Commentary on the economic , geopolitical and simply fascinating things going on. Served occasionally with a side of snark.
Thursday, June 27, 2013
Europe agrees to Cyprus style bail in regime - the template lives ! Of course , as this allegedly comes into effect in 2018 and has built in loopholes which means it will be ignored when inconvenient , it's just another EU fluffernutter sandwich ! Additional data and news from around the horn in Europe - The Guardian liveblog ....
Turns out that for Europe, Cyprus was a "bail-in" template after all, and following an agreement reached early this morning, Europe now has a joint failed-bank resolution mechanism. Several hours ago, EU finance ministers announced that they had reached agreement on the principles governing the imposition of losses on creditors in bank 'bail ins'. Having already agreed to establish "depositor preference" in the pecking order of creditors at risk, the stumbling block to agreement was the availability of flexibility at the national level to complement the bail in with injections of funds from other sources. Under the compromise achieved overnight, once a bail in equivalent to 8% of total liabilities has been implemented, support from other sources can be used (up to 5% of total liabilities) with approval from Brussels.
So investors (i.e. yield chasers) and not taxpayers will foot the cost of bank bailouts going forward for a change? Maybe on paper: "From 2018, the so-called “bail-in” regime can force shareholders, bondholders and some depositors to contribute to the costs of bank failure. Insured deposits under €100,000 are exempt and uninsured deposits of individuals and small companies are given preferential status in the bail-in pecking order." In reality, last night's agreement is the usual fluid melange of semi-rigid rules filled with loopholes designed to benefit large banks whose impairment may be detrimental to "systemic stability".
To wit, from the FT: "While a minimum bail-in amounting to 8 per cent of total liabilities is mandatory before resolution funds can be used,countries are given more leeway to shield certain creditors from losses in defined circumstances." In other words, here is the bail in regime... which we may decide to ignore under "defined circumstances."
Next, since the "package must be agreed with the European parliament, a process that could stretch until the end of 2013" we urge no breath holding, especially since it was in late 2012 that news of a joint European bank regulator was announced, and one year later this concept has crashed and burned. In fact the bail-in deal will "open debate on further stages of financial integration, including on establishing a central authority to shut down eurozone banks" and "Germany is strongly resisting centralising such important powers to shut down banks under existing treaties."
In other words, yet another European agreement that is at best worth the price of the paper it is printed on. In the meantime, if indeed some of the systemic European banks keel over and die - say Credit Lyonnaise, Natexis or Deutsche - the last thing that anyone will think about to avoid a systemic collapse will be impairing even more banks. As a reminder, these are the most undercapitalized banks in Europe as reported by Goldmanyesterday:
But golf clap to Europe for finally admitting that reason and logic also apply to the most banana continent of all: after all, it took years of legislating to realize that the insolvency impairment waterfall, a concept rooted in logic and not in political BS, applies in Europe as it does everywhere else in the world too (except for the TBTFs in the US of course).
And all of the above, from a slightly less jaded perspective, via Reuters:
The European Union agreed on Thursday to force investors and wealthy savers to share the costs of future bank failures, moving closer to drawing a line under years of taxpayer-funded bailouts that have prompted public outrage.
After seven hours of late-night talks, finance ministers from the bloc's 27 countries emerged with a blueprint to close or salvage banks in trouble. The plan stipulates that shareholders, bondholders and depositors with more than 100,000 euros ($132,000) should share the burden of saving a bank.
The deal is a boost for EU leaders, who meet later on Thursday in Brussels, and can show that they are finally getting to grips with the financial crisis that began in mid-2007 with the near collapse of Germany's IKB.
"For the first time, we agreed on a significant bail-in to shield taxpayers," said Dutch Finance Minister Jeroen Dijsselbloem, referring to the process in which shareholders and bondholders must bear the costs of restructuring first.
The rules break a taboo in Europe that savers should never lose their deposits, although countries will have some flexibility to decide when and how to impose losses on a failing bank's creditors.
"They can affect German savers just as well as they can affect any other investor in the world," German Finance Minister Wolfgang Schaeuble said after the meeting.
* * *
But thorny issues lie ahead, not least whether countries or a central European authority should have the final say in shutting or restructuring a bad bank.
The European Commission, the EU executive, is expected to unveil its proposal for a new agency to carry out this task of "executioner" as early as next week, officials said.
"The most important discussion has yet to start and that is how decisions on restructuring will be made," said Nicolas Veron, a financial expert at Brussels-based think tank Bruegel. "It's premature to say that Europe is getting its act together."
Many Europeans remain angry with bankers and the easy credit that helped create property bubbles in countries including Ireland and Spain, which then burst and plunged Europe into a recession from which it has yet to recover.
Despite Capital Controls, Cyprus Deposits Slide To Lowest Since Mid-2008
Submitted by Tyler Durden on 06/27/2013 08:12 -0400
Another month, another update on the inefficiency of Cypriot capital controls, where following the latest release by the central bank on the May level of deposits in the banking system, we learn that total cash holdings in Cyprus banks dropped by another EUR 1.4 billion in May to EUR55.9 billion, and 23% lower from the same month last year. And with ongoing and unchecked deposit flight continuing, with EUR 14 billion in cash pulled or confiscated since the start of the year, one can see why the administration and the president are about to throw in the towel and demand, this time for a real, a much bigger bailout for Cyprus to plug the ever bigger gaping liquidity hole in the local banks as otherwise all that good money chasing bad will be for nothing.
In the meantime, expect deposit flight to continue as anyone with half a brain can finally see the writing on the wall, if only with a slight delay and following much personal losses.
Over to Greece, and the latest opinion poll data shows that the governing New Democracy is maintaining a narrow lead.
Despite the row over the closure of state broadcaster ERT, ND came top with 22% of support followed by the opposition left-wing Syriza group on 20.8%.
The extremist Golden Dawn party is still third on 9.1%, then PASOK (ND's junior coalition partner) on 6.1%, Independent Greeks on 5.5% and the Communist Party on 5.1%.
Democratic Left, which quit the coalition last Friday, is now polling just 3% support - any lower and it won't qualify for seats in the parliament.
Ireland in recession - the details
The news that Ireland's economy has shrunk for three quarters in a row has dashed any hopes of a recovery, my colleague Lisa O'Carroll writes.
Today's revised gross domestic produce for 2012 show the economy flatlined with GDP rising by just +0.2%, revised down from +0.9%.
GDP for the third and fourth quarters of 2012 was lower than previously stated, at -1% and -0.2%, the central statistics office in Ireland said on Thursday.
The economy continued to contract in the first quarter of 2013 when GDP growth stood at now -0.6%. This was due to falling exports and weakening consumer spending, said the CSO.
Key event
Back to the EU bank bailout deal agreed in the early hours in Brussels (in which bondholders, shareholders and depositors with over €100,000 in the bank would contribute to future rescue deals if a bank failed).
Tim Dolan, a partner at the international law firm SJ Berwin, comments on the deal:
This deal creates a clear set of rules for dealing with failing banks which should lead to a level playing field between banks based in larger and smaller European nations. The risk with this deal was that smaller European nations would be left having to require failing banks to resort to obtaining support from creditors while larger European nations would be able to support failing banks by deploying taxpayer support. This deal should ensure broad consistency.
All creditors of banks, and particularly unsecured bondholders, need to understand that there is a greater risk that they will suffer some loss should their bank fail in the future. There is also a greater risk that, in the event of a complete collapse of a bank, shareholders and large depositors will be required to provide some support before the taxpayer.
General strike under way in Portugal
Last night, workers gathered at a picket line in Lisbon at the beginning of today's general strike. Photograph: JOSE MANUEL RIBEIRO/REUTERS
The general strike called by Portugal's two biggest unions is underway, as workers register their anger over the country's austerity programme.
Reuters reports that public transport has come "to a virtual standstill":
Trains were not running, metro and ferry services stopped in Lisbon, and many bus routes were suspended, forcing those who chose to go to work take longer, alternative routes that were served by fewer buses than usual. State-owned airline TAP has warned of possible disruption but not cancelled any flights.
German unemployment data released
Germany's labour market continues to outperform the rest of the eurozone.
Data just released shows that the jobless total fell by 12,000 this month, on a seasonally adjusted basis. Economist had expected a rise of 8,000. It leaves Germany's jobless rate flat at 6.8% (May's original reading of 6.9% was revised down) compared to a eurozone average of 12.2%.
French consumer confidence hits alltime low
Gloom in France -- consumers are at their most pessimistic since records began in 1972, according to data released this morning.
The French statistics agency INSEE reported that consumer confidence slid again, to its lowest level since it began monitoring morale in 1972. French consumers are also more downbeat than ever before about their future living prospects.
At just 78, the reading was somewhat shy of analyst forecasts of 81, and far from the long-term average of 100.
The French economy is currently in recession, with unemployment moving steadily higher, and the government trying to cut public spending to hit EU deficit targets. Consumers have plenty of reasons to worry.
New bank rescue rules force losses on creditors
Good morning, and welcome to our rolling coverage of events in the eurozone, the world economy and the financial markets.
Europe's finance ministers have finally agreed new rules to handle the cost of future bank bailouts, which will see losses forced onto creditors such as large depositers as well as bond holders and shareholders.
After another late-night session in Brussels, ministers hammered out rules that will mean creditors are 'bailed in' to help cover the cost of future rescue deals. It's meant to end the era of taxpayers automatically picking up the tab, and should help Europe move towards proper banking union.
The key to the deal is that 8% of a failing bank's total liabilities – first shareholders, then junior bondholders, then 'uninsured deposits' (over €100,000) – must be effectively 'wiped out' before public funds can be used.
Deposits of under €100,000 remain protected. And the deal also puts big deposits held by large companies ahead in the firing line before those of smaller companies and individuals.
Michael Noonan, the Irish finance minister, described it as a revolutionary change in the way banks are treated in the European Union.
The deal also leaves some discretion for national goverments to decide whether to step in, as Jurgen Baetz of Associated Press explains:
Those forced losses will go as high as 8% of a bank's total liabilities, only then would national governments kick in and top it up with a bailout possibly worth another 5% of the liabilities.
The negotiations were complicated because some nations feared being bound by overly rigid European rules. Others warned that too much flexibility would create new imbalances between the bloc's weaker and stronger economies and a lack of common rules would destroy certainty for investors and erode trust in the financial system.
Another key point: member states are expected to set up "ex-ante resolution funds", eventually holding a sum equal to 0.8% of national deposits, to fund their own contributions.
The draft deal still needs the approval of the EU parliament, and is expected to begin in 2018.
I'll pull together reaction to the deal, and more details, shortly.
The deal comes before an EU summit where countries could agree further steps to move closer to full banking union. Leaders will also discuss plans to fight Europe's youth unemployment crisis.
Also coming up today -- a general strike is taking place in Portugal in protest at the country's ongoing austerity measures; and new GDP data for the UK is released at 9.30am BST.
Submitted by Tyler Durden on 06/27/2013 05:55 -0400
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