It is all about to start. EU finance ministers will for the first time debate bankers’ bonuses. Brussels may say it loves democracy, but the meeting is fixed so the most contentious discussion is off-camera, in secret. George Osborne, UK chancellor, will gingerly defend his position against the planned bonus cap in the public debate afterwards, but by then the outcome of the negotiation will be clear. Think of it more like a post-match interview. This is a short guide to what to expect:
Will Osborne be able to overturn the bonus cap? Without wanting to ruin the suspense, the answer is no. The main terms of the political deal — a 1:1 bonus-to-salary ratio, which can raise to 2:1 with a shareholder vote — is here to stay. The European parliament is wedded to it. And apart from Britain, every other country is willing to compromise. Read more
Outgoing Cypriot president Demetris Christofias addresses the European Parliament Tuesday.
In this morning’s dead-tree edition of the FT, fellow Brussels Bloggger Josh Chaffin has a report on Cypriot officials launching an offensive to convince other eurozone governments that it is no longer a haven for money laundering.
The effort has included summoning EU ambassadors in Nicosia to the Cypriot finance ministry, where they were given a 23-slide presentation detailing the country’s anit-money laundering efforts. As is our practice here at the Brussels Blog, we’ve decided to post a copy of the report here. Read more
Germany's Angela Merkel, left, and France's François Hollande at the EU summit in Brussels.
With the eurozone crisis response slowing to a crawl, Friday’s early-morning agreement setting a timetable for a new single eurozone bank supervisor is probably best judged with textual analysis, since the deal is so incremental it’s hard to really judge without a close look at the details.
The key change between the communiqué agreed in June and the one agreed Friday is the firming up of when, exactly, the new supervisor, to be run by the European Central Bank, will start and how long it will take to be phased in. The June deal was immensely vague on this point:
We ask the Council to consider these proposals as a matter of urgency by the end of 2012.
Legal opinions from the top lawyer to EU ministers are not intended for mass circulation. They are usually virtually unquotable, often studiously ambiguous and always highly political. But the Council legal service’s take on the European Commission plan for a single bank supervisor is a classic.
The headline is that the Commission’s supervision blueprint — as announced in September — is illegal in key parts. More important, though, is the detail of the argument and the challenges it poses to finding a diplomatic solution before the end of the year.
Before diving into the argument and quoting key sections, it is worth sumarising and explaining some of the implications. Read more
Is it possible to have one supervisor for eurozone banks, while keeping 17 different paymasters for when things go wrong?
It is the big potential problem of phasing in a banking union – while prudential responsibility is centralized under one supervisor, the means to pay for bank failure isn’t. One cynical diplomat likened it to “telling all cars to suddenly change sides and drive on the left of the road – but leaving the lorries to drive on the right.”
Just think through what would happen in the case of a failed financial institution once the European Central Bank takes over supervision.
Under the Brussels banking union plan, the ECB will have the power to shut down the lender by removing its license to operate. But in practice it would require the authorisation of the bank national authority. As we know, some banks perform vital functions for the economy and are too big to fail. For the ECB to pull the plug, someone would have to be available to pay for winding it up or bailing it out. Read more
Ireland's Enda Kenny, right, with German counterpart Angela Merkel at the EU summit.
It’s been a good week for Ireland.
Not only has last week’s EU summit deal on bank recaptalisation pushed benchmark borrowing rates down to pre-bailout levels (today they were trending down again, to 6.2 per cent, lower than even Spain’s). But it has also enabled Dublin to venture out on the open market for the first time in two years: tomorrow, it will sell €500m in 3-year bills. Small, but a highly-symbolic turning point nonetheless.
Despite the positive market reaction, there is a decent amount of debate in the hallways in Brussels about what, exactly, the deal means for Ireland. As a reminder, eurozone officials agreed to change the rules of future bank bailouts so that the €500bn eurozone rescue fund can inject cash right into struggling banks, something specifically intended for Spain’s upcoming €100bn EU bank rescue.
When Ireland was bailed out, all such money had to be funnelled through the state, meaning it added to Dublin’s ballooning national debt. During the late-night negotiations, Irish officials – aided by backing from the European Central Bank’s Jörg Asmussen and Klaus Regling, head of the bailout fund – were able to insert language saying Ireland would be considered for similar treatment.
Since Ireland has spent about €64bn on shoring up its collapsed banking system, and its overall debt level now stands at about €185bn, moving those debts off its books would surely be the “game changer” touted by Enda Kenny, the Irish prime minster. But how much of that debt could realistically be moved off Dublin’s books? 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.
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
Belgium's finance minister Steven Vanackere talks to colleagues at the Copenhagen meeting.
Our front page story in tomorrow’s dead tree version of the FT includes lines from confidential analyses distributed to European Union finance ministers at their gathering in Copenhagen. As usual, we thought we’d offer a bit more from the documents here at the Brussels Blog.
Among the most interesting elements in the documents are discussions about Europe’s banks, which have seen a surge in confidence thanks to the European Central Bank’s €1tn in cheap loans, known as LTRO for long-term refinancing operations.
One of the analyses in particular – the three-page “Assessment of key risks and policy issues” prepared by the EU’s economic and policy committee – warns that there are new signs of instability in the European banking sector. Details after the jump… Read more