European Union finance ministers agreed to put the ECB – European Central Bank in charge of all Eurozone lenders in a landmark deal that paves the way for the Euro-area’s firewall fund to provide direct bailouts to banks. This deal gives EU leaders greater confidence that they are gaining the upper hand over the Eurozone’s debt crisis. The new supervisory mechanism should be fully ready by March 1, 2014, with about 200 banks automatically qualifying for direct ECB oversight, EU Financial Services Commissioner Michel Barnier said today in Brussels after 14 hours of talks. In the interim, the 500 billion-euro ($654 billion) ESM - European Stability Mechanism could aid banks directly using its own procedures and asking ECB supervisors to step in, he said. The ECB- European Central Bank will have total access to banking information and will give equal treatment to non-euro nations that join the oversight system. EU leaders sought common bank oversight to rejuvenate their campaign to end the financial crisis, now heading into its fourth year. After a hectic year of crisis management, during which Greece had a close brush with the Eurozone exit, getting an agreement on the first stage of a banking union is a victory for the EU and represents a bold step towards pooling sovereignty.
ECB Agreement Highlights:
Under today’s agreement, Euro-area finance ministers could use the ESM to recapitalize banks directly if they make a unanimous request to the ECB to take over direct oversight of a troubled institution, reported Bloomberg. Finance chiefs will need to develop guidelines for when they might offer aid to banks, instead of going through national governments as they did with Spain’s financial-sector rescue program. The legal framework for the new supervisor could be in place by the end of February, allowing the ECB a full year to prepare before taking on its new duties. Today’s agreement opens the way for negotiations with the European Parliament. The balance of ECB power was a key obstacle during the marathon talks. The final proposal includes a mediation procedure for nations that object to bank oversight positions taken by the ECB’s Governing Council, the Frankfurt-based central bank’s monetary policy committee and senior decision- making body. Monetary Policy and supervision decisions will be separate on a day-to-day basis. The U.K., home to Europe’s biggest financial center and which won’t join the banking union, sought a requirement that EBA decisions be taken by so-called double majority voting, so that nations outside the supervisory mechanism can’t be automatically overruled by those who take part. The oversight deal also lays out size thresholds for banks to get direct ECB supervision once the new system is in place. Ministers agreed on central oversight for banks with more than 30 billion euros in assets or with balance sheets that represent at least 20% of a nation’s economic output. The guidelines include at least the top three biggest banks of every participating nation unless “justified by particular circumstances.” The banking deal is a “good outcome,” said U.K. Chancellor of the Exchequer George Osborne in a statement after the meetings. “It shows that when you go in with a clear and principled argument and you make your case, then you can succeed and that’s what Britain has done tonight.”
With Silvio Berlusconi vowing to contest an Italian election early next year, a full bailout of Spain still on the cards and a German general election in September casting a long shadow, 2013 promises to be the EU’s fourth turbulent year in a row, and that’s without mentioning Greece, Ireland or Portugal. Each step towards closer union means a greater surrender of sovereignty by independent nations and spurs a political backlash, especially in times of economic hardship, social tension and high unemployment. European Council President Herman Van Rompuy and the heads of the European Commission, European Central Bank and Eurogroup have put forward a blueprint for closer Eurozone fiscal, economic and political integration alongside the banking union.
Greece Debt Issues Flare after Fresh Aid Release:
Greece’s successful buying back of its own debt will help reduce its debt burden and will ensure that the next slice of emergency funds is released by the Eurozone and International Monetary Fund, but there is a growing acknowledgement that Athens will need debt forgiveness in the years ahead. In June and July, euro zone leaders came close to letting Greece go from the currency bloc. They resolved to keep it in, doing whatever it would take to get it back on its feet. Having taken that decision, they now have to bear the costs, however large and uncomfortable they may be. European governments geared up to provide extra aid or debt relief for Greece after releasing the country’s first loan payment in six months, signaling renewed battles over how to stabilize the euro economy. Euro-area finance ministers approved the payout of 49.1 billion euros ($64 billion) of loans through March and committed to “additional measures” in case Greece’s debt reduction veers off track. While another cut in bailout-loan rates and an increase in infrastructure funding would top the list of extra measures, the policy makers hinted that outright debt relief, still a taboo topic in creditor countries led by Germany, would be on the table as well. Greece will get 34.3 billion euros in coming days, covering 16 billion euros for bank recapitalization, 7 billion euros for the government’s budget and 11.3 billion euros to finance a bond buyback that was used to retire debt. Another 14.8 billion euros will flow in the first quarter of 2013 as long as Greece meets conditions to be agreed on with creditors. That sum consists of 7.2 billion euros for bank recapitalization in January, plus three monthly tranches for the budget.
Borrowing Costs still vary in Eurozone:
The ECB – European Central Bank said that while borrowing costs have dropped, they continue to vary greatly across the euro area and banks remain hesitant to lend to the private sector. “The cost of short-term bank lending to euro area non- financial corporations has declined since early 2012, mainly reflecting the pass-through of reductions in key ECB interest rates and market interest rates,” the Frankfurt-based ECB said in its monthly bulletin today. “Still, borrowing costs continue to vary greatly across Eurozone countries, reflecting differences in banks’ funding conditions and country-specific economic developments affecting the creditworthiness of borrowers,” it said. Lending to the non-financial private sector “remains weak.” ECB President Mario Draghi in September announced an unlimited bond-buying program, saying the bank’s record-low interest rates aren’t reaching borrowers because of unjustified fears of a euro breakup, reported Bloomberg. Since then, bond yields in countries like Spain and Italy have fallen. “In autumn 2012, net issuance of long-term debt securities by banks resident in the euro area was significantly less negative than it had been in previous months,” the central bank said today. “At the same time, interbank trading volumes remain low and concentrated in the shortest maturities.”