MacroScope

One small step…

By Mike Peacock
June 27, 2013

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.

This is not to be sniffed at. For the first time it sets a common set of rules (albeit with wiggle room built in) to deal with bank collapses but, as we’ve explained ad nauseam in recent weeks, it is only one building block en route to a comprehensive banking union which was promised last year and would amount to the last vital plank in the defences being built around the currency bloc to banish future existential threats.

The euro zone powers may well get there in the end but as our poll of 50-odd economists showed yesterday, most don’t see any progress before the end of the year, largely because Germany’s September elections will prevent any further leap beforehand. Berlin has also been distinctly cool to the European Commission’s plans for a cross-border authority to wind up failing banks backed with a common fund.

That isn’t necessarily a disaster – the poll also showed the economists don’t expect the euro crisis to return to the pitch it reached last year – but this is playing out against a backdrop of rising euro zone borrowing costs again.

Austrian Chancellor Werner Faymann said far-reaching banking union was impossible before the German elections and at the very least would be pushed deep into next year. The Commission is expected to unveil its proposal for a new agency as bank “executioner” as early as next week.

Nonetheless, EU leaders meeting for a two-day summit can trumpet a step forward to go alongside the ECB taking over as banking regulator next year and will no doubt do so. Germany’s Angela Merkel will kick us off early with her customary pre-summit address to the Bundestag. The summit will also focus on competitiveness, jobs and growth with a special emphasis on alleviating chronic levels of youth unemployment.

German unemployment data are due before the leaders meet and euro zone money supply figures for May – including a breakdown of bank lending – are likely to show how much remains to be fixed in the financial sector.

Last month’s report showed loans to the euro zone’s private sector contracted for the 12th month in a row, making ECB chief Mario Draghi’s recent assertion that interest rates are starting to transmit properly to all corners of the currency bloc once more somewhat puzzling. His colleagues Jens Weidmann, Klaas Knot and Yves Mersch all make speeches during the day, as will Germany’s Finance Minister Wolfgang Schaeuble.

Having seen yields rise sharply at two debt sales already this week, Italy returns to the market with up to five billion euros of five- and 10-year bonds. Fortunately, both it and Spain have frontloaded their funding for this year, so some of the pressure is off.

German Bund futures have opened flat after weaker revised U.S. GDP suggested the Federal Reserve will not be in a rush to slow its bond-buying with new money and China’s money market crunch eased. European stocks are set for modest gains.

Portugal’s two biggest unions have called a general strike to protest against public sector pay cuts, layoffs and other austerity measures imposed by the terms of the country’s 78 billion euro bailout.

The government shows no sign of changing path – of all the euro zone debtor administrations they are real believers that this is the right medicine. But the return of market pressure could easily derail plans to exit the bailout programme and get back to market funding despite the finance minister’s insistence that bond auctions will resume this year.

So far, strikes and protests have had little impact but this is still significant and will put pressure on a government whose popularity has slumped after it enacted the largest tax increase in Portugal’s modern history this year. The IMF has said Portugal’s debt position remains very fragile and the prime minister has conceded that he may have to ask the EU and IMF for a further easing of budget deficit goals.

France, always considered part of the “core” in the euro zone, bears watching too. With an economy flatlining, its audit office will present a fresh view of the state of public finances which could add to the troubles of a government that has secured a delay until 2015 to bringing its deficit to 3 percent of GDP but is under pressure to both implement major economic reforms in return and to tighten the lid on public spending.

A day after detailing yet more spending cuts, Britain’s government will turn from stick to carrot and spell out plans for 100 billion pounds of infrastructure investment to kick-start the economy. We will test the opposition Labour party’s claim that there is in fact no new money here.

 

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