European banks

Slovenian finance minister Cufer agreed to the outside banking audit just last week.

Last night, after everyone in Brussels had spent most of the day digesting the European Commission’s reports on all 27 EU countries’ budget plans, officials quietly posted far more interesting documents online: the “staff working papers” that underpin the policy recommendations issued earlier in the day.

According to Commission officials, this was done intentionally. They wanted reporters and national officials to focus on the recommendations and not the analysis behind them.

But starting this morning, Brussels Blog began combing through the working documents – which are much longer and more detailed than the Commission recommendations – starting with the country many consider the next eurozone bailout candidate: Slovenia. It makes for eye-opening reading. 

It may seem a moot point now that Cyprus’ financial system has, for all intents and purposes, collapsed in the wake of last month’s €10bn eurozone rescue that forced the island to impose capital controls on any large withdrawals from its banks.

But as part of the bailout deal, Nicosia agreed to allow international inspectors to rummage around its banks to investigate allegations of rampant money laundering that were once a major bone of contention in Berlin. The investigation was completed late last month.

Last week, a damning four-page summary of their findings written by the so-called “troika” of bailout lenders was obtained by Brussels Blog and other news organisations (we’re posting it here for the first time, since we only recently able to return to blogging after a hacker attack). The “confidential” troika summary paints a picture of lax enforcement and repeated breakdowns in anti-money laundering procedures.

This afternoon, the Cypriot central bank fired back, issuing its own two-page synopsis of the two reports – one by Deloitte, the other by Moneyval, the Council of Europe’s anti-money laundering monitoring body – which accused the troika of “drawing inferences where none exists in the original reports.” We’ve posted the Cypriot response here

Bratusek: "Slovenia can on its own without any supervision resolve its problems.”

Amid all the talk that Spain, France and the Netherlands will get waivers next week on tough EU budget rules, allowing them to breach yet again Brussels-mandated deficit ceilings, there are growing signals that one country may not get let off: Slovenia.

Although Slovenia has budget deficit problems similar to its western European counterparts, Brussels’ real concern is about its banking sector, which needs another infusion of taxpayer money to return it to health as non-performing loans continue to rise. Questions about the stability of its three largest banks, all state owned, has put a target on the small former Yugoslav republic as potentially the next eurozone country to need a bailout.

As a result, Slovenia’s demarche from EU economics chief Olli Rehn on Wednesday is likely to come from a place outside the eurozone’s budget deficit rules: new post-crisis enforcement powers Rehn has never used before, the awkwardly named “excessive imbalance procedure”. This authority allows the European Commission to poke around more deeply into a eurozone country’s entire economy – not just government fiscal policy – and demand reforms under threat of swingeing fines.

Alenka Bratusek, Slovenia’s recently-minted prime minister, isn’t too pleased with the prospect of being the first eurozone country to be subject to the EIP. In a meeting with a small group of reporters after Wednesday’s EU summit, Bratusek said officials in Brussels seem to think an EIP citation would help her. She says it won’t. 

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. 

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

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. 

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. 

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? 

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.