IMF chief Lagarde, left, with the EU Commission's Olli Rehn at last night's meeting in Luxembourg
For those trying to figure out what the highly-anticipated EU treatise to be unveiled at next week’s summit on the future of the eurozone will say, it’s worth having a closer read at the International Monetary Fund report presented last night to eurozone finance ministers at their gathering in Luxembourg.
The concluding statement presented by Christine Lagarde, the IMF chief, contains almost all the elements being weighed by EU leaders who are writing the report, and Lagarde was quite open about the fact she actively consulted two of the institutions involved in its drafting: the European Central Bank and the European Commission. Indeed, Olli Rehn, the commission’s economic honcho, explicitly endorsed the report at a press conference last night.
The most likely areas of consensus are in Lagarde’s three long-term recommendations for a eurozone banking and fiscal union, though several of them remain controversial, particularly in Berlin, and it remains unclear whether the four EU institutions drawing up their plan will be as willing to confront the German government as head-on as the IMF has. Read more
Herman Van Rompuy, president of the European Council and chair of all EU summits
For anyone reading the tea leaves ahead of a major EU summit, early drafts of the final communiqué are always essential reading – not necessarily for what’s in them, but for what’s not.
The latest version obtained by the Brussels Blog – the second iteration ahead of next week’s increasingly high-stakes gathering in Brussels (which we’ve posted here) – has quite a few items listed as “p.m.”, an abbreviation for pour mémoire, which loosely translated means “to be added later”. It’s those items where the real debate still rages, and where all eyes will be focused.
The most important p.m. is in the very first section of the 11-page draft: the so-called “report on EMU”, which is the highly-anticipated treatise being drafted by Herman Van Rompuy, the summit chair, with input from José Manuel Barroso, president of the European Commission; Mario Draghi, head of the European Central Bank; and Jean-Claude Juncker, chair of the eurogroup of eurozone finance ministers. Read more
Italy's Mario Monti, left, being greeted at the G20 summit by Mexican president Felipe Calderon
When EU leaders agreed last year to give the eurozone’s €440bn rescue fund more powers to deal with a teetering country short of a full-scale bailout, it actually created two separate tools to purchase sovereign bonds of a government finding itself squeezed by the financial markets.
Some officials in northern creditor countries believed the most efficient tool would be using the fund, the European Financial Stability Facility, to purchase bonds on the primary market (when a country auctions them off to investors) rather then on the secondary market (where bonds already being openly traded).
The rationale was simple: By declaring the EFSF was going to move into an auction, perhaps at a pre-agreed price, they would effectively set a floor that would encourage private investors to pile in. Indeed, as one senior official said at the time, the EFSF might not even need to spend a cent; the mere threat of auction intervention might be enough to drive up prices and spark confidence, luring buyers back.
In addition to the prospect of using only very little of the EFSF’s increasingly scarce resources, a primary market intervention also had another political benefit: instead of buying bonds off private investors – in essence, rewarding the bad bets made by bankers and traders – the EFSF money would go directly to the governments selling the bonds.
With the topic of using the EFSF – and its successor, the €500bn European Stability Mechanism – to purchase sovereign bonds back on the table for Spain and Italy, it would seem an opportune time for advocates of a primary market programme to have their say. But there’s a problem: as designed by eurozone officials, it can only come as part of a full-scale bailout, meaning it is virtually impossible for Rome or Madrid to accept one. Read more
Planning for a European banking union is racing ahead, in spite of the considerable political obstacles. The vision is for two, five or even ten years in the future. But be in no doubt: the institutional turf war is already afoot.
It was on display today in the pages of the international press. Speaking to the FT Jose Manuel Barroso, the European commission president, laid out his vision of a banking union built on the foundations of existing EU institutions.
At the same time Christian Noyer, the governor of the Bank of France, made his pitch in the Wall Street Journal for eurozone central banks to provide “the backbone of the financial union”.
The clashing views highlight the great unanswered question of the banking union: if power over banks is centralised, who will be given control? Cui bono? These three scenarios lay down the broad templates for a union, and the institutions that would stand to win and lose depending on the outcome.
1. An EU banking union
Broadly as outlined by Barroso. A single supervisor, resolution regime and deposit guarantee fund serving all 27 member states. Should the UK refuse to take part — which it will — arrangements would be found to enable the other members to go forward. This union would cover countries outside and inside the single currency club, but remain within an EU framework.
Treaty change would not be necessary, at least according to the commission. Read more
Madrid police stand guard outside Bankia, the troubled Spanish bank, during a protest Saturday.
In talking to senior officials about plans for a Spanish bailout for our story in today’s dead tree edition of the FT, several steered us to the seemingly overlooked bank recaptialisation guidelines for the eurozone’s €440bn rescue fund that were adopted last year.
Those six pages, available for all to see on the website of the rescue fund, the European Financial Stability Facility, make clear European leaders were contemplating exactly the situation Spain now finds itself in: having done the hard work on fiscal reform, but suffering from a teetering banking sector that needs to be recapitalised.
The important thing to note in the current context is that the EFSF guidelines, adopted after more than a year of fighting over whether the fund should be used for bank rescues at all, allow for a very thin layer of conditionality for bailout assistance if the aid goes to financial institutions – notably, it foresees no need for a full-scale “troika” mission of monitors poking around in national budget plans. That’s something the government of Mariano Rajoy has been demanding for weeks. Read more
Some issues to bear in mind when considering whether a European banking union is a realistic possibility. The difficulties highlighted are not impossible to overcome. But it would be a wrench.
1. Germans don’t like strong EU supervision of their banks. Berlin is fond of federal EU solutions. But it is even more keen on running its own banks. The political links — especially between the state and regional savings banks — are particularly strong in Germany. To date Berlin has proved one of the biggest opponents of giving serious clout to existing pan-EU regulators.
2. Germans really don’t like strong EU supervision of their banks. There is again some wishful thinking about Berlin shifting position. Angela Merkel did say she supported EU supervision. But there were important caveats. She referred to supervision of “systemically important banks” — which is likely to exclude the smaller Sparkassen banks and the 8 Landesbanks. To some analysts, this represents a giant loophole. She also did not explain what kind of supervision. Berlin may only support tweaks to the current system.
3. Germans don’t like underwriting foreign bank deposits. Another pillar of a banking union is common deposit insurance. To Berlin this proposal represents another ingenious scheme to pick the pocket of German taxpayers. A weaker proposal to force national deposit guarantee schemes to lend to each other in emergencies has been stuck for two years in the Brussels legislative pipeline. Most countries opposed it. German ministers say it could be considered, once there is a fiscal union across the eurozone. So don’t wait around.
As momentum builds towards finding a “roadmap” for commonly-backed eurozone bonds ahead of next month’s EU summit, where the topic is likely to be on the table, officials have begun focusing on interim steps before getting to full-blow mutualisation of debt, which Berlin has made clear it will not support.
Much of the attention thus far has gone to a “wise men” report put out by five German economists last year that would create a “debt redemption fund,” which would refinance debts from eurozone countries over 60 per cent of their gross domestic product. The fund would jointly guarantee the excess debt to help pay it off through cheaper borrowing costs.
But in recent weeks, people briefed on internal debates in Frankfurt and Brussels say another incremental idea has caught the interest of EU officialdom: instead of eurozone bonds, the currency bloc should start with eurozone bills, short-term debt backed by all 17 euro members. Read more
Italy's Mario Monti and Spain's Mariano Rajoy chat during a March EU summit in Brussels.
The leaked copy of the Italy “country-specific report” from the European Commission which we got a hold of before its official publication Wednesday contains lots of warnings about tax evasion and the black economy. But with Spain and Greece dominating headlines these days, one thing that stands out from reading the report is that Italy is not Spain or Greece.
Both Spain and Greece are struggling mightily to get their budget deficits under control, and some analysts argue they’re failing because of a “debt spiral” where their governments attempt to close shortfalls by instituting severe austerity measures – thus killing economic growth and causing bigger deficits.
The European Commission report (which we’re posting online here) shows how much better Italy’s situation is when it comes to its budgetary situation. Not only is Italy not dealing with huge deficits like Spain and Greece; last year it actually had a primary budget surplus – in other words, it took in more money than it spent, if you don’t count debt payments.
That’s a significant difference, and may be one of the main reasons Italy appears to be decoupling from Spain, as our friends and rivals over at Reuters noted in a Tweet this morning: the spread between Spanish and Italian 10-year bonds have shifted a pretty dramatic 250 basis points over the course of the year. Read more
Antonis Samaras. Getty Images
Leaders have begun arriving at their party caucuses and one of the first to show up at the centre-right EPP gathering was Antonis Samaras, the New Democracy leader locked in a neck-and-neck fight to become Greece‘s next
prime minister. Read more
People pass Bank of Greece in Athens last week
Jitters over whether Greece will be forced out of the euro have turned the focus of policymakers in recent days on whether Greece is on the precipice of a bank run.
It’s no mere academic exercise; a full-scale bank run would force the European Central Bank and eurozone lenders to either pump in more money – without a new government in place, and no assurances Athens would live up to the rescue terms – or pull the plug on Greece’s financial sector.
Since a banking sector without a central bank would essentially force Greece back to the barter system, there would be few options left then for Athens to begin printing its own currency again. Essentially, the drachma would return through the back door.
As we reported in today’s dead-tree edition, senior eurozone officials responsible for monitoring the currency area’s banking system said the rate of withdrawals thus far falls short of a panic. But the International Monetary Fund’s recent report on Greece makes it clear that a slow-motion bank run has been under way for more than two years, with close to 30 per cent of deposits being pulled out since the end of 2009. Read more
Passos Coelho with Britain's David Cameron during a visit to Downing Street on Wednesday
Largely overlooked amidst the handwringing over Spain this week was a piece written by Portuguese prime minister Pedro Passos Coelho in the FT that all but admits publicly what many officials have been saying privately for some time: Portugal is probably going to need a second bailout.
In fairness, Passos Coelho doesn’t actually come out and say that, but it sure sounds like he’s preparing the groundwork:
We are utterly committed to fulfilling our obligations. But while we are optimistic, we must also be realistic and pragmatic. This is why we accept that we may need to rely on the commitment of our international partners to extend further support if circumstances beyond our control obstruct our return to market financing.
Although Portugal’s current €78bn bailout runs through 2014, a decision on whether a second bailout is needed must be made much more quickly than that – probably sometime in the next two or three months. A look at why after the jump… Read more
Klaus Regling, head of the eurozone rescue fund
Coming up with a number for the size of the new, enlarged eurozone rescue fund seems to be the favourite parlour game in the run-up to today’s meeting of eurozone finance ministers in Copenhagen.
According to a leaked copy of the draft conclusions obtained by the FT, the ceiling for the next year will be €700bn. But is that, to quote a former US president, fuzzy math? Is it really €940bn…but some leaders are afraid to admit it out of fear of angering their bailout-fatigued national parliaments?
The leaked draft has three elements of a new firewall starting in mid-2012 : €200bn is committed to the ongoing bailouts in Greece, Ireland and Portugal; €240bn of left-over money in the current, temporary rescue fund is frozen in an emergency account; and two-fifths of the new €500bn permanent rescue fund gets capitalised.
The fuzzy math comes in when you try to account for the new permanent rescue fund, called the European Stability Mechanism. An attempt to clarify, plus some excerpts from the draft, after the jump… Read more
Pope Benedict XVI, eurozone head of state?
Even in the midst of the eurozone crisis, senior officials in Brussels are occasionally able to maintain a sense of humour. Case in point: A press release sent out this afternoon by the office of Herman Van Rompuy announcing yet another emergency eurozone summit – on April 1. Read more
Eurogroup contenders Juncker, left, and Schäuble
Although the financial markets and many non-Europeans will be watching Friday’s gathering of eurozone finance ministers in Copenhagen to find out how much they will enlarge Europe’s rescue fund, the Brussels echo chamber will be watching for another reason entirely: Just who will be getting three top jobs that must be filled by the time summer rolls around?
Up until the last day or two, the smart money was that Yves Mersch, head of Luxembourg’s central bank, would get the first job on offer – a coveted seat on the European Central Bank’s six-member executive board, taking away a post originally slated to go to a Spaniard, Antonio Sáinz de Vicuña.
But senior eurozone officials said the intense politicking that has occurred in the run up to Friday’s meeting has made Mersch’s appointment less certain. “It’s one of those things that could go one way or another,” said one person directly involved in the talks. “I wouldn’t bank on it yet.”
The politics get very complicated and are directly related to the re-election prospects of French president Nicolas Sarkozy. A detailed explanation of the convoluted twists after the jump… Read more
US treasury secretary Timothy Geithner
Timothy Geithner, the US treasury secretary, has occasionally irked his European counterparts with attempts to influence the eurozone’s crisis policymaking, but European officials will be closely listening to him as the clock ticks down to next month’s spring meetings of the International Monetary Fund.
European Union leaders hope to get non-eurozone backing to double the IMF’s funding to $1tn at the gathering. Although the US won’t contribute, Washington is the IMF’s largest shareholder and is widely believed to be behind the insistence of Christine Lagarde, the IMF chief, that no increase will be forthcoming unless the eurozone increases the size of its own €500bn rescue system.
Those interested in tea leaf reading will get their chance today, when Geithner testifies on Capital Hill on the eurozone crisis. The House financial services committee, where Geithner will appear, helpfully released his testimony last night, and it makes clear Geithner is in no mood to back down. Read more
Poul Thomsen, head of the IMF mission to Greece
On Friday, after much of Europe shut down for the week, the International Monetary Fund issued its 231-page report on Greece’s new €174bn bailout, which seems to struggle to keep an optimistic tone about Athens’s ability to turn itself around over the course of the rescue plan.
But the IMF report is worth scrutinising for reasons beyond its gloomy prose: If there’s anyone who might force eurozone leaders back to the drawing board once again, it’s the IMF, which essentially pulled the plug on the first €110bn Greek bailout early last year when it became clear it wasn’t working.
Signs that the IMF is on a bit of a hair trigger litter the new report. Read more
Most of officialdom has been referring to the second Greek bailout, formally launched today, as a €130bn rescue. But the first 189-page report by European Union and International Monetary Fund monitors makes clear it’s actually a lot larger, though the actual size depends on how your measure it.
In the latest in our occasional series “We Read Brick-Sized Bailout Reports So You Don’t Have To”, Brussels Blog will attempt to explain why the figures have gotten so confusing and the bailout is probably better described as a €164.5bn rescue. Or maybe it’s €173.6bn.
The key thing to remember is that the first €110bn Greek bailout was originally supposed to run through the middle of next year and its remainnig funding will be folded into the new package and added to the €130bn in new funding. According to the report, €73bn of the first bailout has been disbursed, leaving about €37bn left.
But here’s where it gets slightly complicated. Read more
IMF's Lagarde, Eurogroup's Juncker and German finance minister Schauble at Thursday's meeting
The Greece crisis is entering a crucial week, with private investors deciding whether to participate in a €206bn debt restructuring and Greek officials scrambling to finalise reform measures to release the last €71.5bn in bail-out money in time for a eurozone finance ministers meeting Friday.
The failure of the ministers to sign off on all the aid during a meeting in Brussels on Thursday caught a few people by surprise. Over the weekend, Brussels Blog got its hands on the report by the troika – the European Union and International Monetary Fund team that monitors Greek compliance – showing where Athens came up short.
As we reported last week, the troika evaluation (a copy of which can be found here) held that Greece had completed most of the 38 “prior actions” ahead of Thursday evening, but had not yet fully implemented all of them, particularly in the area of so-called “growth-enhancing structural measures” – mostly a series of changes in wage and collective bargaining laws aimed at driving down costs. Read more