Banking union talks, storm allowing

December 6, 2013

The finance ministers of Germany, France, Italy and possibly Spain are expected to meet in Berlin to discuss banking union. Two sources told us Dutch Finance Minister Jeroen Dijsselbloem – who chairs the Eurogroup of euro zone finance ministers — should attend as will EU commissioner Michel Barnier and key European Central Bank policymaker Joerg Asmussen.

There is a possibility, however, that a violent storm that has hit Germany could prevent the participants reaching Berlin. If they make it, they will bid to come closer to a solution on a planned European resolution mechanism to deal with troubled banks ahead of a full meeting of euro zone finance ministers next week to help fashion a deal by the end of the year.

The last time the ministers met it didn’t go so well.  

Germany is cool to the original idea that the euro zone clubs together to tackle frail banks. Instead, Berlin wants losses imposed on bank creditors, including bondholders, once stress tests due next year expose any weak links.

The reluctance of Germany, which is worried that it will shoulder much of the burden if weaker countries turn to the bloc’s emergency fund, put it at odds with France, which wants a euro zone-wide safety net.

Thomas Weiser, the head of the band of experts who work behind the scenes for the Eurogroup, is speaking on the same subject in Dublin and Irish Finance Minister Michael Noonan is in London.

European Central Bank policymakers Asmussen, Benoit Coeure, Luc Coene and Ewald Nowotny all speak today. We know there is consternation within the ECB that it might be left with a banking supervisory role without sufficient backstops. There’s plenty more to dig on too.

With inflation forecast to remain well below target for the next two years, pressure is growing to act and Mario Draghi said yesterday a number of options were possible, and ready to be deployed. Most – particularly full-on QE – are unlikely. The most likely – a repeat of the splurge of cheap, long-term money thrown at banks last year – has now been saddled with a pretty stiff caveat.

Draghi said the ECB would only sanction another “LTRO” if he was convinced banks would use it to lend into the real economy, which they didn’t last time, rather than as cheap money for a carry trade into government bonds giving a guaranteed return, which they did.

The Bank of England sought a similar guarantee with its Funding for Lending Scheme, with mixed results. Presumably the ECB is or will soon be consulting with the banks or is Draghi saying a new LTRO is really quite unlikely, which is strongly counter to market expectations?

A source told us last night that the ECB has delayed approving a planned revaluation of Bank of Italy capital held by commercial banks following an intervention by Germany’s Bundesbank. The move, which could see the Bank’s capital revalued to 5 billion to 7.5 billion euros, is meant to allow Italian banks to strengthen their capital position and bring in up to 1 billion euros of tax revenues for the government.

Norway’s statistics office will produce fresh economic forecast which are expected to show a big downward revision in growth. Yesterday Norway’s central bank pushed back by a full year until mid-2015 the point at which it expects to raise interest rates – a more dramatic move than had been expected.

Top European figure of the day is German industry orders for October, which are predicted to slide after a bumper September. The Bundesbank will put out its monthly report on the German economy.

There are various angles to ponder following the death of Nelson Mandela concerning the impact it might have on his country. One is how Jacob Zuma will look in Mandela’s shadow and whether he can in fact turn the situation to his advantage, giving him and the ANC a fillip going into presidential and legislative elections next year.

South African markets are unlikely to be overly rattled – this was of course inevitable at some point. The rand edged up in early trade with hard-headed traders far more focused on the U.S. non-farm payrolls report later in the day, which will dominate all markets today.

French President Francois Hollande may be struggling at home, but he continues to cut a decisive figure in the foreign policy arena.
Last night, he said he would act immediately in the Central African Republic after a vote at the U.N. Security Council authorized French and African troops to use force to protect civilians. France’s defence minister said this morning that French troops have arrived in the capital Bangui to bolster a force due to rise to 1,200.

African leaders are gathering in Paris for a summit on peace and security in Africa, being organised by French president’s office and foreign ministry. A mini-summit devoted specifically to CAR takes place on Saturday.

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