December 19, 2013

A deal on European banking union was finally struck overnight. Already the inquests have begun into how robust it is.

As we exclusively reported at the weekend, EU finance ministers agreed that banks will pay into funds for the closure of failed lenders, amassing roughly 55 billion euros which will be merged into a common pool in 2025. Yes, 2025.

Until then, if there is not enough money, a government will be able to impose more levies on banks. If that does not suffice, it would put in public money and if that is unaffordable, it could seek a bailout from the euro zone’s ESM bailout fund with conditions and stigma attached.

Germany has secured its insistence that no money from the 500-billion-euro ESM, would be available directly for bank clean-ups.
That deals a blow to a central tenet of banking union as it was originally conceived, namely that weak governments should not be left to cope with banks whose problems can buckle a country. The original plan also called for a mutual deposit guarantee which has long since bitten the dust.

The complexity of the structure is another potential problem since recent history shows authorities have to move fast once a bank is teetering. The European Central Bank will have the power to declare a bank is failing but after that a new agency empowered to shut banks, the European Commission and up to 18 different euro zone countries will potentially have a say.

My take, for what it’s worth, is that Europe’s banks have been busy deleveraging and building up capital for some time so whatever the ECB’s health tests reveals next year is unlikely to be so bad that it amounts to an unfundable crisis, particularly since the Cyprus model of bailouts is now enshrined so bank investors and creditors will get hit first.

However, what is to be put in place does not have enough to cope with another full on crisis of the like we’ve seen over the past few years. History shows that if and when that happens again, euro zone leaders and the ECB will scramble to do more but what they’ve agreed now could well fall short.

Those outside national governments have said so pretty clearly. Mario Draghi baldly stated on Monday that the blueprint may be too complex and inadequately funded and last night Michel Barnier, the EU commissioner in charge, said: “When I compare it with my original proposal I have regrets … I would like to have seen things done otherwise.”

The deal will be signed off by leaders at an EU summit later but this still has to get through the European Parliament so there may yet be further twists and turns. Wolfgang Schaeuble and Pierre Moscovici, the finance ministers of Germany and France who have not seen eye to eye on all this, will speak in Paris.

The bloc’s leaders have plenty else to chew over besides. A row about migration may have been averted after EU labour minister last week agreed tougher rules on the temporary posting of workers from poorer countries in central and eastern Europe to wealthier western areas. However, Britain’s David Cameron, under domestic pressure over a feared influx of Romanians and Bulgarians in the new year, may feel the need to stir things up.

The bloc’s failure to secure a free trade agreement with Ukraine will also feature heavily over the next two days while Vladimir Putin’s annual news conference, which has been known to stretch to four hours, could give us some insight into what his game plan is for Ukraine.

In Kiev, Ukrainian premier Viktor Yanukovich will hold his own press conference to explain the deal whereby Putin has offered $15 billion from Russia’s emergency fund to buy its bonds next year and heavily cut price gas. Presumably, Moscow views this as a price worth paying to build a planned customs union with ex-Soviet Republics. But will that really revive its fortunes?

Russia has admitted its failure to diversify its economy will lead to a far lower level of growth than had been expected all the way out to 2030. Putin conceded for the first time last week that Russia’s economic problems were home-grown. Equally for Ukraine, economists say it needs to turn towards the West and a more economically liberal model if it is to modernise successfully and end its dependence on steel and grain.

What a difference a few months makes. The Federal Reserve took the tapering leap, though it was more like dipping a toe in the water and… stock markets soared in sharp contrast to the summer mayhem when the idea of slowing the pace of money-printing was first mooted. Maybe that’s because the Fed also made its forward guidance on interest rates even more dovish.

Asian markets climbed after Wall Street put on two percent and Europe is set to follow suit. There are no obvious implications for the major central banks in our region and market action from now on will tell us whether the likes of Turkey and South Africa are going to have a problem.

The Turkish lira has weakened modestly in early trade but that could well have something to do with domestic factors.
An extraordinary tit-for-tat has blown up with the police and judiciary launching a corruption crackdown and the government responding to the detention of key figures and businessman close to it by removing several dozen senior police officers from their posts.

Prime Minister Tayyip Erdogan said those behind the investigation were trying to form a “state within a state”, an apparent reference to the movement of U.S.-based Turkish cleric Fethullah Gulen, whose followers are influential in Turkey’s police and judiciary. This is not the sort of stuff international investors like to see.

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