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Foreign ministerial talks in Paris yesterday made little progress on Ukraine. Russia rejected Western demands that its forces in Crimea should return to their bases and its foreign minister refused to recognise his Ukrainian counterpart. Moscow continues to assert that the troops that have seized control of the Black Sea peninsula are not under its command. The West is pushing for international monitors to go in.
Today, at least some of the focus switches to Brussels where EU leaders will hold an emergency summit with a twin agenda of how to help the new government in Kiev and possible sanctions against Russia. On the latter, Europe has appeared more reticent than Washington not least because of its deep financial and energy ties, none more so than Germany and Britain.
The bloc yesterday offered Ukraine’s new government 11 billion euros in financial aid over the next two years, contingent on it reaching a deal with the IMF. It will also freeze the assets of ousted president Viktor Yanukovich and 17 others seen as culpable for violation of human rights – around 80 people were killed in the capital last month as they protested against Yanukovich’s rule. Kiev caused some market wobbles by saying it would look at restructuring its foreign currency debt.
NATO will cut back on cooperation with Russia and suspend planning for a joint mission linked to Syrian chemical weapons while increasing its engagement with Ukraine's new leadership.
Any sense of euphoria EU leaders felt about agreeing a plan to underpin Europe’s banks – which should have been muted anyway – may be tempered by S&P’s decision to cut the bloc’s credit rating to AA+ from AAA.
In global terms that’s still rock solid but the rationale – flagging “rising risks to the support of the EU from some member states” has some resonance. On the upside, the agency affirmed its rating of Ireland following its bailout exit and kept its outlook positive. Presumably, S&P is clearing the decks before Christmas because it also reaffirmed the UK’s top notch AAA rating, and reaffirmed South Africa too.
A deal on European banking union was finally struck overnight. Already the inquests have begun into how robust it is.
As we exclusively reported at the weekend, EU finance ministers agreed that banks will pay into funds for the closure of failed lenders, amassing roughly 55 billion euros which will be merged into a common pool in 2025. Yes, 2025.
EU finance ministers succeeded last night where they failed last Friday and reached agreement on how to share the costs of future bank failures, with shareholders, bondholders and depositors holding more than 100,000 euros all in the firing line in a bid to keep taxpayers off the hook.
Germany and France had been at odds over how much leeway national governments would have to impose losses on those differing constituencies and, as with many EU deals, a compromise was reached whereby some flexibility is allowed.
G7 finance ministers meet London on Friday and Saturday. Since they and many more met in Washington only three weeks ago and not much has changed since, it’s tempting to ask what is the point of this British gathering. There have been mutterings from some of the travelling delegations to that effect.
If there is an angle, it is the unusual focus on financial regulation (usually not part of the Group of Seven’s remit) with some feeling that more than four years after the collapse of Lehman Brothers, efforts to put in place structures to prevent similar events spinning out of control in future are flagging. That puts the euro zone’s fluctuating plans for a banking union firmly in focus, which in turn puts German Finance Minister Wolfgang Schaeuble right in the spotlight.
from Expert Zone:
(The views expressed in this column are the author's own and do not represent those of Reuters)
The BRICS summit in Durban last week, which brought the leaders of Brazil, Russia, India, China and South Africa together, is best recalled for the rich visual imagery that Russian President Vladimir Putin invoked. Putin suggested that the five countries were like the lion, elephant, buffalo, leopard and rhinoceros. Notwithstanding the normative vision for the developing world that was outlined by the leaders, the subtext is a logical extension of this animal metaphor.
There are signs of headway from Athens where we have just snapped a government source saying the IMF accepts Greek debt is “viable” if it falls to 124 percent of GDP in 2020, rather than the 120 that it had previously decreed was the maximum sustainable level.. The source said fresh measures have been found to reduce debt to 130 percent of GDP by 2020, leaving another 10 billion euros to be covered.
At the latest failed meeting of euro zone finance ministers on Tuesday, we confirmed that the EU/IMF/ECB troika had calculated Greek debt would only fall to 144 percent of GDP in 2020 without further measures, meaning roughly 50 billion euros needed to be knocked of Greece’s debt pile. A report circulated at the meeting concluded (apologies for the number soup) that debt could only be cut to 120 percent of GDP in eight years if euro zone government agreed to take a writedown on their loans, which they will not do for now.
The EU budget summit, which could turn into a marathon as it tries to nail down monies for the next seven years, begins today. With the euro zone repeatedly failing to nail down a Greek deal, the EU would be well advised not to let this negotiation fall apart too. Having said that, there is little sign of great concern in market pricing – presumably the ECB’s pledge to buy government bonds in whatever amount it takes to steady the bloc continues to suppress investor nerves and short sellers.
Net contributors to the budget including Germany, France and Britain want to cut 100 billion euros from the European Commission's draft budget proposal, but differ over which areas to cut. Meanwhile, the main beneficiaries of EU funding such as Poland, Hungary and the Czech Republic oppose cuts. The meeting is intended to lay the groundwork for political agreement on the budget by EU leaders at their final summit of 2012 in December. It will last two days, maybe more and it could well be that no agreement is reached. Officials say only a cut in real terms – for the first time ever – is likely to do the trick.
Spanish Prime Minister Mariano Rajoy secured an overall majority in regional elections in Galicia over the weekend but in the Basque country, the nationalists were the big winners. These polls have been identified as one reason why Rajoy has held off asking for sovereign aid and Catalan elections still loom next month. Rajoy is likely to have to offer politically poisonous pension reforms in return for outside assistance.
So far, we seem to be no closer to a bailout request, which could then trigger European Central Bank intervention, and with 10-year yields having dropped more than two percentage points from a 7.5 percent peak since Mario Draghi’s vow to do whatever it takes to save the euro, one could reasonably ask why Madrid should be in a hurry. Some officials are saying Spain could quite comfortably wait until the turn of the year, leaving a prolonged period of limbo.
The day before an EU summit that probably won’t come up with anything decisive in crisis management. If that sounds rather underwhelming beware. There’s an awful lot of jockeying for position over when Spain will seek sovereign help, the Greek troika talks continue to look messy with time running very short and the leaders would be very well advised to demonstrate that their longer-term plans for closer integration are not running out of puff – item one on that agenda is getting plans for step one of a banking union back on track.
We could get a decent crack at this today with a number of EU leaders, including Angela Merkel, Spain’s Mariano Rajoy and Greek premier Antonis Samaras, gathering in Bucharest for a centre-right political congress.