December 15, 2018

Unable to Reach Deal, Europe Plans New Talks on Bank Rescues

“We ran out of time,” Michael Noonan, the Irish finance minister, told reporters as he left the meeting here. “There are still core issues outstanding, so we’ll need a full meeting next week, and there’s no guarantee it will reach conclusion.”

Diplomats said the next attempt to reach a deal was scheduled for Wednesday — a day before the leaders of the European Union’s 27 member states gather for a summit Brussels, their last scheduled meeting before the summer. The leaders had been expected to endorse the finance ministers’ decision.

The failure to reach a deal could further unsettle investors who were already jittery about the lingering recession in the euro zone, turbulence on global markets, renewed political instability in Greece, and hints that Cypriot leaders were balking at their bailout agreement. 

The marathon effort, involving 18 hours of talks beginning Friday morning, was 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.

The rules would specify the order in which investors and creditors have to absorb losses so taxpayers do not have to bear the burden.

A deal could also help prevent a recurrence of the chaos that ensued during a bailout for Cyprus in March, when governments and international lenders argued over how to impose losses on investors in the country’s troubled banks.

The tools would become important building blocks in the future for a possible banking union, which includes a single supervisor under the European Central Bank overseeing about 150 of the bloc’s largest lenders. It is supposed to go into force in the middle of next year.

A day earlier, as part of the effort to address the banking issue, the 17 ministers from the euro area agreed to allow a rescue fund, the European Stability Mechanism, or E.S.M., to pump money directly into failing banks during the second half of next year.

But on the second day of talks, as ministers from the 10 remaining non-euro countries in the European Union joined the meeting, there was a deadlock over how to stop disorderly bank bailouts from turning into national fiascos.

One of the most sensitive issues was a divide between countries using the euro, and those remaining outside the single currency, was where losses should fall when banks fail, said Mr. Noonan. “Those countries which aren’t in the euro need greater flexibility because they haven’t access” to the shared rescue fund.

France and Germany, which are both members of the euro group of countries, were also divided on that issue. France sought more leeway to access the shared European mechanism while Germany resisted, said diplomats who spoke on condition of anonymity.

The German stance, which was shared by the Dutch, underlined how some northern European countries want to ensure that bank bailouts remain a national responsibility as much as possible, and how they remain determined to resist creating a lender of last resort that could expose them to losses incurred by other parts of the bloc.

For much of the day, ministers were divided over how, and whether, to allow countries discretion to protect certain classes of creditors.

The worry among some countries like Britain was that automatic losses for some creditors could set off fears of losses at other institutions, which could start bank runs. But countries like Spain wanted to ensure that bank investors do not flee to more prosperous countries like Germany, where mechanisms for resolving bank problems might be better capitalized and could be used to shield creditors from losses.

A proposal put forward by the Irish delegation during the negotiations would have given countries the flexibility to choose where losses would fall, as long as 8 percent of a failing bank’s total liabilities were wiped out first.

But that proposal failed to gain sufficient traction. Sweden protested that the figure was too high. The Dutch and the Germans said the Irish figure was too low, and they complained it still could induce risky behavior if bankers were overly confident of relying on mechanisms like national bailout funds to come to their rescue.

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Wall Street Unchanged in Early Trading

Wall Street was mostly unchanged in early trading Friday, but stocks looked likely to rack up a loss for the week, as investors were kept on their heels by uncertainty over how soon central banks will rein in their stimulus programs.

In early trading the Standard Poor’s 500-share index and the Dow Jones industrial average were a few points lower, and the Nasdaq composite was flat.

Worries over the longevity of monetary policy around the world has roiled markets recently and nerves were stretched further this week when the Bank of Japan decided to hold its policy steady. The extraordinary measures taken by policy makers to support the economy have helped fuel a rally that has raised the S.P. by nearly 15 percent this year.

Talk that the Federal Reserve, which meets next week, could begin reducing its bond buying later in the year has fueled a sell-off in global markets this week that has bruised stocks, bonds, emerging market assets and the dollar alike. On Wall Street, stocks have fallen during three of the past four days, and heading into Friday’s session, the S.P. 500 is down 0.4 percent on the week.

The dollar remained sluggish as trading in New York started, but it looked to have gained a foothold against the yen at around 95.15 and at $1.3297 against the euro.

On Thursday Wall Street jumped 1 percent after better-than-expected retail sales figures brought some relief to markets, but the mood was expected to remain fragile running into next week’s Fed meeting.

Philippe Gijsels, head of research at BNP Paribas Global Markets, said with growth patchy, he didn’t expect the Fed to reduce its support for the economy before the end of the year.

“If you have easy monetary policy and improving economic conditions, which will also help companies to produce good earnings, … then you have a lot of the building blocks in place” to drive stock market gains, he added.

Shares of Smith Wesson, the gun maker, rose in premarket trading after the company raised its outlook for the fourth quarter. The stock was up 5.2 percent in early trading.

Groupon climbed 7.7 percent after Deutsche Bank raised its rating to buy from hold, according to

With the impact of the sell-off on riskier assets settling, top European stocks climbed as much as 0.5 percent as they tracked a rebound in Japanese and Asian shares, before a late-morning wobble erased some of the gains.

Asian and European shares, as well as MSCI’s world index, have fallen for four straight weeks now, while for emerging market equities it has been five as a dash back to cash and core economies has taken hold.

Despite rebounding 2 percent on Friday, Japan’s Nikkei is nursing losses since mid-May of more than 15 percent. It is a slump that has been intertwined with a strong rebound in the yen which has seen its best run since early 2010 this week.

In Europe’s debt markets, southern euro zone bonds were back on the front foot after a mixed few sessions despite the Continent’s economic malaise. German and United States benchmark bonds were also up, adding to this week’s solid gains.

Rating agency Standard Poor’s helped sentiment toward the euro zone periphery as it kept Spanish government debt above junk status, although it left the country at risk of a downgrade by maintaining a negative outlook on the bonds.

It was a more stable situation in emerging markets assets too after the recent turbulence caused by the combination of central bank stimulus jitters and political unrest in countries such as Turkey and Syria.

Commodities, especially metals, have largely avoided the dramatic swings seen by equities and currencies this week but have not been completely immune to the market mood.

Copper has been hit by signs of slowing demand from China. It edged off a six-week low to $7,094 a metric tonne midday in Europe, while precious metals gold and platinum hovered near their recent lows.

Brent crude broke back above $105 a barrel for the first time in more than a month, however, and New York benchmark light sweet crude rose 0.8 percent to $97.44 a barrel, although analysts said the volatile dollar would remain a heavy influence on prices.

“The key driver of oil has been the weakness in the dollar rather than any fundamental factors,” said Ric Spooner, chief market analyst at CMC Markets. “Traders are wary about pushing things higher because they are confronted with a situation of plenty of supplies when seasonal demand is supposed to pick up,” he said.

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