November 18, 2017

Europe’s Bank Deal Is Seen as Progress With Flaws

It may not be the “revolutionary change in the way banks are treated in the European Union” that the Irish finance minister, Michael Noonan, trumpeted after the late-night session.

The agreement is intended to reduce the chance that a bank crisis will descend into a government debt crisis, as happened in Spain and Ireland when the cost of bank rescues helped undermine public finances.

But because Germany insisted on high hurdles before its taxpayers would be made liable for bank failures in other countries, there remains a risk that weaker countries could still become victims of the failure of a big domestic bank.

“There is not much sharing of the costs across the euro zone,” said Marie Diron, an economist in London who advises the consulting firm Ernst Young. The 60 billion euro, or $78 billion, in euro zone money that has been allocated for bank recapitalization “is nothing,” she said. “It would be exhausted very quickly.”

The deal on banks is aimed at breaking the so-called doom loop, in which struggling governments take their states deeper into debt to save their banking systems, only to face sky-high sovereign borrowing costs.

Analysts were cautious about declaring an end to Europe’s banking woes.

“Is it the best solution to break the doom loop? Of course it’s not,” said Nicolas Véron, a senior fellow at Bruegel, a research organization in Brussels.

He said Germany was unlikely to agree to pay for past mistakes by banks or bank regulators in other countries, even after the German national elections in the autumn.

Mr. Véron said he expected the agreement to be modified as it went through the European Parliament, as leaders weigh some of the consequences of forcing creditors and some depositors to help pay for bank rescues.

But as European Union heads of state arrived here on Thursday for a two-day summit meeting, they sought to put the finance ministers’ deal in the best possible light.

François Hollande, the French president, hailed the breakthrough as “extremely useful for protecting savers and to avoid having taxpayers pay for a banking crisis for which they are not responsible.”

The German chancellor, Angela Merkel, speaking to her Parliament in Berlin on Thursday before heading to Brussels, thanked her finance minister, Wolfgang Schäuble, for his efforts on the bank deal. “The priority will be to make the creditors and owners responsible, and we get away from taxpayers always putting up for the banks,” Ms. Merkel said. “This is really necessary.”

The new system is expected to go into full effect in 2018. It specifies the order in which banks’ investors and creditors, and then uninsured depositors, will face losses.

Deposits under 100,000 euros would remain protected. Small businesses and individual savers with more than 100,000 euros would enjoy better protection than other categories of unsecured creditors when losses were imposed.

Such clarity could help prevent a recurrence of the chaos that ensued during the bailout for Cyprus in March, when governments and international lenders initially agreed to penalize small savers because of the lack of a template for imposing losses on the country’s troubled banks.

Ms. Diron, the London economist, warned that the agreement could increase the interest rates banks pay to raise the money they lend to customers.

But that is a necessary adjustment, she said. Rates banks paid in the past were too low, because investors assumed that they would be bailed out by governments.

“Investors will now price in the risk of losing their money,” Ms. Diron added. “But that should have happened already.”

The deal gives countries like Britain some flexibility to choose where losses will fall, as long as bondholders and shareholders representing 8 percent of a failing bank’s total liabilities are wiped out first.

Sweden won leeway for even more flexibility to make exemptions to certain classes of creditors in exchange for other commitments.

Germany was especially wary of endorsing new rules that could eventually mean the use of shared European money to directly inject new capital into other countries’ failing banks. As a concession to German concerns, the ministers agreed to significant measures.

Before using cash directly from the shared European fund, a bank would need to draw the maximum amount permissible from its own government bailout money. Governments then would need to put any initial money drawn from the shared European fund onto their national balance sheets.

After that, a bank would still need to wipe out all of its remaining senior bondholders before, finally, being able to use the shared European fund directly.

The European Union’s governments and members of the European Parliament also confirmed on Thursday that they had finally agreed on a European Union budget through the end of the decade.

That funding amounts to nearly 1 trillion euros for farming, science, infrastructure and overseas aid, as well as money to support the daily business of running the organization.

Article source: http://www.nytimes.com/2013/06/28/business/global/european-banking-deal-is-seen-as-progress-with-flaws.html?partner=rss&emc=rss

Europe’s Troubled Economies Join the Rescue Team

Under an agreement clinched on Thursday, the fund will be able to purchase distressed government bonds on the open market and lend money to countries to recapitalize their banks.

The initial reaction by surprised investors bordered on the effusive. But details were scant and a devil lurked amid them — an inconsistency that skeptical analysts and hedge fund investors had begun to latch onto by the end of the trading day Friday.

The potential problem is that, after Germany and France, the facility’s next largest guarantors are Italy and Spain. And they happen to be the two countries that, with their fragile banking systems and high financing requirements, may be next in line for a bailout if the crisis deepens.

In the afterglow of last week’s summit meeting, the rescue fund, known as the E.F.S.F., was quickly labeled an embryonic European monetary fund. In fact, with Europe and the International Monetary Fund having committed close to $1 trillion to the crisis since it flared early last year, the extent to which the new European fund is seen as credible will go a long way toward determining whether Europe’s broader strategy in addressing its economic ills will be accepted by the markets.

Already, hard questions are being asked.

“The creditors are becoming the debtors — that is the problem,” said Stephen Jen, a currency strategist and former economist for the I.M.F. who runs SLJ Macro Partners, a hedge fund based in London. “The burden of support in the euro zone will become even more concentrated on Germany and France.”

In a note to investors on Friday, analysts at Merrill Lynch echoed this theme, pointing out that it might take close to €300 billion for the E.F.S.F. to make a meaningful impact if it were called upon to purchase discounted Italian and Spanish bonds in the secondary market.

“Given that the E.F.S.F. has already committed €145 billion for Portugal and Ireland and €73 billion for the second Greek package, the E.F.S.F. would only be able to use €220 billion out of the €440 billion, which might err on the tight side,” Merrill’s analysts wrote.

And these calculations do not include the capital needs for Europe’s weak banks, the other new area of responsibility for the fund. Some economists say that figure could go as high as €250 billion.

Adding to the uncertainty was a statement Friday from Chancellor Angela Merkel of Germany that the necessary legal changes to the fund’s structure — its size, its financing and its decision making, to name just a few — would not be taken up by the German Parliament until the second half of September, following Europe’s summer break.

With signs of jitters resurfacing late Friday — a rally by Spanish bonds fizzled at the market’s close — the idea that investors would wait patiently for two months for Europe’s leaders to provide the fine print on their grand proposal was met with disbelief in some quarters.

“I would suggest that if the eurocrats want to go on vacation that they bring their cellphones,” added Mr. Jen, the hedge fund investor.

Based in Luxembourg and overseen by Klaus Regling, a German economist and former top official in the European Commission’s financial division, the E.F.S.F. was conceived in May 2010 during Europe’s first attempt to quell market fears over Greece and other debt-burdened nations in the euro zone.

But unlike the Troubled Asset Relief Program that invested billions of dollars in American banks, the E.F.S.F. has not been handed a pot of cash to disburse as it sees fit. Instead, every time it wants to put money to work, it has to issue a bond — backed by the guarantees of euro zone economies.

Because Germany is its largest backer, the fund carries a triple-A rating which allows it to raise money relatively inexpensively (3.3 percent for 10 years, for one recent offering).

Article source: http://www.nytimes.com/2011/07/25/business/global/europes-troubled-countries-become-part-of-the-rescue-team.html?partner=rss&emc=rss