Of euro budgets and banks
Euro zone finance ministers meet today and will have one eye on budgetary matters given a Tuesday deadline for member states to send their draft budgets to the European Commission for inspection, and with protracted German coalition talks keeping other meaningful euro zone reform measures on hold.
Most draft budgets are in but we’re still waiting on Italy and Ireland. Dublin will unveil its programme on deadline day. Italy’s situation is more fluid so we may get something today.
Over the weekend, Dublin said it may quit its bailout by the year-end without any backstop in the form of a precautionary credit line. That would rule it out for ECB bond-buying support, which it probably also doesn’t need. But it needs at least the 1.8 percent growth forecast for next year to keep bearing down on debt.
Meanwhile, we got hold of documents showing Italy plans to give banks and insurance companies more speedy tax breaks on loan losses and writedowns to help them to clean up their balance sheets and get lending again.
For Rome, the aim is to agree a 2014 budget that cuts labour taxes but also meets the 3 percent of GDP deficit limit. Taxes and social contributions paid by Italian firms are among the highest in the world.
The budget will reduce this burden by some 5 billion euros, according to government sources. But that will put upward pressure on public finances so spending cuts will have to be found, which Prime Minister Enrico Letta will face a battle to impose. Finnish Prime Minister Jyrki Katainen is in Rome for talks with Letta while French President Francois Hollande is on a state visit to South Africa.
Greece is in with a 2014 budget plan that promises a return to growth after six years of recession and a hefty primary surplus which could unlock negotiations about some further form of debt relief. Its finance minister says he plans to roll over about 4.5 billion euros of bonds maturing in March next year to partly plug a funding shortfall.
The euro ministers, meeting in Luxembourg, are also expected to turn their minds to new stress tests of euro zone banks — the Asset Quality Review – which will see the light of day next year.
Backstops will need to be in place as and when balance sheet holes are uncovered. If the banks’ shareholders, creditors and maybe large depositors can’t fill the gap, national government help may be required and if that is insufficient, what then? The euro zone’s ESM rescue fund has been talked about but that is not without controversy either.
Germany has said the ESM should not provide a cent more than 80 billion euros for bank recapitalization, and there is a further argument about whether it should be used to clean up “legacy assets” – yet the IMF believes Spanish and Italian banks face 230 billion euros of losses alone on credit to companies in the next two years.
European Central Bank President Mario Draghi laid it on the line at the IMF’s annual meeting in Washington, saying: “The effectiveness of this exercise will depend on the availability of necessary arrangements for recapitalising banks … including through the provision of a public backstop. These arrangements must be in place before we conclude our assessment.”
Time could be tight. Agreement on a resolution mechanism is slated for a December summit of EU leaders but protracted German coalition talks are holding things up. The European Parliament must get a chance to vote through whatever is agreed before its elections in the Spring. If not, the whole process could be stymied.
Talks between Angela Merkel’s CDU and the centre-left SPD will resume on forming a German grand coalition but any agreement is probably weeks away yet. European Council President Herman Van Rompuy will visit Berlin for talks with Merkel ahead of an EU summit later in the month.
Finance Minister Wolfgang Schaeuble predicted over the weekend that a government would be in place by mid-November and said Berlin was committed to finding a way forward on banking union by the end of the year. But to demonstrate the stasis, he is not expected to be in Luxembourg and the SPD are playing hardball. On Sunday, they threw a potential spanner in the works by insisting on a national minimum wage as a price for joining a Merkel-led coalition.
With little concrete progress on the debt and budget standoff in Washington, financial markets are in jittery mode. The G20/IMF meetings urged swift action but that was about it. Some notably poor Chinese export figures over the weekend aren’t helping either.