er rea­sons like stim­u­lat­ing its econ­o­my (yes, aus­ter­i­ty for coun­tries that need to bor­row to stim­u­late their economies...that’s how the EU works). That was the big con­ces­sion by the hawks that’s being tout­ed by EU lead­ers. No aus­ter­i­ty for mon­ey bor­rowed to keep peo­ple alive (but aus­ter­i­ty for any­thing else). Behold the grand sol­i­dar­i­ty:

    Reuters

    EU min­is­ters agree half a tril­lion euro coro­n­avirus res­cue plan

    Jan Strupczews­ki, Gabriela Baczyn­s­ka
    April 9, 2020 / 1:58 AM / Updat­ed

    -BRUSSELS (Reuters) — Euro­pean Union finance min­is­ters agreed on Thurs­day on half-a-tril­lion euros worth of sup­port for their coro­n­avirus-bat­tered economies but left open the ques­tion of how to finance recov­ery in the bloc head­ed for a steep reces­sion.

    The agree­ment was reached after EU pow­er­house Ger­many, as well as France, put their feet down to end oppo­si­tion from the Nether­lands over attach­ing eco­nom­ic con­di­tions to emer­gency cred­it for gov­ern­ments weath­er­ing the impacts of the pan­dem­ic, and offered Italy assur­ances that the bloc would show sol­i­dar­i­ty.

    But the deal does not men­tion using joint debt to finance recov­ery — some­thing Italy, France and Spain pushed strong­ly for but which is a red line for Ger­many, the Nether­lands, Fin­land and Aus­tria.

    It only defers to the bloc’s 27 nation­al lead­ers whether “inno­v­a­tive finan­cial instru­ments” should be applied, mean­ing many more fraught dis­cus­sions on the mat­ter were still ahead.

    “Europe has shown that it can rise to the occa­sion of this cri­sis,” said French Finance Min­is­ter Bruno Le Maire, prais­ing what he said was the most impor­tant eco­nom­ic plan in EU his­to­ry.

    Ear­li­er on Thurs­day, Ital­ian Prime Min­is­ter Giuseppe Con­te warned that the EU’s very exis­tence would be under threat if it could not come togeth­er to com­bat the COVID-19 pan­dem­ic caused by the nov­el coro­n­avirus.

    ...

    While Le Maire said the Thurs­day agree­ment paved the way for debt mutu­al­i­sa­tion, his Dutch coun­ter­part, Wop­ke Hoek­stra, stressed the oppo­site.

    “We are and will remain opposed to eurobonds. We think this con­cept will not help Europa or the Nether­lands in the long-term,” Hoek­stra said after talks end­ed.

    STRAINED SOLIDARITY

    Mario Cen­teno, who chaired the Thurs­day talks after six­teen hours of all-night dis­cus­sions ear­li­er this week failed to yield a deal, said 100 bil­lion euros would go to a scheme to sub­sidise wages so that firms can cut work­ing hours, not jobs.

    The Euro­pean Invest­ment Bank would step up lend­ing to com­pa­nies with 200 bil­lion euros and the euro zone’s Euro­pean Sta­bil­i­ty Mech­a­nism (ESM) bailout fund would make 240 bil­lion euros of cheap cred­it avail­able to gov­ern­ments, he said.

    Ger­man Chan­cel­lor Angela Merkel ear­li­er in the day talked on the phone with Con­te and Dutch Prime Min­is­ter Mark Rutte, paving the way for the even­tu­al agree­ment, which now awaits approval from the bloc’s 27 nation­al lead­ers in the com­ing days.

    She said she agreed with Con­te on the “urgent need for sol­i­dar­i­ty in Europe, which is going through one of its most dif­fi­cult hours, if not the most dif­fi­cult”.
    Merkel also made clear Berlin would not agree to joint­ly issued debt, but said oth­er finan­cial avenues were avail­able.

    Dis­cus­sions on that have so far been fraught between the more fis­cal­ly con­ser­v­a­tive north and the indebt­ed south, which has been hit hard­est by the pan­dem­ic.

    The pack­age would bring the EU’s total fis­cal response to the epi­dem­ic to 3.2 tril­lion euros ($3.5 tril­lion), the biggest in the world.

    But con­tro­ver­sy remained over how to kick­start eco­nom­ic growth, with Euro­pean Eco­nom­ics Com­mis­sion­er, Pao­lo Gen­tiloni, say­ing the mon­ey for that could be raised against the bloc’s next joint bud­get for 2021–27.

    ————

    “EU min­is­ters agree half a tril­lion euro coro­n­avirus res­cue plan” by Jan Strupczews­ki and Gabriela Baczyn­s­ka; Reuters; 04/09/2020

    “The pack­age would bring the EU’s total fis­cal response to the epi­dem­ic to 3.2 tril­lion euros ($3.5 tril­lion), the biggest in the world.”

    3.2 tril­lion euros in total, the biggest coro­n­avirus response pack­age in the world. That’s about the most pos­i­tive spin you could put on it. In real­i­ty, of that 3.2 tril­lion euros, 2.2 tril­lion of it is from the ECB for shoring up cred­it mar­kets and anoth­er 417 bil­lion was the dis­cre­tionary fis­cal mea­sures of EU gov­ern­ments on their own. Dis­cre­tionary fis­cal mea­sures that the hawks feel should incur an aus­ter­i­ty penal­ty. The new half a tril­lion euro pack­age that just got announced is the extent of the pan-EU response. As we should expect, the ECB is the only Euro­pean insti­tu­tion act­ing in a many that remote­ly resem­bles Euro­pean sol­i­dar­i­ty, and that’s over the wish­es of the ECB’s hawks. Hawks who almost always win out when it comes to pan-EU deci­sions out­side of the ECB’s domain which is exact­ly what hap­pened in this case. It has long been pro­ject­ed that the only way the euro­zone could end up issu­ing joint debt is if there’s some sort of unprece­dent­ed cri­sis that threat­ens the entire to col­lapse the entire thing. Well, we’re right in the mid­dle of that unprece­dent­ed mega-cri­sis and the hawks con­tin­ued to win out on their refusal to joint­ly issue debt. Even joint debt just for this cri­sis. That remains ver­boten:

    ...
    But the deal does not men­tion using joint debt to finance recov­ery — some­thing Italy, France and Spain pushed strong­ly for but which is a red line for Ger­many, the Nether­lands, Fin­land and Aus­tria.

    It only defers to the bloc’s 27 nation­al lead­ers whether “inno­v­a­tive finan­cial instru­ments” should be applied, mean­ing many more fraught dis­cus­sions on the mat­ter were still ahead.

    ...

    While Le Maire said the Thurs­day agree­ment paved the way for debt mutu­al­i­sa­tion, his Dutch coun­ter­part, Wop­ke Hoek­stra, stressed the oppo­site.

    “We are and will remain opposed to eurobonds. We think this con­cept will not help Europa or the Nether­lands in the long-term,” Hoek­stra said after talks end­ed.

    ...

    Merkel also made clear Berlin would not agree to joint­ly issued debt, but said oth­er finan­cial avenues were avail­able.
    ...

    Instead, it was a mere half a tril­lion euros in most­ly cred­it. 100 bil­lion to sup­port wages, 200 bil­lion in cred­it for busi­ness, and 240 bil­lion in cred­it from the ESM that’s going to be capped at 2% of GDP for a mem­ber state:

    ...
    STRAINED SOLIDARITY

    Mario Cen­teno, who chaired the Thurs­day talks after six­teen hours of all-night dis­cus­sions ear­li­er this week failed to yield a deal, said 100 bil­lion euros would go to a scheme to sub­sidise wages so that firms can cut work­ing hours, not jobs.

    The Euro­pean Invest­ment Bank would step up lend­ing to com­pa­nies with 200 bil­lion euros and the euro zone’s Euro­pean Sta­bil­i­ty Mech­a­nism (ESM) bailout fund would make 240 bil­lion euros of cheap cred­it avail­able to gov­ern­ments, he said.
    ...

    And as the fol­low­ing arti­cle points it, if any of that ESM cred­it line is spent on any­thing oth­er than med­ical needs, it’s going to make that coun­try sub­ject to aus­ter­i­ty ‘con­di­tions’. So if a coun­try makes its econ­o­my extra depressed by shut­ting down its econ­o­my to keep peo­ple health and it ends up need­ing to tap the ESM to finance a stim­u­lus pro­gram to pull itself out of that eco­nom­ic pit it’s going to have to impose more aus­ter­i­ty:

    The Guardian

    EU strikes €500bn relief deal for coun­tries hit hard­est by pan­dem­ic

    Com­pro­mise reached after Nether­lands relents on ‘eco­nom­ic sur­veil­lance’ of ben­e­fi­cia­ry nations

    Daniel Bof­fey in Brus­sels

    Thu 9 Apr 2020 18.35 EDT
    First pub­lished on Thu 9 Apr 2020 09.01 EDT

    A messy com­pro­mise to unlock €500bn (£438bn) of EU sup­port for coun­tries hit hard­est by the coro­n­avirus pan­dem­ic has been struck after Italy’s prime min­is­ter, Giuseppe Con­te, warned that the exis­tence of the bloc was at stake.

    EU finance min­is­ters on a video con­fer­ence call struck a deal late on Thurs­day after the Nether­lands shift­ed on a demand for “eco­nom­ic sur­veil­lance” of coun­tries ben­e­fit­ing from €240bn of cred­it lines via the Euro­pean sta­bil­i­ty mech­a­nism, a bailout fund for strug­gling mem­ber states.

    Italy and Spain have in turn accept­ed a delay on agree­ment on so-called “coro­n­abonds” that would allow mem­ber states to raise funds on the same terms from the finan­cial mar­kets. The issue of a “recov­ery fund” yet to be fleshed out will be put to the EU’s heads of state and gov­ern­ment at a future sum­mit.

    Italy’s finance min­is­ter, Rober­to Gualtieri, told reporters: “We have put on the table of the Euro­pean Coun­cil a recov­ery fund enabling com­mon debt issuance. Off the table is any con­di­tion­al­i­ty on the use of Euro­pean sta­bil­i­ty mech­a­nism financ­ing. Now it’s up to the lead­ers to take the right deci­sions.”

    The Dutch finance min­is­ter, Wop­ke Hoek­stra, said a “sen­si­ble” deal had been reached. Bailout funds would still come with con­di­tions if the cash was spent on the wider econ­o­my rather than a response to the imme­di­ate cri­sis, the min­is­ter insist­ed.

    Hoek­stra tweet­ed: “The [Euro­pean sta­bil­i­ty mech­a­nism] can pro­vide finan­cial help to coun­tries with­out con­di­tions for med­ical expens­es. It will also be avail­able for eco­nom­ic sup­port, but with con­di­tions. That’s fair and rea­son­able.

    “We are and will remain opposed to Eurobonds. We think this con­cept will not help Europa or [Nether­lands] in the long term.”

    Agree­ment was also found on boost­ing the lend­ing capac­i­ty of the Euro­pean Invest­ment Bank and a new €100billion scheme pro­posed by the Euro­pean Com­mis­sion to keep fund employee’s salaries if they are put on reduced hours.

    ...

    Ear­ly on Thurs­day, the Ital­ian prime min­ster Giuseppe Con­te had added to the ten­sion by claim­ing that it was an exis­ten­tial issue for the EU.

    “It’s a big chal­lenge to the exis­tence of Europe,” he told the BBC. “If Europe fails to come up with a mon­e­tary and finan­cial pol­i­cy ade­quate for the biggest chal­lenge since world war two, not only Ital­ians but Euro­pean cit­i­zens will be deeply dis­ap­point­ed.”

    The start of the lat­est round of dis­cus­sions of the finance min­is­ters had been repeat­ed­ly delayed on Thurs­day as the main pro­tag­o­nists, Italy, the Nether­lands, Ger­many and France sought to find a way for­ward between them­selves.

    Ahead of the full meet­ing of finance min­is­ters, Mário Cen­teno, the Por­tuguese finance min­is­ter who is pres­i­dent of the Euro­zone group, insist­ed the EU need­ed to build a finan­cial safe­ty net as Europe “dipped into reces­sion” with “all in lock­down, casu­al­ties ris­ing by the hour and with no end in sight”.

    “We either sink or swim togeth­er”, Cen­teno had said as he called on min­is­ters to show the “nec­es­sary spir­it of com­pro­mise”.

    Fol­low­ing agree­ment, Cen­teno told the min­is­ters: “We act­ed deci­sive­ly for our cit­i­zens in less than a month”.

    The nego­ti­a­tions on the EU’s fis­cal response to the epi­dem­ic exposed deep divi­sions between north and south, and reignit­ed feel­ings of bit­ter enmi­ty last expe­ri­enced dur­ing the finan­cial cri­sis.

    The Dutch gov­ern­ment with the sup­port of Ger­many, Fin­land and Aus­tria, led rejec­tion of the cen­tral demand of the Ital­ian gov­ern­ment for “coro­n­abonds” which would involve all EU mem­ber states bor­row­ing from the mar­kets on the same terms.

    The issu­ing of joint bonds would cre­ate joint lia­bil­i­ty and make bor­row­ing more expen­sive for the wealth­i­er north­ern mem­ber states as it cheap­ens it for the rest, at a time when the gap between Ger­man and Ital­ian bonds is ris­ing.

    The Dutch par­lia­ment has backed its gov­ern­ment on its approach, with politi­cians warn­ing that anti-EU sen­ti­ment would be inflat­ed in the wealth­i­er mem­ber states as well if the elec­torate con­clud­ed that their mon­ey was being mis­spent.

    Austria’s finance min­is­ter, Ger­not Blümel, said the Nether­lands had not been stand­ing alone. “That is out of the ques­tion for us,” he said of the issu­ing of coro­n­abonds. “That remains the case. We were also not in favour of this for­mu­la­tion because the idea opens the door to a mutu­al­i­sa­tion of debt ... It was not just the Nether­lands.”

    ————-

    “EU strikes €500bn relief deal for coun­tries hit hard­est by pan­dem­ic” by Daniel Bof­fey; The Guardian; 04/09/2020

    “EU finance min­is­ters on a video con­fer­ence call struck a deal late on Thurs­day after the Nether­lands shift­ed on a demand for “eco­nom­ic sur­veil­lance” of coun­tries ben­e­fit­ing from €240bn of cred­it lines via the Euro­pean sta­bil­i­ty mech­a­nism, a bailout fund for strug­gling mem­ber states.”

    “Eco­nom­ic sur­veil­lance”. That was what the Nether­lands had been demand­ing as a con­di­tion for any coun­try that taps the ESM’s 240 bil­lion dur­ing this emer­gency. And “eco­nom­ic sur­veil­lance” is, of course, code for an aus­ter­i­ty regime. Some sort of “troi­ka” could get set up for Italy or Spain and find all the gov­ern­ment pro­grams and pen­sions they think should be cut and the night­mare of aus­ter­i­ty-induced eco­nom­ic shocks in the mid­dle of a down­town can be repeat­ed. Although this time the “troi­ka” would include the ESM instead of the IMF, which would prob­a­bly make it an even more ruth­less troi­ka than before. It’s one of the dark ironies of the euro­zone cri­sis that the IMF was, rel­a­tive­ly speak­ing, a mod­er­at­ing voice on the troi­ka. It was still nuts and sup­port­ive of egre­gious aus­ter­i­ty poli­cies but still rel­a­tive­ly mod­er­at­ing com­pared to the Euro­pean Com­mis­sion. A troi­ka trig­gered by the ESM would con­sist of the ESM lead­er­ship in place of the IMF. That could be per­ilous for a mem­ber state to be sub­ject­ed to which is why no one has used the ESM so far. The ESM Was designed to be so painful no mem­ber state will use it unless they have no choice.

    And thanks to COVID-19, a num­ber of EU mem­bers might end up with no choice. They’re going to have to tap the ESM because they won’t have any oth­er option for emer­gency spend­ing by the gov­ern­ment. The ESM is the only option giv­en for that. The issue of joint­ly-issued “coro­n­abonds” remains offi­cial­ly unre­solved. The lead­ers from Italy and Spain are even mak­ing pro­nounce­ment about how coro­n­abonds might come in the future. But as we can see, the bloc of hawks (Ger­many, Aus­tria, Fin­land, and the Nether­lands), haven’t moved at all on that issue:

    ...
    Italy and Spain have in turn accept­ed a delay on agree­ment on so-called “coro­n­abonds” that would allow mem­ber states to raise funds on the same terms from the finan­cial mar­kets. The issue of a “recov­ery fund” yet to be fleshed out will be put to the EU’s heads of state and gov­ern­ment at a future sum­mit.

    Italy’s finance min­is­ter, Rober­to Gualtieri, told reporters: “We have put on the table of the Euro­pean Coun­cil a recov­ery fund enabling com­mon debt issuance. Off the table is any con­di­tion­al­i­ty on the use of Euro­pean sta­bil­i­ty mech­a­nism financ­ing. Now it’s up to the lead­ers to take the right deci­sions.”

    ...

    Austria’s finance min­is­ter, Ger­not Blümel, said the Nether­lands had not been stand­ing alone. “That is out of the ques­tion for us,” he said of the issu­ing of coro­n­abonds. “That remains the case. We were also not in favour of this for­mu­la­tion because the idea opens the door to a mutu­al­i­sa­tion of debt ... It was not just the Nether­lands.”
    ...

    And if there aren’t going to be coro­n­abonds in the future, that makes tap­ping the ESM unavoid­able. But accord­ing to the Dutch finance min­is­ter, there are con­di­tions for the ESM. That’s part of what they just agreed to. The con­di­tions are only waived if the ESM cred­it line is spent on med­ical expens­es. ESM cred­it will be avail­able for “eco­nom­ic sup­port, but with con­di­tions”. Which basi­cal­ly means there won’t be an cred­it avail­able for eco­nom­ic sup­port because no mem­ber state is going to want to take the mon­ey for stim­u­lat­ing its econ­o­my if it comes with the cost of “eco­nom­ic sur­veil­lance” that will undo any val­ue of the stim­u­lus:

    ...
    The Dutch finance min­is­ter, Wop­ke Hoek­stra, said a “sen­si­ble” deal had been reached. Bailout funds would still come with con­di­tions if the cash was spent on the wider econ­o­my rather than a response to the imme­di­ate cri­sis, the min­is­ter insist­ed.

    Hoek­stra tweet­ed: “The [Euro­pean sta­bil­i­ty mech­a­nism] can pro­vide finan­cial help to coun­tries with­out con­di­tions for med­ical expens­es. It will also be avail­able for eco­nom­ic sup­port, but with con­di­tions. That’s fair and rea­son­able.

    “We are and will remain opposed to Eurobonds. We think this con­cept will not help Europa or [Nether­lands] in the long term.”
    ...

    So EU mem­ber states heav­i­ly hit by COVID-19 basi­cal­ly aren’t get­ting any sort of mean­ing­ful eco­nom­ic stim­u­lus cred­it line. There’s a cred­it line for that, but you don’t want to use it for any­thing oth­er than med­ical expens­es. Med­ical expens­es are the only non-penal­ized form of eco­nom­ic stim­u­lus under this bailout pack­age. A bailout pack­age that includes the promise of future talks over coro­n­abonds that the hawks con­tin­ue to promise to not sup­port in those future talks. Sol­i­dar­i­ty in the EU comes in the form of the promise of future failed talks. There will be talks. Talks about fun­da­men­tal issues about the struc­tur­al fair­ness of the Euro­pean project like joint debt issuance. Those future talks will hap­pen in the spir­it of sol­i­dar­i­ty. And that’s pret­ty much the extent of the sol­i­dar­i­ty. A pledge to keep hold­ing future failed talks where joint debt issuance is decried by the hawks as way too much sol­i­dar­i­ty that they will always com­plete­ly oppose.

    Posted by Pterrafractyl | April 9, 2020, 8:50 pm
  14. Here’s a pair of arti­cles that point to two of the dynam­ics that have emerged from the coro­n­avirus cri­sis and the fight over whether or how the EU and euro­zone should tack­le the enor­mous eco­nom­ic shock of the COVID lock­down that relate to the broad­er euro­zone sys­temic crises that have plagued Europe ever since the finan­cial cri­sis and sub­se­quent debt crises:

    The first arti­cle is a Bloomberg piece about a sug­ges­tion by EU Com­mis­sion Pres­i­dent Urus­la von der Leyen about how the EU should joint­ly tack­le the coro­n­avirus cri­sis that touch­es on the fight over whether joint­ly-issued “eurobonds” should be issued to finance the coro­n­avirus response. As we’ve seen, the results of that debate were a series of half-mea­sures that did­n’t involve joint­ly-issued debt and pledge to revis­it the coro­n­abond top­ic dur­ing lat­er talks. Pres­i­dent von der Leyen’s pro­pos­al is sort of an exten­sion of those coro­n­avirus talks. Sort of.

    She pro­posed that the Euro­pean bud­get should be the “Moth­er­ship” of the EU’s coro­n­avirus response and that an increased EU Com­mis­sion bud­get should be how much of that joint response in chan­neled. Because the EU bud­get is a joint bud­get that is paid into by each mem­ber state accord­ing to the size of their GDP but poten­tial­ly spent accord­ing to the needs of each mem­ber state. That makes it one of the few aspects of the EU that real­ly joint­ly financed. In that sense, the EU bud­get is kind of like a coro­n­abond.

    This was a sig­nif­i­cant pro­pos­al in part because it rep­re­sent­ed a poten­tial com­pro­mise from Ger­many on the coro­n­abond issue (Von der Leyen was Ger­many’s Defense Min­is­ter before tak­ing this job). But more fun­da­men­tal­ly, it rep­re­sent­ed a poten­tial­ly sig­nif­i­cant step in the evo­lu­tion of the EU because one of the key fea­tures of the EU is how rel­a­tive­ly small the EU Com­mis­sion’s bud­get it rel­a­tive to the size of the EU econ­o­my. The EU bud­get is anal­o­gous to the US fed­er­al bud­get in terms of the role it plays as the union’s joint fed­er­al bud­get but it’s tiny com­pared to the US fed­er­al bud­get. That is, of course, by design pre­cise­ly because the EU bud­get rep­re­sent that which the hawk­ish mem­ber state hate the most: a trans­fer union that auto­mat­i­cal­ly trans­fers mon­ey from the wealth­i­er mem­ber states to the poor­er mem­ber states. Keep that bud­get small keeps those rich-to-poor trans­fers small.

    As the arti­cle notes, the EU bud­get is so small it’s going to be dwarfed by the size of a rea­son­able coro­n­avirus response pack­age cost. The EU bud­get is a mere 1 tril­lion euros spread over sev­en years. That’s like 160 bil­lion euros a year. The US fed­er­al bud­get in 2019 was $4.45 tril­lion and Europe’s fed­er­al coro­n­avirus fis­cal response alone should cost well over $2 tril­lion. So propos­ing to make the EU bud­get the “Moth­er­ship” is a poten­tial­ly his­toric moment in the evo­lu­tion of the EU in terms of the size and impor­tance of EU-lev­el joint­ly financed spend­ing. If a mean­ing­ful coro­n­avirus response real­ly is financed pri­mar­i­ly through an EU bud­get “moth­er­ship” that could dou­ble or more the EU bud­get. At least tem­porar­i­ly. But poten­tial­ly a long tem­po­rary time that extends for years.

    On the oth­er hand, there’s the obvi­ous pos­si­bil­i­ty that chan­nel­ing the coro­n­virus spend­ing through the EU bud­get is just anoth­er way of keep­ing it small and inad­e­quate. That way there is some joint­ly financed spend­ing. Just not near­ly enough, which is how the hawks want it. That kind of sce­nario is entire­ly pos­si­ble and, based on his­to­ry, prob­a­bly what we should expect:

    Bloomberg

    EU Tar­gets Super-Charged Cri­sis Bud­get With Coro­n­abonds Blocked

    * Lead­ers to hold ‘strate­gic’ dis­cus­sion about plans next week
    * Bloc at log­ger­heads over financ­ing eco­nom­ic recov­ery efforts

    By Nikos Chrysoloras
    April 16, 2020, 5:31 AM CDT

    The heads of the Euro­pean Union’s main insti­tu­tions said the bloc must increase its bud­get fire­pow­er to repair its dev­as­tat­ed econ­o­my as they seek a way around the grid­lock over joint bond issuance.

    An expand­ed bud­get should be “the moth­er­ship” of efforts to revive growth after the coro­n­avirus pan­dem­ic, Euro­pean Com­mis­sion pres­i­dent Ursu­la von der Leyen told EU law­mak­ers in Brus­sels on Thurs­day. The bloc’s lead­ers will have a “strate­gic dis­cus­sion” about the spend­ing plan dur­ing a con­fer­ence call next week, said Euro­pean Coun­cil Pres­i­dent, Charles Michel, who leads their meet­ings.

    The bud­get is a cor­ner­stone of EU pol­i­cy which allows farm­ers to com­pete against cheap imports from the devel­op­ing world, helps poor­er states catch up with the rich ones and under­pins projects that bind the union togeth­er, from infra­struc­ture to aca­d­e­m­ic research. It’s nor­mal­ly set at around 1 tril­lion euros ($1.1 tril­lion) spread across 27 coun­tries over sev­en years, but that’s a frac­tion of the fund­ing that will be required to rebuild the econ­o­my after Covid-19.

    Offi­cials in Brus­sels are look­ing to increase the bud­get, front­load spend­ing and sup­ple­ment con­tri­bu­tions with bor­row­ing after more rad­i­cal pro­pos­al for joint debt issuance ran into resis­tance from coun­tries like the Nether­lands and Ger­many.

    EU mem­bers con­tribute to the bud­get on the basis of their size and eco­nom­ic strength mak­ing it the only sig­nif­i­cant form of direct fis­cal trans­fer from rich­er coun­tries to poor­er ones. It is the only instru­ment “that is trust­ed by all mem­ber states, which is already in place and can deliv­er quick­ly,” von der Leyen said Thurs­day. “It is trans­par­ent and it is time test­ed as an instru­ment for cohe­sion, con­ver­gence and invest­ment.”

    Using the bloc’s com­mon bud­get may be more palat­able for the rich north, but it’s unclear whether it would sat­is­fy Italy and the oth­er south­ern coun­tries that have been hard­est hit by the virus.

    Foot­ing the Bill

    ...

    Euro­pean gov­ern­ments have already com­mit­ted 3 tril­lion euros to cush­ion the blow from the pan­dem­ic, and “a lot more” will be need­ed, von der Leyen said Thurs­day. With high­ly indebt­ed economies like Italy’s set to nose­dive this year, investors have raised doubts about their abil­i­ty to foot the bill with­out back­ing from their rich­er peers.

    Despite mas­sive Euro­pean Cen­tral Bank pur­chas­es, Ital­ian 10-year notes were trad­ing at 1.73% on Thurs­day, dou­ble the yield demand­ed by investors in mid-Feb­ru­ary. While bor­row­ing costs remain far below the lev­els seen dur­ing the sov­er­eign debt cri­sis eight years ago, sen­ti­ment could change quick­ly if EU lead­ers are seen to be fail­ing to come up with a con­vinc­ing response.

    The bloc’s finance min­is­ters will dis­cuss a pack­age of pro­pos­als includ­ing a 100 bil­lion-euro employ­ment insur­ance fund and cred­it lines of up to 240 bil­lion euro’s from the euro-area bailout fund lat­er on Thurs­day. The con­tentious sub­ject of joint debt issuance could also come up in the video con­fer­ence, but offi­cials have said they expect to see no more fight­ing over the issue at least until lead­ers meet vir­tu­al­ly on April 23.

    Polls show­ing a steep rise in euroskep­ti­cism have put pres­sure on Ital­ian pre­mier Giuseppe Con­te to extract con­ces­sions from north­ern Euro­pean coun­tries next week. But even an agree­ment on upgrad­ing the bud­get will be a tall order — gov­ern­ments spent much of Feb­ru­ary fight­ing over a spend­ing increase worth less than 0.1% of their col­lec­tive GDP.

    Two EU offi­cials in Brus­sels said the bloc’s insti­tu­tions will be wait­ing for guid­ance from lead­ers before unveil­ing an updat­ed bud­get pro­pos­al in the fol­low­ing weeks. The size of the pro­pos­al will depend on the mag­ni­tude of the eco­nom­ic slump, one of the offi­cials said.

    ———-

    “EU Tar­gets Super-Charged Cri­sis Bud­get With Coro­n­abonds Blocked” by Nikos Chrysoloras; Bloomberg; 04/16/2020

    An expand­ed bud­get should be “the moth­er­ship” of efforts to revive growth after the coro­n­avirus pan­dem­ic, Euro­pean Com­mis­sion pres­i­dent Ursu­la von der Leyen told EU law­mak­ers in Brus­sels on Thurs­day. The bloc’s lead­ers will have a “strate­gic dis­cus­sion” about the spend­ing plan dur­ing a con­fer­ence call next week, said Euro­pean Coun­cil Pres­i­dent, Charles Michel, who leads their meet­ings.”

    An expand­ed EU bud­get that’s the moth­er­ship of the EU’s pan­dem­ic response. That could be the “coro­n­abond” com­pro­mise: The EU bud­get has the key fea­ture the coro­n­abond advo­cates are look­ing for in being joint­ly financed but issued based on need. It’s how the EU, and espe­cial­ly the euro­zone, real­ly should oper­ate but the wealthy hawk mem­bers led by Ger­many have con­tin­ued to voice their com­plete oppo­si­tion to joint debt issuance even in the face of the pan­dem­ic. That’s pre­cise­ly the mes­sage that was voiced by mul­ti­ple hawk­ish gov­ern­ment offi­cials when the last under­whelm­ing coro­n­avirus pack­age was announced: joint debt issuance remained com­plete­ly off the table for a num­ber of gov­ern­ments. And eurogroup deci­sions have to be unan­i­mous so a sin­gle hawk mem­ber can block some­thing and all the hawks appears to be com­plete­ly opposed to coro­n­abonds no mat­ter what. That leaves the EU bud­get as real­ly the only oth­er real­is­tic option for a joint­ly financed coro­n­avirus response. And it’s an option that push­es EU-lev­el spend­ing in the direc­tion it’s long need­ed to go in terms of the size of the EU bud­get rel­a­tive to the size of the broad­er EU econ­o­my. So this pro­pos­al of an expand­ed EU bud­get offers the hawks a poten­tial com­pro­mise on the issue of a joint­ly financed coro­n­avirus response and mean­ing­ful sol­i­dar­i­ty. But doing so would come at the risk of expand­ing the EU bud­get which is some­thing the hawks will want to avoid as a gen­er­al prin­ci­ple. The EU bud­get is small because the hawk­ish nations want it small because it’s joint­ly financed:

    ...
    Offi­cials in Brus­sels are look­ing to increase the bud­get, front­load spend­ing and sup­ple­ment con­tri­bu­tions with bor­row­ing after more rad­i­cal pro­pos­al for joint debt issuance ran into resis­tance from coun­tries like the Nether­lands and Ger­many.

    EU mem­bers con­tribute to the bud­get on the basis of their size and eco­nom­ic strength mak­ing it the only sig­nif­i­cant form of direct fis­cal trans­fer from rich­er coun­tries to poor­er ones. It is the only instru­ment “that is trust­ed by all mem­ber states, which is already in place and can deliv­er quick­ly,” von der Leyen said Thurs­day. “It is trans­par­ent and it is time test­ed as an instru­ment for cohe­sion, con­ver­gence and invest­ment.”

    Using the bloc’s com­mon bud­get may be more palat­able for the rich north, but it’s unclear whether it would sat­is­fy Italy and the oth­er south­ern coun­tries that have been hard­est hit by the virus.
    ...

    Using the com­mon bud­get may be more palat­able for the rich north, but it’s def­i­nite­ly unclear whether it would sat­is­fy Italy and the oth­er south­ern coun­tries that have been hard­est hit by the virus because it remains entire­ly unclear if an expand­ed EU bud­get would be expand­ed enough. It’s entire­ly pos­si­ble we’re look­ing at a gam­bit by the hawks to use the EU bud­get as a joint­ly financed sub­sti­tute for coro­n­abonds that only spends a pal­try amount com­pared to what’s required. The entire EU bud­get right now, 1 tril­lion euros spread over sev­en years, is a pit­tance com­pared to the tril­lions of euros real­is­ti­cal­ly need­ed for a coro­n­avirus fis­cal response. And increas­ing EU bud­get spend­ing is his­tor­i­cal­ly a huge issue because of the hawks. So the idea that the EU bud­get will be able to expand enough to finance a real­is­tic response to the pan­dem­ic seems rather unre­al­is­tic in the con­text of the unyield­ing pos­ture by the EU hawks that has been held from the start of the finan­cial cri­sis in 2008. Joint­ly financed spend­ing is one of those red lines the hawks have refused to allow to be crossed no mat­ter how deep the var­i­ous EU and euro­zone crises got and hold­ing the EU bud­get down to a min­i­mum is part of hold­ing that line. A dra­mat­ic expan­sion of the EU bud­get real­ly would rep­re­sent a sig­nif­i­cant cross­ing of that hawk­ish joint finance red line:

    ...
    The bud­get is a cor­ner­stone of EU pol­i­cy which allows farm­ers to com­pete against cheap imports from the devel­op­ing world, helps poor­er states catch up with the rich ones and under­pins projects that bind the union togeth­er, from infra­struc­ture to aca­d­e­m­ic research. It’s nor­mal­ly set at around 1 tril­lion euros ($1.1 tril­lion) spread across 27 coun­tries over sev­en years, but that’s a frac­tion of the fund­ing that will be required to rebuild the econ­o­my after Covid-19.

    ...

    Polls show­ing a steep rise in euroskep­ti­cism have put pres­sure on Ital­ian pre­mier Giuseppe Con­te to extract con­ces­sions from north­ern Euro­pean coun­tries next week. But even an agree­ment on upgrad­ing the bud­get will be a tall order — gov­ern­ments spent much of Feb­ru­ary fight­ing over a spend­ing increase worth less than 0.1% of their col­lec­tive GDP.
    ...

    And keep in mind that when Pres­i­dent von der Leyen ref­er­enced the 3 tril­lion euros that have already been com­mit­ted, recall that 2.2 tril­lion euros of that 3.2 tril­lion where the ECB’s QE bond buy­ing. And a large part of the remain­ing tril­lion in spend­ing was the mon­ey already being spent inde­pen­dent­ly by mem­ber states. In oth­er words, there still has basi­cal­ly be no mean­ing­ful response to the pan­dem­ic at the EU lev­el out­side of the ECB’s inter­ven­tion in the bond mar­kets:

    ...
    Euro­pean gov­ern­ments have already com­mit­ted 3 tril­lion euros to cush­ion the blow from the pan­dem­ic, and “a lot more” will be need­ed, von der Leyen said Thurs­day. With high­ly indebt­ed economies like Italy’s set to nose­dive this year, investors have raised doubts about their abil­i­ty to foot the bill with­out back­ing from their rich­er peers.

    Despite mas­sive Euro­pean Cen­tral Bank pur­chas­es, Ital­ian 10-year notes were trad­ing at 1.73% on Thurs­day, dou­ble the yield demand­ed by investors in mid-Feb­ru­ary. While bor­row­ing costs remain far below the lev­els seen dur­ing the sov­er­eign debt cri­sis eight years ago, sen­ti­ment could change quick­ly if EU lead­ers are seen to be fail­ing to come up with a con­vinc­ing response.
    ...

    But there’s a eurogroup meet­ing of euro­zone finance min­is­ters com­ing up on April 23, so we’ll get a sense of how the hawks will treat von der Leyen’s pro­pos­al:

    ...
    The bloc’s finance min­is­ters will dis­cuss a pack­age of pro­pos­als includ­ing a 100 bil­lion-euro employ­ment insur­ance fund and cred­it lines of up to 240 bil­lion euro’s from the euro-area bailout fund lat­er on Thurs­day. The con­tentious sub­ject of joint debt issuance could also come up in the video con­fer­ence, but offi­cials have said they expect to see no more fight­ing over the issue at least until lead­ers meet vir­tu­al­ly on April 23.

    ...

    Two EU offi­cials in Brus­sels said the bloc’s insti­tu­tions will be wait­ing for guid­ance from lead­ers before unveil­ing an updat­ed bud­get pro­pos­al in the fol­low­ing weeks. The size of the pro­pos­al will depend on the mag­ni­tude of the eco­nom­ic slump, one of the offi­cials said.
    ...

    Now let’s turn to a piece in Mar­ket­Watch about French Pres­i­dent Emmanuel Macron’s call for joint financ­ing of a col­lec­tive coro­na response. He declared that Europe needs anoth­er 400 bil­lion euros in EU lev­el coro­n­avirus response. And that’s cer­tain­ly a step in the right direc­tion, just not near­ly enough. But it’s more than the hawks want to give.

    The piece notes that the EU is set up around unan­i­mous deci­sion-mak­ing. So a sin­gle nation can block some­thing new like coro­n­abonds which is why the pro­pos­al of using the EU bud­get is so tan­ta­liz­ing and why Macron needs to make his case in the hopes of win­ning over Ger­many and the rest of the hawks. This is one of those unan­i­mous deci­sion bat­tles that invari­ably involves cre­at­ing a giant deal every­one kind of likes and kind of hates and does­n’t work because the hawks are ide­o­log­i­cal­ly insane.

    Macron’s call for a big joint­ly financed coro­n­avirus response includ­ed a warn­ing that a lack of mean­ing­ful EU sol­i­dar­i­ty dur­ing a cri­sis like the coro­n­avirus will only fuel the far right in the coun­tries hard­est hit by the virus. And then the piece ends with the point the flip side is also true: if some sort of joint financ­ing is in the end agreed to, that’s only going to fuel the far right polit­i­cal­ly in the hawk­ish nations where the pub­lic broad­ly oppos­es joint financ­ing (e.g. Ger­many, the Nether­lands, Fin­land, Aus­tria). The far right cham­pi­ons the hawk­ish pro-aus­ter­i­ty poli­cies and attempts to lead the revolt against the con­se­quences:

    Mar­ket Watch

    Opin­ion: Macron faces uphill strug­gle to enroll EU on coro­n­abond scheme

    By Pierre Bri­ançon
    Pub­lished: April 17, 2020 at 7:20 a.m. ET

    French Pres­i­dent Emmanuel Macron says Europe needs anoth­er €400 bil­lion to help repair its part­ly-destroyed econ­o­my once the coro­n­avirus out­break sub­sides. And, as France has long defend­ed, he wants that mon­ey to be bor­rowed by EU mem­bers joint­ly, with the pro­ceeds, he said in a Finan­cial Times inter­view, going to indi­vid­ual coun­tries accord­ing to their needs, not in pro­por­tion to the size of their respec­tive economies.

    That is a ver­sion of the moot­ed so-called coro­n­abonds, which France, Italy, Spain and their Euro­pean Union allies have pushed since the begin­ning of the cur­rent cri­sis, with lim­it­ed suc­cess so far. Since such deci­sions, in the EU set­up, can only be tak­en unan­i­mous­ly, the oppo­si­tion of Ger­many and the Nether­lands, the self-styled “fru­gal” coun­tries, explains why the idea has so far looked dead-on-arrival.

    Or maybe not. Anoth­er dra­ma will play out next week on this sub­ject when EU lead­ers gath­er for a video­con­fer­ence on April 23. But things seem to be mov­ing at the usu­al EU pace — i.e., slow­ly — and a com­pro­mise doesn’t look impos­si­ble. Euro­zone finance min­is­ters agreed in their last meet­ing to “work on a recov­ery fund” that would be “tem­po­rary, tar­get­ed and com­men­su­rate with the extra­or­di­nary costs of the cur­rent cri­sis and help spread them over time through appro­pri­ate financ­ing.” But they left it up to their lead­ers to give the idea the polit­i­cal impe­tus it will need.

    Grant­ed, EU gov­ern­ments have already agreed on a pack­age of mea­sures using dif­fer­ent exist­ing tools and insti­tu­tions, which all amount to cheap loans to be offered to coun­tries that would request them. But all these mea­sures would end up adding to the pub­lic debt load of mem­ber coun­tries, putting some of them at risk of finan­cial insta­bil­i­ty after the recov­ery has start­ed, if mar­kets start wor­ry­ing about their abil­i­ty to fund them­selves.

    ...

    There were signs in recent weeks that France and Ger­many were mov­ing clos­er to a com­pro­mise on the thorny top­ic of joint euro­zone bor­row­ing. But Macron putting sud­den­ly a num­ber on the French pro­pos­al, while warn­ing in the tra­di­tion­al grandil­o­quent French way that Europe could unrav­el if it didn’t agree with him, may trig­ger adverse polit­i­cal reac­tions in Ger­many — unless, that is, the French pres­i­dent already knows that chances for a deal are moot.

    The French pres­i­dent has a point in not­ing that if Europe can­not show its cit­i­zens that it is there when they need it, pop­ulists in the south of Europe will gain ground — and that is also true of France, where Macron will face a far-right chal­lenge if he runs for reelec­tion in 2022. But he also for­got to men­tion the oth­er pop­ulists — in the Nether­lands or Ger­many, where far-right par­ties can be expect­ed to cam­paign against the very idea of pool­ing Euro­pean resources to help the coun­tries who need them most.

    ———–

    “Opin­ion: Macron faces uphill strug­gle to enroll EU on coro­n­abond scheme” by Pierre Bri­ançon; Mar­ket Watch; 04/17/2020

    “The French pres­i­dent has a point in not­ing that if Europe can­not show its cit­i­zens that it is there when they need it, pop­ulists in the south of Europe will gain ground — and that is also true of France, where Macron will face a far-right chal­lenge if he runs for reelec­tion in 2022. But he also for­got to men­tion the oth­er pop­ulists — in the Nether­lands or Ger­many, where far-right par­ties can be expect­ed to cam­paign against the very idea of pool­ing Euro­pean resources to help the coun­tries who need them most.

    It’s one of the fea­tures of the EU: the cryp­to-far right dom­i­na­tion of the fed­er­al lev­el of the EU ensures poli­cies that will cre­ate hav­oc in coun­tries like Spain and Italy and the local far right par­ties get to reap the polit­i­cal ben­e­fits with the anti-EU stances. That far right has its bases cov­ered. And if things get so bad there just has to be a col­lec­tive joint­ly financed response to hold the thing togeth­er and even the Ger­man gov­ern­ment and the rest of the hawks agree to it, that could end up tur­bo-charg­ing the far right ‘pop­ulists’ in the hawk­ish states. That’s part of how the EU oper­ates. The far right always wins. Some­where. It’s a prob­lem. There’s an estab­lish­ment EU far right that rep­re­sents the ‘cen­ter right’ com­po­nent of EU pol­i­tics like the CDU and then there’s the ‘anti-estab­lish­ment’ and ‘pop­ulist’ far right in coun­tries like Italy that are dam­aged by the ‘cen­ter right’ cryp­to-far right poli­cies. And they do their dance of griev­ances. And at the crux of it is an adamant oppo­si­tion to joint­ly financ­ing spend­ing and turn­ing the EU into a more US-style trans­fer union where wealthy states sys­tem­at­i­cal­ly trans­fer wealth to the poor­er states:

    ...
    That is a ver­sion of the moot­ed so-called coro­n­abonds, which France, Italy, Spain and their Euro­pean Union allies have pushed since the begin­ning of the cur­rent cri­sis, with lim­it­ed suc­cess so far. Since such deci­sions, in the EU set­up, can only be tak­en unan­i­mous­ly, the oppo­si­tion of Ger­many and the Nether­lands, the self-styled “fru­gal” coun­tries, explains why the idea has so far looked dead-on-arrival.
    ...

    So as we can see, the bat­tle lines in the EU fight over a joint coro­n­avirus response appears to be around fights over pro­pos­als like Macron’s extra 400 bil­lion euros in EU-lev­el spend­ing (good but not enough) and Ursu­la von der Leyen’s vague and unde­fined pro­pos­al to turn the EU bud­get into the “moth­er­ship” for a joint response. Which sug­gests we’re look­ing at maybe a 400 bil­lion euro EU-lev­el response that the hawks agree to and that’s it. No more. 300 bil­lion euros is more like­ly. If that. Which is about as good as it gets for EU pol­i­cy. Good enough to hold things togeth­er but not good enough to fix the prob­lem. That’s how things usu­al­ly work so that’s prob­a­bly what we should expect. Bet­ter than noth­ing but not good enough. Maybe. If we’re lucky. That’s the sta­tus of the EU lev­el joint coro­n­virus response so far: it’ll be sig­nif­i­cant if we’re lucky.

    Posted by Pterrafractyl | April 17, 2020, 11:49 pm

Post a comment