Europeans Agree to Use Bailout Fund to Aid Banks

(…..) Deal reached in Brussels was particularly important for Mr. Rajoy, who had resisted German pressure over the past two weeks to accept tougher bailout terms and can now return to Madrid with agreement in hand that eases concerns over Spain’s creditworthiness by ensuring the rescue will not add to the country’s sovereign debt, as the funding will flow direct to the banks. Spain also ensured that, when its banks are bailed out by the eurozone rescue fund, the fund will not be treated as a preferred creditor. This prospect had deterred some private investors since, in the event of a default, they would have faced proportionately bigger losses. José Maríá Méndez, director general of the association of Spanish savings banks, or cajas, described European deal as “very positive” for Spain. “It now seems to me a fair agreement between European partners that sets the foundation for a banking union”, he said at a conference on the euro debt crisis in the northern Spanish city of Santander. The deal, however, is less favorable for Italy than for Spain, according to Nicholas Spiro, managing director of Spiro Sovereign Strategy, a London consulting firm that assesses sovereign debt. “Mr. Monti only managed to extract a commitment the rescue funds will, if called upon by Rome, purchase limited amounts of government debt provided Italy sticks to its current reform program”, Mr Spiro wrote in a note to investors. “What’s more, any bailout loans to Italy would still be given seniority status”. Monti, an experienced European player and former European Union commissioner, hailed the agreement as a “very important deal for future of the E.U. and the eurozone,” adding, “it is a double satisfaction for Italy.” He had argued that other eurozone leaders must find ways to help “virtuous countries” like his own and Spain, which were fixing their economies and were solvent, but were under speculative market pressure. Countries that request bond support from the rescue fund will have to sign a memorandum of understanding setting out their existing policy commitments and agreeing to a timetable. But they will not face the intrusive oversight of a “troika” of international leaders to which Greece, Ireland and Portugal have been subjected. Eurozone “will be strengthened by this”. Italy has no immediate plans to ask for help from existing funds, he added, on assumption that bond yields would ease after this agreement. The summit outcome was welcomed by the Institute for International Finance, a bank lobby group, though its market monitoring group issued a statement calling for more detail. “The Signal of intention to establish a single supervisory mechanism creating the possibility of recapitalizing banks directly is encouraging”. “Likewise, the indication that EFSF/ESM funds for Spain’s banking sector would not have seniority over private claims reflects an important recognition that such seniority would undermine the objective, breaking the negative feedback loop, restoring confidence in euro area sovereign debt markets”. “Nevertheless, such statements require concrete, immediate steps to give confidence to all parties that these directions will be fully realized”, the statement added.

Link: http://www.nytimes.com/2012/06/30/business/global/daily-euro-zone-watch.html 

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Consultor Internacional

11 Responses to Europeans Agree to Use Bailout Fund to Aid Banks

  1. Professor Uziel Nogueira says: The use of money from the stabilization fund to recapitalize Spanish banks directly does not change the fundamentals of the euro zone’s debt crisis. The sovereign debt question now becomes entangled with bank’s liquidity and solvency. Spain’s credit risk will not come down to sustainable levels any time soon.


    The more money is throwing into the banks, the longer the financial speculation game in the euro zone.

    http://www.nytimes.com/2012/06/30/business/global/daily-euro-zone-watch.html

  2. (…..) Before banks can be recapitalised directly, the euro zone will have to create a strong central supervisor, centred on the European Central Bank (ECB). This will take time, with several thorny problems to settle – not least the question of which banks should be supervised. Germany has tried to limit scrutiny to big cross-border banks. But in Spain, and probably in Germany too, the worst problems lie in smaller regional banks. Another issue will be the relationship with banks and supervisors in non-euro countries, such as Britain (which does not want to join the euro) and eastern European members (many of whom are committed eventually to adopting the single currency). So the new system may not be immediately applicable to Spain, which has put in a request for €100 billion of loans from the temporary rescue fund, the European Financial Stability Facility (EFSF) to recapitalise its banks. For now the loan will add to Spain’s debt burden. But European officials say that once the supervision system is up and running, the permanent rescue fund, known as the European Stability Mechanism (ESM) could assume the burden back from Spain. The new arrangement may eventually be of assistance to Ireland, which is saddled with the debts of its collapsed banking sector (…..) Mr Monti declared himself satisfied, but caused considerable irritation to partners. Among the deals he had blocked was the “growth pact”, a mixture of stimulus measures. “Who needs the growth pact? Not Germany,” said one bemused participant. The euro zone’s fiscal hawks say the bond-buying mechanism will be little different from the existing system. “Mario Monti raised a gun to his head and threatened to shoot himself. In the end he wounded himself in the shoulder,” said one scornful diplomat.

    http://www.economist.com/blogs/charlemagne/2012/06/euro-crisis-0

  3. (…..) It is a painful defeat for Merkel. With the German parliament set to approve the ESM and the fiscal pact on Friday evening, Merkel had been eager to avoid making concessions to the southern Europeans. On the eve of the summit, the chancellor’s advisers had ruled out the possibility of easing the rules governing access to the ESM. In particular, Merkel considered IMF oversight of aid recipients to be non-negotiable. Now, however, she will travel in defeat back to Berlin, where she is scheduled to address the German parliament in the afternoon. Merkel’s confidants began trying to put a positive spin on the summit results early on Friday morning. The chancellor had pushed through her maxim of “no liability without oversight,” said Hermann Gröhe, general secretary of Merkel’s Christian Democrats, in an interview on German breakfast television. Direct ESM aid to banks will only be allowed, he said, once the oversight authority is established at the ECB. From the German perspective, however, that is but a small consolation. Mediterranean countries, for their part, can celebrate a breakthrough. The euro zone’s “mental block” has been broken, Monti exulted, adding that he was very satisfied with the agreement. His negotiating tactic — which involved holding up agreement on the European Union growth pact until his other demands had been met — proved to be “objectively very useful,” the Italian prime minister added. Monti’s uprising began at 7:00 p.m. on Thursday evening. That was when European Council President Herman Van Rompuy wanted to conclude the summit’s first working session and announce the growth pact to the press. According to participants, Monti was furious and asked Van Rompuy where he was going. Had the president perhaps not understand correctly, Monti reportedly asked. The Italian prime minister said he could not leave the summit without concrete measures to fight the high interest rates on Italian government bonds. He would not agree to the growth pact until that issue had been clarified. Rajoy lent his support to Monti and said that he too could not yet approve the pact. The threats apparently made an impact on the other delegates. Danish Prime Minister Helle Thorning-Schmidt asked pointedly whether the attendees were now all hostages. Van Rompuy remained seated. It was only after 10 p.m. that he made another attempt to appear before the press. Merkel urged him to announce an agreement on the growth pact. French President François Hollande, however, told him to tell “the truth” (…..)

    http://www.spiegel.de/international/europe/merkel-makes-concessions-at-eu-summit-a-841663.html

  4. At first glance, it looked as though Chancellor Angela Merkel gave up several core demands during the EU summit on Thursday night. But did she? A closer look reveals a clever retreat to secure greater gains. To find the summit’s true loser, one must look no further than Paris.

    http://www.spiegel.de/international/europe/merkel-concessions-at-euro-crisis-summit-smarter-than-they-seem-a-841772.html

  5. (…..) Merkel underscored that she had pressed to make sure that the rules of the ESM were adhered to. She said she had successfully defended the ESM’s preferred creditor status and that only a single exception would be made, for Spain. Likewise, she noted that, if at all, the ESM would only provide direct assistance to private banks after a long process of setting up a banking supervision mechanism, and that Germany would have several opportunities to exercise its veto during this process (…..) However, when it comes to whether the ESM will be able to provide direct assistance to private banks, at least on paper, Merkel has left one door open. Granted, the basic parameters have already been set. But the ESM will only be allowed to lend to private banks once a European banking supervision mechanism has been put into place — and that could take a long time. There are still “difficult negotiations” ahead, Merkel said, adding that this “will not be resolved in 10 days.”


    Given this situation, reports about how such measures could immediately help Spanish banks are incorrect.

    First, the European Commission and the European Central Bank (ECB) have to work out a concrete proposal for such a supervisory mechanism. Among other things, they have to decide whether the new organization will be part of the ECB or independent. Then the heads of the 17 euro-zone countries will have to approve it, which is supposed to happen by the end of this year.


    If the German government believes that the new organization doesn’t have sufficient powers of oversight, it can put the kibosh on the plans. Germany will maintain an additional veto right even after the supervisory agency has been established. Each time direct aid for a bank is requested, the German government and the Bundestag can say no.

    Merkel pointed this out in Brussels in order to counter criticism that she gave in. She added that, under these conditions, the bank aid was not a short-term measure to push down the high interest rates on Spanish sovereign bonds but, rather, a “medium-term measure.” The only immediate help for Spain is the agreed to waiver of the ESM’s preferred creditor status (solely for that country), which gives the euro-zone countries no advantages over Spain’s other creditors. Since all creditors will bear an equal share in the losses if Spain defaults on its loans, this makes Spanish bonds less risky for private investors. On the whole, the summit was a victory for the southern European countries. The summit’s decisions will reduce the IMF’s influence in Europe and give the European Commission a leading role in supervising reform efforts. One thing is clear: IMF officials will not seize control in Rome or Madrid. Since the beginning of the euro crisis, this possibility has been a thorn in the side of Mediterranean countries. Merkel, on the other hand, always wanted IMF participation because she doesn’t believe that EU monitors will be as ruthless. A frosty reception is awaiting her in Berlin, where the parliamentary vote is anxiously awaited.

    http://www.spiegel.de/international/europe/merkel-has-plenty-of-room-to-maneuver-despite-euro-summit-concessions-a-841806.html

  6. El Parlamento de Alemania aprobaba ayer viernes el pacto fiscal y el fondo de rescate permanente que entrará en vigor en julio, el Mecanismo Europeo de Estabilidad (MEDE), a falta de que el Tribunal Constitucional lo ratifique. “Hoy, Alemania, con la aprobación del pacto fiscal y del MEDE por todos los partidos en ambas cámaras del Parlamento, enviará una importante señal” que denotará que “estamos superando la crisis de la deuda europea de una forma sostenible”, ha ensalzado la canciller alemana Angela Merkel, antes de la votación. La aprobación de estas dos medidas en el Bundestag por una mayoría de dos tercios estaba prácticamente asegurada después de que la oposición se aprestara a apoyarlas a cambio de un paquete de medidas de estímulo económico. No obstante, el presidente de Alemania, Joachim Gauck, ha advertido de que no firmará ambas iniciativas legislativas hasta que el Tribunal Constitucional de luz verde al MEDE y al pacto fiscal europeo e incluso, por imperativo legal, el Gobierno de Merkel podría verse obligado a someter las dos medidas a referéndum. El Constitucional alemán ya ha expresado sus reticencias en los últimos años ante la creciente cesión de soberanía a Bruselas.


    En una cita que ya se ha convertido en habitual e inquietante para Merkel, la máxima instancia judicial en Alemania insiste en que el Bundestag debe reservarse el derecho de veto a cualquier política que emerja de la Unión Europea.

    Precisamente, el Constitucional ha recibido una ola de demandas para exigir que toda decisión procedente de Bruselas sea sometida a votación e, incluso, algunos barones regionales de la gobernante Unión Cristiano Demócrata piden celebrar plebiscitos para certificar su implementación. En caso de que el Tribunal Constitucional concluya que, para refrendar el pacto fiscal y el MEDE, hay que reformar la Carta Magna alemana, Berlín se vería obligado a convocar un referéndum popular. Esta posibilidad, de hecho, ya ha sido vaticinada por el ministro de Finanzas alemán, Wolfgang Schaüble, quien ha dejado entrever que, para seguir ahondando la “unión política y fiscal” europea, la celebración de una votación popular podría producirse antes de lo que muchos piensan. La votación en el Bundestag se produce horas después de la clausura de la cumbre del Consejo Europeo en Bruselas que comenzó este jueves y que ha finalizado con un acuerdo histórico que habilita la recapitalización directa de los bancos españoles y el uso de fondos de rescate para amainar la presión de los mercados. Estos dos frutos de la cumbre, duramente criticados por Merkel desde hace meses, no violan los tratados europeos, según ha argumentado la canciller alemana ante los parlamentarios germanos. Sin embargo, esta rectificación de Merkel podría exacerbar el sentimiento euroescéptico en el seno de su propia formación política y propulsar la convocatoria de un referéndum que calibrara la opinión de la población hacia Europa. En esta línea, algunas voces democristianas han remarcado que la recapitalización directa de los bancos de la eurozona han de estar condicionados bajo “estrictos requisitos y controles”. Los ataques, asimismo, tampoco han cesado del lazo de la oposición. El presidente del Partido Socialista alemán, Sigmar Gabriel, ha exhortado a Merkel a que las “medidas de crecimiento no vengan demasiado tarde”, recordando su apoyo al pacto fiscal por el que abogaba la canciller germana. El MEDE no puede entrar en vigor sin la aprobación de Alemania y, por ende, de su Parlamento, ya que es necesaria la aprobación de los poderes legislativos del equivalente al 90 por ciento del capital del fondo de rescate permanente. Hasta el 9 de julio, no se conocerá con exactitud el grado de consentimiento.

    http://www.elconfidencial.com/mundo/2012/06/30/alemania-aprueba-el-pacto-fiscal-y-el-nuevo-fondo-de-rescate-permanente-101101/

  7. Once again, a swelling chorus is calling on Germany to finally take action. “Start the engines, Angela,” reads the colorful headline of a piece whose authors seem to assume that Chancellor Merkel commands the horsepower to save the euro, save the British and American recoveries, and — as a throw-in — save the Obama presidency. If only the Germans showed more leadership and found it in them to roll out “decisive policies,” argues Harvard historian Charles Maier, the everlasting eurocrisis could be ended. It is true that Germany is the pivot in the euro game. Nothing happens if Germany does not consent. But the reverse is not true. If Germany wants something, it does not necessarily happen. That’s where the problem of German leadership starts. While much of the world looks at Germany as an ascending economic power within a declining continent, thereby shifting the regional balance of power in its favor, Germans themselves (and certainly their current elected leader) are keenly aware of the limits of German power. History has taught them painful lessons. Since Germany’s emergence as an industrial economy, it has been too big to be one of many in Europe and too small to dominate the continent. The latter proposition has been tested time and again and has usually ended in blood and tears somewhere in Russia. Among Germans, this experience has produced an ingrained skepticism toward the notion of German dominance, even if it comes in the form of a benevolent hegemony, based on the consent of the neighbors and transfer of wealth to them. Germans will be quick to point out that Germany is too small to take much of the rest of Europe onto its back. The German economy accounts for only 27% of the eurozone’s output. The debt-to-GDP ratio hovers around an unhealthy 80% and might jump to around 100% given the commitments and guarantees to other European nations. Nobody in Germany has forgotten the enormity of the task to bail out, reform and integrate East Germany after the fall of the Berlin Wall. To this very day, 3% to 4% of GDP are spent on transfers to the former East. In 1989, East Germany accounted for roughly a fourth of the population of West Germany and no more than a fraction of its economic output. Compare that to ailing Spain and Italy, whose combined economies rival Germany’s today. Therefore, it is a fantasy to assume that Germany alone can be Europe’s white knight (…..)

    http://edition.cnn.com/2012/06/20/opinion/brockhoff-germany-euro/index.html

  8. Facing a bank crisis in Spain and the prospect of outbreaks in other major countries, European leaders have pledged to establish a new agency aimed at curbing problems afflicting lenders in the euro zone. Yet for now the proposal amounts to little more than a vague statement of intent, one that has prompted more questions than answers. Will the new regulator have the power to rein in risky practices and hold offending banks accountable, for example, and will it be willing to exercise that power? Or will it be weak and overly beholden to national political factors that have too often gotten in the way of making bank supervision effective in Europe? It is not a moot point, given that two rounds of stress tests by another Pan-European agency gave passing grades to most banks in countries that use the euro currency, including some that turned out to be deeply troubled and in need of bailouts, contributing to a crisis of confidence in Europe’s financial system. “Creating a common supervisor is an important step in the right direction, but we still don’t know whether it will be a brand new agency or an existing one with minor changes,” said Antonio Garcia Pascual, chief economist for Southern Europe at Barclays in London. “What’s important is that this agency ends the inadequate examination of lenders, from national champions to small savings banks, due to factors like local resistance and political interference.” European officials say they understand these concerns, adding that their latest move represents an attempt to move away from reliance on national regulators that have failed to detect systemic faults. Making it work is critical. In the short term, a signal of tighter regulation in the future — along with bailouts for troubled banks — is needed to stem the flight of capital from countries with banking problems, which threatened to spread to financial institutions throughout Europe.


    In the longer term, by agreeing to cede power over banks, European countries hope Germany will trust them more and eventually stand ready to share euro zone debt, which could help them ease austerity measures and adopt pro-growth plans to revive their struggling economies (…..)

    http://www.nytimes.com/2012/07/02/business/global/doubts-greet-plan-for-euro-zone-bank-regulator.html

  9. Over the past few months I’ve read a number of optimistic assessments of the prospects for Europe. Oddly, however, none of these assessments argue that Europe’s German-dictated formula of redemption through suffering has any chance of working. Instead, the case for optimism is that failure — in particular, a breakup of the euro — would be a disaster for everyone, including the Germans, and that in the end this prospect will induce European leaders to do whatever it takes to save the situation. I hope this argument is right. But every time I read an article along these lines, I find myself thinking about Norman Angell. Who? Back in 1910 Angell published a famous book titled “The Great Illusion,” arguing that war had become obsolete. Trade and industry, he pointed out, not the exploitation of subject peoples, were the keys to national wealth, so there was nothing to be gained from the vast costs of military conquest.


    Moreover, he argued that mankind was beginning to appreciate this reality, that the “passions of patriotism” were rapidly declining. He didn’t actually say that there would be no more major wars, but he did give that impression. We all know what came next. The point is that the prospect of disaster, no matter how obvious, is no guarantee that nations will do what it takes to avoid that disaster.

    And this is especially true when pride and prejudice make leaders unwilling to see what should be obvious. Which brings me back to Europe’s still extremely dire economic situation (…..) So will Europe save itself? The stakes are very high, and Europe’s leaders are, by and large, neither evil nor stupid. But the same could be said, believe it or not, about Europe’s leaders in 1914. We can only hope that this time is different.

    http://www.nytimes.com/2012/07/02/opinion/krugman-europes-great-illusion.html

  10. Professor Uziel Nogueira says: Prof PK is always missing a basic (political) fact about the euro zone. The debtor countries WISH to be saved by Germany’s taxpayers money while Ms. Merkel has to play defense. Prof PK is correct in saying that the economic strategy of fiscal austerity and wage cuts is NOT a solution to solve the problems of debtor nations. Their fundamental weakness is lack of economic competitiveness that can only be solved with structural reforms, if ever. Is hard to envision rich Greeks paying taxes and workers being productive as their Northern counterparts. Germany’s leadership made a huge political mistake in 1999 when rushed in the euro to countries not ready for the common currency. Some countries will never be. Ms. Merkel is attempting to undo that mistake without causing a major political and economic earthquake in Europe and elsewhere. Can it be done? Greece will be a test case.


    Merkel’s political message is that the common currency is NOT an entitlement, a short cut to economic prosperity without sacrifice. In other words, if you want to play in the German economic team, you need to earn your place with hard work. Are the remaining 16 member countries of the euro zone ready for the challenge? A small euro zone team is the only logical outcome.

    No doubt, the EU continues to be an interesting proposition for Europe. It will certainly be increased from the current 27 member countries but the euro is not for all.

    http://www.nytimes.com/2012/07/02/opinion/krugman-europes-great-illusion.html

  11. (…..) So far, the markets have been kind to France, concentrating their fire on Spain and Italy, and considering France as a relatively safe haven after Germany. But for a country “that suffers from serious fiscal imbalances” and has the euro zone’s highest level of public spending as a percentage of G.D.P., Mr. Spiro said, “France remains ‘the lucky peripheral’ ”. In a difficult economic environment, Mr. Hollande will have a hard time ensuring that the country’s luck does not change.

    http://www.nytimes.com/2012/07/03/world/europe/france-faces-stiff-budget-cuts-to-meet-european-deficit-target.html

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