Commentary on the economic , geopolitical and simply fascinating things going on. Served occasionally with a side of snark.
Monday, April 7, 2014
Europe's Failed Bank Resolution Scheme Updates - April 7 , 2014 -- Battle Cry of the Day: Save the Bondholders; Failed Bank Resolution on Verge of Unraveling Days Before Ratification ..... Greece updates ....... Open Europe blogspot items to ponder on Euro Land politics !
A landmark EU agreement on a common rulebook for handling bank failures is in danger of unravelling over the fine print restricting when a state can intervene to rescue a struggling bank.
The political stand-off over the bank recovery and resolution directive – a centrepiece of post-crisis financial reforms – is extremely unusual because it comes days before the European parliament is supposed to adopt the agreed text of the legislation.
While London insists it is belatedly rectifying a technical discrepancy, other diplomats suspect it is revisiting a fundamental element of the reforms, which aim to spare taxpayers from the costs of bank failure. “This is a complete mess, a nightmare and we have to decide what to do fast,” said one person involved.
At issue is what form of support a state can provide to a lender in difficulty without triggering a so-called bail-in, where losses are imposed on private investors who lent money to a bank.
The British want to clarify that central banks can extend liquidity even when relying on a specific government guarantee, without triggering haircuts on bondholders.
According to people involved in the talks, the Czech Republic is objecting in principle to making such substantial changes after a political agreement was reached, while Denmark is raising more substantial concerns about the specific British proposal. Copenhagen has taken a hard line against loopholes which could permit disguised governmental bailouts.
At the other end of the spectrum, multiple countries responded by calling for broader exemptions in the text. France, Italy, Sweden and Portugal specifically want assurances that state guarantees can also be extended to help a struggling bank issue bonds without requiring bail-in. This, however, is opposed by the European parliament.
The debate is also refocusing attention on “precautionary recapitalisation” – one form of state intervention that was exempt from requiring immediate bail-in. The drafting remained unclear, however, and officials are still pressing for clarity on how it could be used and whether it would clash with EU competition rules curbing state aid.
Sharon Bowles, the chair of the parliament’s economics and finance committee, said the revisions were essential to accommodate national central banks that “do not have big balance sheets” and need extra guarantees from the state when lending to struggling lenders. By contrast she wants state guarantees for bank bonds “outlawed” as it would open a loophole that protected private investors from risk.
Save the Bondholders
What's this all about? Saving the bondholders once again.
The deal was supposed to prevent further taxpayer bailouts. Taxpayers have put about €473bn into European banks since 2008.
“With these new rules in place, massive public bailouts of banks and their consequences for taxpayers will finally be a practice of the past,” said Michel Barnier, the EU commissioner responsible for the reforms.
Really? No Not Really
Under the deal, the nationalisation of a bank would be possible in exceptional circumstances, and only after 8 per cent of liabilities of a bank have been bailed-in.
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 with approval from Brussels.
After the minimum bail-in is implemented, countries are additionally given an option to dip into resolution funds or state resources to recapitalise the bank and shield other creditors. The intervention is capped at 5 per cent of the bank’s total liabilities and is contingent on Brussels’ approval.
Gunnar Hökmark, the lead negotiator for the parliamentary side, said: “We now have a strong bail-in system which sends a clear message that bank shareholders and creditors will be the ones to bear the losses on rainy days, not taxpayers.
Battle Cry of the Day
Seems like there was a fair amount of scope for "shielding certain creditors from losses". But now, at the last minute that is not enough for the UK, France, Italy, Sweden, and Portugal.
Germany has not yet weighed in on the changes. Chancellor Angela Merkel will not want to see the deal unravel, so I suspect she will likely to go along with the majority. Thus, it's highly likely additional bondholder-protecting loopholes work their way into the treaty.
By the way, I find it peculiar there needs to be a deal at all. Where is it written that bondholders can never suffer losses? Where is it written that taxpayers, not bondholders have to bail out failed banks?
Seems to me that taxpayers never should have bailed out banks, and a simple structure of losses should apply.
100% of each class should be hit before the next class is hit. Should that be insufficient, then and only then should taxpayers be at risk.
Mike "Mish" Shedlock
Items from Greece........
So , Greece tax collections should be less if unpaid VAT and fines are offset against Greece unpaid tax refunds ......
PM announces plans for firms and state to offset VAT debts
Prime Minister Antonis Samaras announced on Monday the launch of a scheme that will allow companies to offset the VAT they owe the state against the returns the state owes them.
The option will also be open to firms to use in the debts they owe to each other, meaning they would subtract the VAT from the total owed.
Samaras said that fines imposed on businesses that are unable to pay their taxes because the state has not returned their VAT would be scrapped.
“The state cannot be strict on citizens if it is not fair to citizens,” he said.
Despite more relaxed official statements, the Finance Ministry is gearing up for return to the markets
By Sotiris Nikas
Athens will issue its first bonds in four years later this week and will only sell them to foreign investors, sources have suggested.
There has been some confusion in the market over whether the government would be proceeding with the issue following statements by Finance Minister Yannis Stournaras on Monday in which he said that Greece is in no rush to return to the markets before Easter. The ministry also announced that “the return to the markets will take place within the first half of the year, as planned,” adding to the confusion.
However, it is believed that Monday’s statements were intended to the muddy the waters and that the government is set on proceeding as planned with issuing bonds either tomorrow or on Thursday.
Sources say that the plan provides for a bond issue directed only at foreigners for two main reasons. The first is that the issue should send a clear message that those who turned their back on Greece in April 2010 are now placing their trust back in the country as it gradually emerges from the bailout process. Moreover, no one wants the idea to spread that the new bond issue was supported by domestic funds.
Stournaras, meanwhile, said on Monday that the return to the markets “means that Greece, after four years of being cut off and unable to borrow, will slowly start to test the waters for a return similar to the way other countries such as Portugal and Ireland emerged from the bailout process.”
The second reason is that the country’s creditors, and particularly the European Central Bank, have asked that Greek banks do not use the mechanism of the new bond to draw more liquidity from the Eurosystem while also using the ECB’s mechanism for the same purpose.
The main scenario for the new bonds remains that it will be a five-year issue, with Public Debt Management Agency (PDMA) likely starting its book-building process tomorrow and ending it on Thursday, although the dates remain uncertain. The amount to be borrowed will be at least 2 billion euros.
Wednesday's general strike to disrupt transport, health and other state services
Workers in the state and private sector are to walk off the job on Wednesday, disrupting public services and some modes of transport on the first general strike of the year against austerity.
Hospitals will be operating on skeleton staff as doctors and nurses join the 24-hour walkout and pharmacies will close for the day. Teachers and prison staff are also scheduled to join the action along with court staff, causing disruption to scheduled trials.
Air-traffic controllers were expected to stage a work stoppage but the timing of the walkout had not been made public by late Monday.
Intercity trains, the Proastiakos suburban railway, trolley buses and ferry services are to be suspended, though the Piraeus-Kifissia electric railway (ISAP) and the metro will be operating as usual, with the exception of the metro’s Doukissis Plakentias - Athens International Airport route, which will be suspended. Blue buses are to run a limited services from 9 a.m. to 9 p.m.
Downtown Athens is expected to experience serious traffic problems as strikers march to protest austerity measures. The country’s two main labor unions, GSEE and ADEDY, which called the walkout, have organized a protest rally to begin at 11 a.m. at central Klafthmonos Square and culminate with a march on Parliament. An hour earlier, the Communist-affiliated labor union PAME is to hold its protest rally at Omonia Square.
The appointment of Arnaud Montebourg - an outspoken critic of German and EU-mandated austerity and pro-competitivenesses policies - as the new French Economy Minister has not gone down well in Germany.
In a feature piece headlined, "He insults Germany and is promoted", Die Welt claims that "his appointment is controversial – he is known for his failures". The paper goes on to argue:
"He sees himself as the legitimate successor of Jean-Baptiste Colbert, the finance minister of the legendary French Sun King Louis XIV... In his previous post of Minister for Re-industrialisation, he above all others terrified foreign investors with class warfare slogans, and now has acquired even more powers in the government of President Francois Hollande".
The paper also claims that Montebourg secured his new position by threatening Hollande that, unless given the Economic Ministry, he would resign from the government - a move which would have been hugely destabilising given his position as a figurehead on the left of the Socialist Party. The paper has a round-up of some of Montebourg's more memorable quotes:
“The EU is the only one that does not protect itself against unfair competition. We have become the idiots of the global village...For 30 years, consumers have made the law in Europe and the result has been a disaster. Me, I defend the producers."
"The issue of German nationalism is resurfacing through the policy à la Bismarck [of Angela Merkel]."
"Mrs Merkel is killing the euro, and it would be time to show the failure of the German model, rather than singing its praises."
Even allowing for the fact that Montebourg is playing to the gallery a fair bit, and that thenew government's economic policy will remain more pragmatic overall, it is clear why his appointment will raise concerns in Berlin and beyond about France's already fragile economic situation. In the meantime, we're looking forward to new additions to his already impressive repertoire of memorable quotes.
Tuesday, April 01, 2014
Article 50: a trump card or joker?
We have today published the full report assessing the implications of our EU ‘wargame’which simulated the negotiating dynamic under two scenarios: first, a UK-EU renegotiation from within and, second, under ‘Brexit’. As we’ve stressed before, the fact is that unless the UK wants to simply fall back on WTO trading rules and unilateral free trade, renegotiation and withdrawal will both require a negotiation with other EU states and the EU institutions.
The only formal way to the leave the EU is via the so-called “Article 50” exit clause of the EU Treaties, which stipulates a two-year timeframe within which to potentially conclude a continuity deal. In our simulation, after their initial hostility, all other member states recognised the need to strike a new trade deal with the UK with economic incentives trumping political rhetoric. Britain is unlikely to face the ‘worst case scenario’ of having to fall back on World Trade Organisation rules.
A Norway-style deal – effectively single market membership but with no formal political influence – is likely to be rejected by EU partners and is in any case a bad deal for the UK as it amounts to “regulation without representation”.
While a reciprocal trade agreement for goods, where the UK has a sizeable trade deficit of £56.2 billion (2012) with the EU, would be relatively easy to strike, access to the EU’s services market – where the UK has a trade surplus of £11.8 billion (2012) – will be far more difficult.
Access for UK financial services would be a particular concern since a third of the UK’s trade surplus in financial and insurance services in 2012 came from trade with other EU member states – of the total £46.3 billion UK financial and insurance services trade surplus, £15.2 billion was with the EU and £14.5 billion with the US. Perhaps over time, further bilateral deals on market access could rectify this but the political resistance from France and some others could be high.
While Article 50 of the EU treaties has the benefit of definitely triggering negotiations – which isn’t guaranteed under Cameron’s renegotiation plan – it comes with several drawbacks:
Article 50 is a one way street – once it is triggered, and even if the deal available at the end of the process proves unsatisfactory to the UK, there is no way back into the EU except with the unanimous consent of all other member states.
It is likely to put the UK on the back foot in any negotiation. The remaining EU member states would be in charge of the timetable and the European Parliament would have a veto over any new agreement. Therefore, while having to fall back on WTO rules entirely is unlikely, it would remain a possibility.
As the UK will not take part in the final qualified majority vote on whether to accept the new deal, protectionist-minded member states could have greater influence on the degree of market access the UK could secure post-exit – particularly on services (see graph below).
Compared to renegotiation from within, Article 50 therefore cedes more control than what is often thought.
Ultimately, though, while a high transaction cost is undeniable, the big question is if there is a point – and if so when – at which the high one-off cost of Brexit would be outweighed by the long-term benefits of more economic and political independence over areas such as financial regulation, agricultural policy or criminal justice, particularly if the eurozone comes to dominate the wider EU and the necessary reform proves unattainable.