September 26, 2017

News Analysis: Central Banks Criticize Europe for Political Gridlock on Economy

FRANKFURT — For European officials, it may have been an especially untimely – and embarrassing – example of political gridlock.

Their failure early Saturday to agree on a crucial pillar of the euro zone’s new banking architecture, despite 18 hours of haggling, came just as the world’s central bankers were about to blast politicians for exactly that kind of dithering.

The Bank for International Settlements, a group representing central banks including the Federal Reserve and the European Central Bank, on Sunday warned political leaders that they should not expect central banks’ cheap-money policy to hold the global economy together forever. The organization, based in Basel, Switzerland, said in its annual report that politicians should finally do their share of “the hard but essential work of adjustment.”

‘’Returning to stability and prosperity is a shared responsibility,’’ Jaime Caruana, general manager of the B.I.S., said Sunday in Basel, according to a text of his remarks. ‘’Monetary policy has done its part.’’

The report’s publication came a day after political leaders meeting in Luxembourg had just provided a vivid example of what the central bankers were complaining about. Despite debating well into the early morning hours Saturday, European Union finance ministers could not agree on new rules to lessen the chances that taxpayers will bear the burden if commercial banks collapse.

“We ran out of time,” Michael Noonan, the Irish finance minister, told reporters as he left the meeting at about 4 a.m. “There are still core issues outstanding, so we’ll need a full meeting next week, and there’s no guarantee it will reach conclusion.”

The message from the group in Basel was that central banks cannot enable such lack of action indefinitely. “The balance between costs and benefits is deteriorating,” Stephen Cecchetti, head of the monetary and economic department of the B.I.S., said in an interview, referring to central bank policies that have flooded the world with cheap money since the financial crisis began in 2008.

In fact, there are already clear signs of central bank retrenchment. Fed Chairman Ben S. Bernanke indicated last week that the American central bank was likely to wind down the purchases of bonds it has used to push down market interest rates. The European Central Bank seems to be running out of ways to stimulate the euro zone, and there is doubt about whether the Bank of Japan can maintain an ambitious policy to flood the economy with money and achieve a target of 2 percent inflation.

As long ago as last summer, the Europan bank president, Mario Draghi, was publicly lamenting the limits of the central bank’s ability to address the broader problems of the European economy and calling upon political leaders to pursue structural solutions.

Jörg Asmussen, a member of the policy-making executive board of the central bank, reiterated the point in a speech Sunday in Kiel, Germany. “The global reform agenda has lost momentum, as the sense of urgency imposed by the crisis has vanished,” he said.

But there did not seem to be any awareness of the limits of central bank forbearance among the 17 ministers in Luxembourg. Like students who have waited too long to get going on a term paper, the ministers pulled an all-nighter in a desperate attempt to complete their assignment — in this case, to establish a system meant to ensure that taxpayers never again have to pay so much for the mistakes of bankers.

The ministers have scheduled another meeting for Wednesday, a day before the leaders of the European Union’s 27 member states gather for a summit meeting in Brussels, their last scheduled meeting before the summer hiatus. The leaders have been expected to endorse the finance ministers’ decision — if there is one.

The 18-hour marathon was aimed at breaking the so-called doom loop, in which struggling governments go deeper into debt to save their banking systems, only to face sky-high borrowing costs. That vicious circle was largely the reason Ireland and Cyprus required international bailouts, while Spain has struggled to avoid being sucked into a similar vortex.

But since agreeing in principle last year to centralize bank supervision in the euro zone and create a system to wind down terminally ill banks, the finance ministers have been snagged on various issues, including how to share the cost.

Jack Ewing reported from Frankfurt and James Kanter from Luxembourg. Mark Scott contributed reporting from London.

Article source: http://www.nytimes.com/2013/06/24/business/global/central-banks-criticize-europe-for-political-gridlock-on-economy.html?partner=rss&emc=rss

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.

Article source: http://www.nytimes.com/2013/06/22/business/global/lots-of-talk-but-little-agreement-on-how-europe-should-rescue-banks.html?partner=rss&emc=rss