Commentaries

IMF undermines EU fight for Lativa peg

By Paul Taylor
July 16, 2009

 Just when it looked as if Latvia’s currency peg to the euro had weathered the storm, the International Monetary Fund has raised fresh doubts by withholding funds for the Baltic European Union newcomer. 

Neelie Kroes lays down the law on bank rescues

By Paul Taylor
July 16, 2009

Neelie Kroes is laying down the law. The European Union’s competition chief may be lenient on timing, but she is sticking rock-hard to the principle that institutions which get public money during the financial crisis must be shrunk, broken up, sold off or wound up to avoid distorting competition. That is the main message of guidelines for restructuring state-aided banks drafted by EU regulators and obtained by Reuters on Thursday.

Blair for EU president? Don’t hold your breath

By Paul Taylor
July 15, 2009

The British government has chosen a strange time to announce its support for former Prime Minister Tony Blair for the not-yet-existent job of President of the European Council. French President Nicolas Sarkozy has publicly touted Blair as a good candidate, and his name is among a handful discussed among EU diplomats. But there was no obvious reason for Europe Minister Glynnis Kinnock to go public with a British candidacy now.

Germany headed for zombie banks

By Paul Taylor
July 13, 2009

Is Germany the new Japan?
    Europe’s biggest economy is well on its way to making a key mistake blamed for Japan’s “lost decade” of economic stagnation in the 1990s by failing to clean up its banks decisively.
    The obstacles are political rather than financial. Berlin seems determined to avoid telling voters the bad news before a Sept. 27 general election about banks’ expected losses and the likely cost to the taxpayer.
    Instead, the government is allowing banks to conceal or defer the full extent of losses on toxic securities and bad loans, and refusing to subject them to public stress tests or to force them to increase their capital. In doing so it risks perpetuating “zombie banks” that are too sick to lend to business and households.
    “There are very strong political reasons for the policy paralysis,” says Nicolas Veron of the Bruegel economic think-tank in  Brussels. “Nothing can happen before the German election. But Japan waited a decade. We can wait three months.”
    It is no surprise that when the European Central Bank flooded Eurozone banks with 442 billion euros in liquidity last month, most preferred to deposit the money back with the ECB overnight or put it in safe government bonds rather than lending to the real economy.
    Despite jawboning from ECB president Jean-Claude Trichet and threats by German Finance Minister Peer Steinbrueck, the banks are effectively on lending strike because their problem is not liquidity but solvency.
    Anxious to avoid a credit crunch before the election, Steinbrueck failed to convince his European Union peers last week to suspend bank capital adequacy rules pending reforms due later this year. He was also rebuffed by the Bundesbank when he appeared to endorse the idea of the German central bank lending directly to business to bypass a frozen capital market.
    Banks are expecting more loans to go sour and heavier losses on impaired assets as the recession bites deeper, eating into their capital base. Their instinct is to draw in their horns and reduce leverage, which got them into the mess in the first place.
    The ECB’s latest Financial Stability Review explains why. It estimates that Eurozone banks face a further $283 billion in write-downs by the end of 2010 on top of the $366 billion in losses written off since the crisis began in mid-2007. Rather than forcing banks to recognise those bad assets and remove them from their balance sheets, most Eurozone governments have been playing for time, seemingly hoping that something will turn up.
    Close links between Germany’s banks and its political establishment are another reason for reluctance to carry out painful restructuring. The regional Landesbanks and savings banks are key levers of political patronage. In an earlier role as state premier of North Rhine-Westphalia, Steinbrueck was a negotiator with the European Commission on behalf of WestLB [WDLG.UL] and other state-controlled Landesbanks. Of the private sector banks, Commerzbank <CBKG.DE> is on government life support.
    Germany’s bad bank scheme for commercial and state banks is designed to stretch out the problem over the next two decades rather than resolve it. Banks may voluntarily put toxic assets into special purpose vehicles guaranteed by the state until maturity, paying an annual fee. But if the assets are worth less at the end than the price assessed by an independent valuer, the liability rests with the banks, not the taxpayer.
    Italy, France, the Netherlands, Belgium and to a lesser extent Spain are all in denial about the extent of their banking problems, although the Dutch, Belgians and French have had to spend billions of euros of taxpayers’ money to save Fortis, ABN Amro, ING <ING.AS> and Dexia SA <DEXI.BR>.
    Spain has been bolder, creating a 99 billion euro bank rescue fund, expected to lead to a wave of restructuring, tie-ups and bail-outs after the country’s housing bubble burst.
    So what does the Eurozone have to do to avoid a Japanese-style prolonged period of stagnation with zombie banks?
    Governments should start by telling voters and markets the truth about their banks’ exposures. Far from undermining confidence in all banks, as Steinbrueck contends, disclosure would restore trust in sound institutions and dispel general suspicion.
    They should then compel banks that are found wanting to increase their equity capital, either from private investors if they can, or from the state if they must. This may lead to a temporary nationalisation of some sick banks, as Britain did with Royal Bank of Scotland <RBS.L>. Ultimately, banks that are not viable must be broken up or closed down.
    The European Commission’s competition department and the Committee of European Banking Supervisors can provide pan-European political cover for governments that fear taxpayers’ wrath at bailing out banks with public money.
    The way should be clear once Germany has voted. It would be dangerous to delay any longer. As the Japanese example shows, procrastination merely increases the long-term pain.

Nabucco pipeline turns corner but needs gas

By Paul Taylor
July 13, 2009

Things are finally looking up for the Nabucco pipeline.
After years of setbacks and wrangling, the prospect of building a supply route for Caspian natural gas across Turkey to central Europe, by-passing energy giant Russia, took a big step forward on Monday when five nations signed a transit agreement.
Getting Turkey on board was crucial, at a time of uncertainty in its negotiations to join the European Union.
What the 7.9 billion euro project most needs now is gas. Key potential suppliers Azerbaijan, Turkmenistan and Kazakhstan face pressure from Moscow to send all their output north, through the Russian pipeline network, rather than west.
China is meanwhile racing to build pipelines that will vie to take Caspian and central Asian gas to the Far East. Iran and Iraq are also potential suppliers to Nabucco but there are political obstacles in both cases.
The European Union, backed by the United States, will need to show unwavering commitment to get Nabucco built and filled. Moscow will try hard to thwart it.
Given their scale and cross-border reach, all big pipeline projects are political. The EU-sponsored Nabucco is just as geopolitically driven as the U.S.-backed Baku-Tblisi-Ceyhan (BTC) oil pipeline was in the late 1990s.
Washington’s determination to create an energy corridor from Azerbaijan across Georgia to Turkey, cutting out Iran and Russia, convinced sceptical oil majors to invest. The fact that BTC was built despite an oil price slump was a triumph of geopolitics over commercial considerations. The rise in prices by the time it opened in 2005 vindicated the investment.
Sceptics say Nabucco, due to be operational by 2014 with a capacity of 31 billion cubic metres a year, will not be built until there is enough signed-up gas to fill it. There is none so far. But the BTC precedent suggests that building it is the key to filling it.
The European Union is weaker and less united than the United States, and Moscow is pressing ahead with a rival South Stream project to pipe gas under the Black Sea to southeastern Europe.
Suppliers will only sign up if they feel confident that the West is fully behind Nabucco, and willing to stand up to Russia.
Last year’s Georgia war and repeated gas crises between Moscow and Ukraine have spurred Europe’s drive to diversify energy sources but made Caucasian and Central Asian governments more wary of the risks of incurring the Kremlin’s wrath.
The EU’s decision to provide 200 million euros in start-up funding for Nabucco is encouraging. But given the credit squeeze, European governments may have to do more to guarantee finance for the project.
The pipeline is only one piece in the puzzle of European energy security, and arguably not the most important.
Creating a single European Union energy market by connecting member states’ pipelines and power grids is the most urgent and practical way to reduce dependency on Moscow.
Developing liquefied natural gas supplies and terminals is another relatively quick way to diversify suppliers and routes.
Reducing fossil fuel consumption through efficiency savings and by developing renewable sources will also help.
But the lengths to which Russia has gone to try to kill off Nabucco highlight the importance of the project.

from Paul Taylor:

What is Juncker’s game?

By Paul Taylor
June 5, 2009

What on earth is Jean-Claude Juncker up to? The veteran Luxembourg prime minister keeps dropping hints that he is fed up and wants to stand down as chairman of the Eurogroup of euro zone finance ministers, then pulling back.