December 1, 2023

News Analysis: Germany a Hurdle to European Unity on Banks

BRUSSELS — European Union officials presented long-awaited plans on Wednesday in hopes of ending the vicious circle in which bailouts of failing banks endanger government finances and the euro currency.

But first they must face down Germany.

Even as officials here laid out their blueprint, the uncompromising stance of German officials like Wolfgang Schäuble was ringing in their ears.

A day earlier, Mr. Schäuble, the German finance minister, warned the European Commission “to be very careful” with its proposal for a single authority to oversee the wind-down of troubled banks because “otherwise, we will risk major turbulence.”

It was in keeping with Germany’s longstanding resistance to sharing financial risk with other European countries. But it was at odds with the more unified approach to European problem-solving that Brussels wants.

“Germany’s intellectual starting point is national resources for national problems, and that is some way off the European Commission’s proposal, which is looking for a European solution,” said Mujtaba Rahman, the director for Europe at the Eurasia Group. If the proposal fails, he said, there is the danger that “the problematic link between banks and sovereigns will actually have been reinforced, not weakened.”

The plan presented on Wednesday by Michel Barnier, the European commissioner overseeing financial services, was conceived as part of a broader European banking union whose other provisions would include a single banking supervisor and an agreement to impose any losses mainly on a bank’s creditors and shareholders, rather than taxpayers.

The program, called the single resolution mechanism by Mr. Barnier, would rely on the European Central Bank to signal when a financial institution in the euro area was facing severe difficulties.

A resolution board, supported by a staff of around 300, and made up of representatives from the central bank, the European Commission and member states of the union, would then make a recommendation, as necessary, on how to shut down or shrink a bank. The board also could draw on a shared fund to help close or radically restructure failing lenders after creditors and shareholders have borne some losses.

European Union officials want the size of the fund to be about 70 billion euros, or $90 billion, by the time it is fully financed by 2025, with money coming from levies on banks.

There would be limits to the power of the new centralized system. It could not, for example, order the closing of a bank without permission of the host government if doing so would result in that country’s taxpayers being liable for some of the bill.

The process was aimed at “involving all relevant national players,” Mr. Barnier said at a news conference Wednesday. But, he said, central management is vital to “allow bank crisis to be managed more effectively in the banking union.”

Giving such a central role to the European Commission, the European Union’s executive arm, could irk both Germany and France, according to some analysts.

That “clearly contradicts” a proposal signed jointly by France and Germany ahead of the last summit meeting of European leaders in June, Philippe Gudin, an economist at Barclays, wrote in a research note. Discussions, scheduled to begin in September among finance ministers, “will likely be long and lively” with the risk of delays because of a lack of agreement, he wrote.

Mr. Barnier said he wanted the system up and running by January 2015. That would require agreement over the course of next year.

For now, Germany is the country raising red flags.

The central sticking point is the call by German officials like Mr. Schäuble for a change in the European Union’s treaties before acceding to anything more than a network of national authorities to handle bank failures.

Treaty changes would be cumbersome and time-consuming process that could take years, if they succeeded at all.

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Moody’s Downgrades Top French Banks

Moody’s cut various ratings for Société Générale, BNP Paribas and Crédit Agricole by one notch, citing the problems each had had recently in raising funds on the open market.

The ratings agency said the banks could face further losses on their holdings of Greek and Italian government bonds should the crisis deepen.

Just a day earlier, Europe’s main banking regulator said that all French banks had passed a test designed to see whether financial institutions had enough capital to weather unexpected shocks.

And on Friday, Goldman Sachs upgraded its recommendation for holding shares of European banks to neutral from underweight. It said a decision Thursday by the European Central Bank to lend troubled banks dollars for longer periods under eased terms would help the banks weather the effects of the crisis and an economic downturn.

But the Moody’s assessment includes more dire assumptions about the future of the euro than the European Banking Authority used. Moody’s also repeated a warning that Greece and several other countries could default on their debts and exit the euro zone if politicians failed to find a solution to their problems.

If Société Générale, BNP Paribas and Crédit Agricole continue to have trouble getting funding, Moody’s said, the French government will probably step in to provide them with financial support, raising the specter of at least a partial nationalization of the biggest French banks.

The French government has a long history of stepping in to support its banks, considering them integral to the economy. French officials have said they are ready to backstop the banks if the markets force their hand, but they insist the banks are sound.

The downgrades came as European leaders took their latest step Friday to keep the euro monetary union from breaking apart. All 17 members of the euro zone agreed to sign a treaty that would require them to enforce stricter fiscal and financial discipline in future budgets.

The leaders also agreed to provide €200 billion, or $266 billion, to the International Monetary Fund and to make changes to Europe’s own bailout funds to help keep the crisis from engulfing Italy and Spain.

Many banks in Europe have had trouble getting funding in recent months, and have had to turn to their national central banks and the E.C.B. instead.

Société Générale, BNP and Crédit Agricole had “materially” increased their borrowing from the French central bank in September, Moody’s said, adding that it was “unlikely that markets will return to normalcy soon.”

Standard Poor’s warned in the past week that it could cut the credit ratings of 15 countries in the euro zone — including France — by two notches, as the bill from the crisis grows and the European economy risks tipping into a recession.

If such a downgrade were to happen, all banks in those countries would have even more funding problems.

Société Générale and BNP recently cut the amount of Italian debt they hold. Each also recently took losses on their investments in Greek bonds.

But Société Générale and Crédit Agricole remain exposed to Greece through subsidiaries there that could pose fresh problems if Greece were to default or leave the euro, Moody’s said.

BNP is exposed to Italy further through a retail banking outlet.

To maintain a sizable capital cushion so as to absorb any fresh losses the crisis might inflict, each bank has announced plans to sell assets. But with investor appetite dampened by the crisis, Moody’s warned that the banks could have a hard time finding buyers.

Société Générale said it was “confident” it could reach its capital goals and “surprised” by the Moody’s decision to downgrade it.

Société Générale is one of a handful of European banks that have been the subject of rumors of financial difficulty. The bank has vigorously denied that, and last summer called on the French government to investigate what it said were attacks against it by short-sellers, or investors betting against its stock.

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Criticism of Spain’s Central Bank Grows

Much of the recent criticism from politicians, economists and investors has been aimed directly at the central bank governor, Miguel Ángel Fernández Ordóñez, for not standing up to vested political and banking interests, particularly when they kept the central bank from forcing failing banks to close.

The main opposition Popular Party has recently led the charge against the central bank, ahead of a general election on Nov. 20 that is expected to return the party to power with a parliamentary majority, according to opinion polls.

Earlier this month, Soraya Sáenz de Santamaría, the Popular Party’s parliamentary spokeswoman, said at a press briefing that the next government should impose “a profound reform” of the Bank of Spain, applying stricter “technical criteria” in selecting its top officials. She also said the central bank should bear responsibility for the “unethical” behavior of some managers of the collapsed savings banks, known as cajas.

A few days later, Spanish prosecutors started a corruption investigation into payments, including salaries, made to directors of Caja Mediterráneo, which required a bailout of 2.8 billion euros, or about $3.85 billion.

In a e-mail response to questions, the central bank stressed that its role was to supervise the solvency and not salary arrangements at a bank. Mr. Fernández Ordóñez declined to comment.

Beyond its handling of troubled banks, the Bank of Spain has recently been facing the same accusation that has dogged the Socialist government of José Luis Rodríguez Zapatero since the start of the crisis: that, having cheered the fact that Spanish banks kept away from subprime assets in the United States, it then underestimated the damage that could result from their property lending at home.

“The Bank of Spain misunderstood both the economic and the financial crisis,” said Fernando Fernández, a professor at the IE business school in Madrid and former chief economist of Banco Santander.

“They simply didn’t seem to realize that a bursting of the real estate bubble here would have a very serious impact on the banking sector, even though that had been the case in the past,” he said.

“It would be a mistake to press for his resignation,” Mr. Fernández said, “because this would create additional damage to the image of the Spanish economy, despite the fact that I think he has not been a very good governor.”

Last year, when Spain’s troubled public finances and saving banks first drew the ire of investors, the central bank was among the few Spanish institutions to retain the strong confidence of investors and economists.

The central bank had won plaudits for limiting the banks’ reliance on risky, off-the-balance-sheet derivative transactions. It was also praised for imposing buffers against excessive lending. While the extra measures helped, they were not designed to contain the spillover from the euro-zone sovereign debt crisis, which, combined with a property bubble, left its banks exposed to potential losses of 168.8 billion euros, according to the stress tests carried out by the European Banking Authority last July.

“The credibility of the Bank of Spain, which was very high coming into the crisis, has declined significantly,” said Luis Arenzana, a Madrid-based partner of Shelter Island Capital Management, an asset management company.

“The technocrats at the Bank of Spain are top-caliber people,” he said. “But the governor has been too weak, especially when dealing with politicians.”

Mr. Fernández said the central bank should have used its mandate to intervene in cajas as soon its inspectors had unearthed major problems — rather than delay by two years in some cases and try instead to engineer mergers that gave such cajas and their politicians more time to sink into trouble.

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Germany and France Back Greece on Austerity Effort

In their call, French President Nicolas Sarkozy and German Chancellor Angela Merkel had been expected to tell the Greek prime minister, George Papandreou, that he must meet deficit-cutting promises to the European Union and the International Monetary Fund in return for subsidized loans and a second bailout.

Together, they are pushing all euro zone states to ratify as soon as possible decisions made on July 21, which expand the European Financial Stability Facility and allow it increased flexibility to protect Greece and other heavily indebted members as they work to cut deficits and stabilize their finances.

The facility would be expanded to 440 billion euros to allow it to cover Greece, Ireland and Portugal, buy bonds in the secondary markets, aid troubled banks and offer lines of credit.

Wall Street rallied on the European statement, with the Dow Jones industrial average up more than 2 percent by late afternoon.

Earlier Wednesday, France brushed off concerns about its biggest banks Wednesday, insisting that it had no plans to nationalize any of them despite a credit rating downgrade linked to their exposure to the limping Greek economy.

Moody’s Investors Service downgraded two of France’s biggest banks Wednesday, Société Générale and Crédit Agricole, citing the fragile state of bank financing markets and, in the case of Crédit Agricole, exposure to the Greek economy. It kept a third, BNP Paribas, under review.

The French government’s latest attempt at reassurance about the health of their banks came as the leaders of France and Germany prepared to speak with their Greek counterpart amid worries that Athens may default on its heavy debt load.

U.S. Treasury Secretary Timothy Geithner also sought to soothe nerves over a possible Greek default, saying in a CNBC interview that European leaders have the capacity “to hold this thing together.”

The head of the European Commission also said he would present options soon for the introduction of euro area bonds — the latest effort by European leaders to show they are trying to strengthen the foundations of their monetary union.

The credit ratings cuts had been widely anticipated by investors but nevertheless sparked knee-jerk drops in the euro and Asian stock markets, both of which had already been on the back foot earlier in the Asian trading day.

But the downgrades were less severe than many analysts had anticipated, and European markets rose.

The Bank of France governor, Christian Noyer, called the ratings cuts “good news” because they were less than expected. In a radio interview, he also said it would make “no sense” to nationalize any French bank, calling such talk “surreal.”

Mr. Geithner said in the CNBC interview that there was “no chance that the major countries of Europe will let their institutions be at risk in the eyes of the market.”

Still, underscoring concerns about the impact of Europe’s debt crisis and banking problems on the United States, Mr. Geithner plans to take the unusual step of attending a meeting of finance ministers from all 27 European Union nations in Poland on Friday.

In a stark warning, the Polish finance minister, Jacek Rostowski, who will host that meeting,  said at the European Parliament in Strasbourg, France, on Wednesday that the European Union itself “might not survive” a collapse of the euro zone.

Société Générale, BNP Paribas and Crédit Agricole all hold Greek debt. Crédit Agricole and Société Générale are more exposed to the Greek banking system through subsidiaries. But Moody’s said Société Générale’s risks from its Greek holdings were relatively modest and manageable.

Société Générale, BNP Paribas and Crédit Agricole are considered integral actors in the French economy, lending billions of euros to businesses and individuals, and the government has indicated it would never let them any of them fail.

Stephen Castle contributed reporting from Brussels and Bettina Wassener contributed from Hong Kong.

This article has been revised to reflect the following correction:

Correction: September 14, 2011

An earlier version of this article erroneously stated that the downgrade of Société Générale was related to its exposure to the Greek economy.

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The Agenda: More Lending, but Not to Small Businesses

The Agenda

How small-business issues are shaping politics and policy.

The Federal Deposit Insurance Corporation reported a modest bit of good news from the banking world on Tuesday.

In the second quarter of the year, bank failures were down, troubled banks were fewer and bank profits were up. And the F.D.I.C. said that “loan portfolios grew for the first time in three years.” According to the agency’s release, the bulk of the lending growth came in commercial and industrial loans as well as loans between banks.

Ah, business lending, then, is back! Well, not so fast. Yes, top-line commercial lending is up, but a closer look shows one segment of loans that did not increase: those to small businesses. According to the F.D.I.C., while the nation’s total commercial and industrial loan portfolio grew by $34 billion, or almost 3 percent, total outstanding loans to small businesses actually fell by $2.5 billion, or 0.4 percent.

Small-business loans are defined as those of $1 million or less, but exclude agricultural loans and loans secured by farmland. As of the end of June, the total commercial and industrial loan portfolio amounted to $1.2 trillion. Small-business loans made up almost exactly half of that, or $607 billion.

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