MacroScope

Banking disunion

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.

Union? Don’t bank on it

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.

Banking union talks, storm allowing

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.

ECB forecasts to contrast with Britain’s

The European Central Bank holds its last rates meeting of the year with some of the alarm about looming deflation pricked by a pick-up in euro zone inflation last week – though at 0.9 percent it remains way below the ECB’s target of close to two percent.

The spotlight, as always, will be on Mario Draghi but also on the latest staff forecasts. If they inflation staying well under target in 2015 (which is quite likely), expectations of more policy easing will gather steam again.

For today, another rate cut after last month’s surprise move would be a huge shock. Launching quantitative easing is anathema to much of the Governing Council unless it was clear a Japan-style downward price spiral was in the offing, which it isn’t. The bank’s vice-president, Vitor Constancio, has said the ECB would only cut the deposit rate it pays banks for holding their money overnight – now at zero – into negative territory in an extreme situation.

Crisis in Kiev

Ukraine’s shock decision to turn its back on an EU trade deal continues to reverberate with mass rallies on the streets of Kiev in protest at President Viktor Yanukovich’s decision.

To try to defuse tensions, Yanukovich issued a statement saying he would do everything in his power to speed up Ukrainian moves toward the EU. Is this another U-turn or mere semantics? The answer is important.

Kiev must find more than $17 billion next year to meet gas bills and debt repayments. Another sovereign meltdown is far from impossible.
Yanukovich is due to embark on a trip to China. Dare he go? And is the opposition cogent enough to threaten him? The call for a national strike will be an acid test.

And more from the ECB…

The bombardment of European Central Bank interventions continues today. ECB chief Mario Draghi addresses the European Banking Congress in Frankfurt and any number of his colleagues break cover elsewhere.

Draghi shepherded a surprise interest rate cut earlier this month and consistently says that other options are on the table though yesterday he said that talk of cutting the deposit rate into negative territory to try and force banks to lend more was people “creating their own dreams”.

Having said that, the prospect of printing money has been raised, at least in principle, and the markets still expect a new round of long-term liquidity pumped into the banking system – a repeat of last year’s LTROs – early next year. Anything more would be hugely difficult for Germany and its fellow travellers to swallow.

ECB cacophony

A round of European Central Bank policymakers speeches this week can be boiled down to this. All options, including money-printing, are on the table but it will be incredibly hard to get it past ECB hardliners and neither camp sees a real threat of deflation yet.

Reports that the ECB could push deposit rates marginally into negative territory in an attempt to force banks to lend have been played down by our sources, not least because it would distort the working of the money market.

Today, ECB chief Mario Draghi speaks at a Berlin conference. Bundesbank head Jens Weidmann, who opposed this month’s cut in the main interest rate along with about a quarter of the Governing Council, will also be there as will Angela Merkel.

France, Italy compare notes

French President Francois Hollande is in Rome for talk with Italy’s Enrico Letta. Both have a lot on their minds.

The French economy contracted in the third quarter and Hollande faces a blanket of criticism over his timid economic reforms (although he has pushed through some labour and pension changes).

The French government announced yesterday an overhaul of a complex tax system, hoping it will douse a public backlash against high taxes (which have been favoured over spending cuts so far) which has led to back-pedalling on several plans this year. It will not lower the overall tax burden but is promising a fairer system to be enshrined in the 2015 budget. Whether that does anything to revive its rock-bottom popularity rating remains to be seen. Detail is scant so far.

ECB quandary

Another round of European Central Bank speakers will command attention today with disappearing inflation fuelling talk of further extraordinary policy moves.

Chief economist Peter Praet, who last week raised the prospect of the ECB starting outright asset purchases (QE by another name) if things got too bad, is speaking at Euro Finance Week in Frankfurt along with Vitor Constancio and the Bundesbank’s Andreas Dombret, while Joerg Asmussen makes an appearance in Berlin.

We know a quarter of the ECB Governing Council didn’t want to cut interest rates (a move which Praet proposed) two weeks ago and more glaring differences could be about to emerge. Printing money would be hugely difficult for German policymakers and their allies to countenance.

Italian shuffle

The decision by one of Silvio Berlusconi’s key allies to break from his party and back Prime Minister Enrico Letta’s fragile coalition appears to have shored up the Italian government with a final vote on expelling the media magnate from public life looming large.

Berlusconi said on Saturday his rump centre-right party had split from the coalition but did not have the numbers to bring it down.
Angelino Alfano, interior minister and deputy premier, said all five of the centre-right ministers under his umbrella would stay in the government but there is still plenty of disagreement within the coalition about the 2014 budget and doubts about Letta’s ability to push through meaningful economic reforms.

Letta is speaking at a conference “Charting the Way Ahead” today. On Sunday, economy minister Fabrizio Saccomanni said he wanted to accelerate public spending cuts following Friday’s criticism of the draft budget by the European Commission, which it said could break the bloc’s debt rules.