Banking disunion

December 10, 2013

The full Ecofin of 28 EU finance ministers meets after Monday’s Eurogroup meeting of euro zone representatives didn’t seem to get far in unpicking the Gordian Knot that is banking union. Ireland’s Michael Noonan talked of “wide differences”.

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 police banks and prevent a repeat of the bloc’s debt crisis.

But a German official rejected a euro zone proposal unearthed by Reuters that would allow the euro zone’s bailout fund, the European Stability Fund, to lend and help finance the cost of any future bank rescues or wind-ups. Berlin does not want to end up footing the bill for failures elsewhere and is still constrained because a coalition deal to form the next government has yet to win final approval from the Social Democrats.

Furthermore, most euro zone countries are happy to let the European Commission, the EU executive, rule on restructuring or closing banks but Germany wants the decision to be taken by the EU’s 28 finance ministers, where it holds more sway.

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.

This is such a divisive issue that it may fall to EU leaders led by Angela Merkel to try and break the logjam at their summit on Dec. 19-20 and there’s talk of another euro zone finance ministers’ meeting the day before.

One ray of light – the euro zone agreed last night that the troika of bailout inspectors will return to Greece today following a period of growing frustration over Athens’ 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 Greek Finance Minister Yannis Stournaras said they were now only 1 billion euros apart.

European Central Bank chief and IMF head Christine Lagarde are both speaking on our patch. With inflation forecast to remain well below target for the next two years, pressure is growing to act and Draghi has said a number of options were possible, and ready to be deployed.

The coming man in Italian politics, 38-year-old Matteo Renzi, newly elected leader of the centre-left PD party, dismissed suggestions yesterday that he could force snap elections and said he would support Letta’s coalition at a confidence vote on Wednesday.

It’s the smart move, leaving it up to Letta to forge agreement on a new electoral law that is capable of delivering more durable governments. Renzi can then reap the dividends.

The Italian Treasury will launch a second buy back of debt following a successful exchange last month which saw 2015 and 2017 paper swapped for 2018 bonds. The market gobbled that up, easing debt repayment pressure next year in the process.

The Treasury will aim to repeat the trick by repurchasing on Tuesday floating rate notes maturing in December 2014 and September 2015, as well as fixed-rate bonds maturing in 2015 and inflation-linked bonds maturing in 2017.

Nelson Mandela’s memorial ceremony will be fascinating for the enticing pairings in attendance – Barack Obama and Iran’s Rouhani (though Netanyahu won’t be there), Obama and Raul Castro, Tony Blair and Mugabe. If the person in charge of seating arrangements has a sense of humour…

French President Francois Hollande is attending along with his predecessor, Nicolas Sarkozy, though they apparently took separate planes. Obama and George W. Bush did take Air Force One together.

Hollande will then zoom off to the Central African Republic where he has increased France’s military presence to 1,600 troops to try and stamp out waves of religious violence which have swept over its former colony. As I write, French media are reporting two French soldiers have been killed.

Housing bubble, what housing bubble? Despite their protestations, the UK government and Bank of England are already moving to take the sting out of Britain’s boom-bust property market. The closely-watched RICS housing survey, out overnight, showed expectations of future rises in house prices hit a 14-year high in November. Industrial output and trade data follow this morning.


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