MacroScope

Union? Don’t bank on it

By Mike Peacock
December 9, 2013

The Eurogroup of euro zone finance ministers meets, followed by the full Ecofin on Tuesday, to try and unpick the Gordian Knot that is banking union.

The ministers are seeking to create an agency to close euro zone banks and a fund to pay for the clean-up – completing a new system to prevent a repeat of the bloc’s debt crisis.

But Germany, which does not want to foot the bill for failures elsewhere, is wary not least because a coalition deal to form the next government has yet to win final approval from the Social Democrats.

Berlin also wants European countries to decide the fate of failing banks rather than the European Commission or some other independent body, raising the prospect of a clutch of countries banding together to veto decisions.

An impromptu meeting of key finance ministers in Berlin on Friday broke up without any proclamations – so it could be that they remain miles apart or that they have stitched something up and are keeping quiet about since so many other governments weren’t involved in the talks. The former is more likely.

Unless Berlin moves, what finally results may have precious little common backstopping of the financial system and if the costs continue to fall on national governments, the “doom loop” of weak banks dragging down weak sovereigns and vice versa will be unbroken. The end game is to have a common resolution fund financed by the banks themselves, but there is no detail on that beyond the fact that it will take years to build up.

This is such a divisive one that it may fall to EU leaders led by Angela Merkel to try and break the logjam at their summit on Dec. 19-20. Over the weekend, Spanish Prime Minister Mariano Rajoy said Europe needed more unity and integration – which is generally a coded call for Germany to step up to the plate.

With Greece’s Yannis Stournaras attending, it would be no surprise if he was given a grilling. EU/IMF inspectors have postponed a planned visit to Athens, a move that marks a new low in relations and could delay bailout payments as frustration grows over Greece’s failure to complete the reforms it has promised in return for aid.

The Greek parliament approved the government’s 2014 budget on Saturday. The coalition hopes its promise of a primary surplus will loosen their lenders’ purse strings. But they differ sharply over next year’s projections although Stournaras said they were now only 1 billion euros apart.

Slovenia also looms large. The government will publish the results of an external audit of the banks on Thursday or Friday, which will say how much cash the government must inject to keep them afloat.

We’ve heard from sources that the tiny euro zone member needs as much as 5 billion euros to recapitalize largely state-owned banks. Officials say that might not require an international bailout but we haven’t seen the final figures yet.

Yet another big week for Italy. Emboldened by the splitting of Silvio Berlusconi’s party and the media mogul’s expulsion from parliament, Prime Minister Enrico Letta has already called and won one confidence vote in parliament. On Wednesday, he has set up another to cement his coalition’s standing.

Letta is expected to win with the help of a centre-right group which split from Berlusconi but the election on Sunday of Matteo Renzi as leader of the centre-left Democratic Party (PD) could inflame things.

Renzi, the 38-year-old mayor of Florence, will not join the government but as party leader he will lead the PD into the next election as candidate for prime minister and might start pushing for more left-wing policies immediately, anathema to the centre-right bloc in the coalition.

One assumption had been that Renzi might try to hasten new elections but his allies say he needs time to unify the party behind him. Renzi may meet Letta today and may well be minded to wait for the coalition to reform an electoral law that has consistently delivered fractious, unstable governments.

Who knows what might happen in Ukraine but the agreement by Gazprom to defer until spring payments for Russian gas imports removes some of the short-term financial stress.

President Viktor Yanukovich met Vladimir Putin on Friday. We are still digging to see if they did a deal to persuade Kiev to turn its back on an EU trade deal. Yanukovich has also been in China seeking help.

Perhaps the biggest question of the next few days is whether violence will be used to try and disperse demonstrators in Kiev and if so, whether that quells them or leads to a major flare-up. On Sunday, anti-government protesters toppled a statue of Lenin in Ukraine’s capital and said Yanukovich would be next.

As usual, the week after a European Central Bank policy meeting boasts speeches from a number of its members from Mario Draghi on down. Today we have Yves Mersch and Benoit Coeure. With inflation forecast to remain well below target for the next two years, pressure is growing to act and Draghi said 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.

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? Even hardline Bundesbank chief Jens Weidmann said on Sunday that the ECB still had “other tools” at its disposal.

German trade data, just out, showed its surplus narrowed in October with imports climbing sharply, presumably reflecting burgeoning domestic demand. Industrial output figures are due later following Friday’s largest monthly fall in industry orders for a year.

The Bundesbank had lifted its forecasts for economic growth to 0.5 percent for this year and 1.7 percent for next year. In June it had forecast growth of 0.3 percent and 1.5 percent respectively.  Even the new numbers are hardly impressive.

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