Rumour has it that certain European investors are no longer willing to provide Irish banks with overnight funding. If true, this could trigger the much-discussed bail-out (for it’s unlikely to end in default). A bail-out might still impose losses on bondholders, though, after recent discussions at the EU.
Until now, Ireland didn’t need any extra funding till mid-2011. Shenanigans in the secondary (resale) bond market were troubling, then, but did not need to affect the country’s cost of debt. Just as long as debt auctions took place once things had calmed down.
Growing divergence between countries’ economic policies is threatening the global recovery, Mario Draghi has said.”The economic recovery is strong in the emerging countries, weak in the United States and uneven in the euro area. The economic policy responses are divergent,” said the Italian central bank governor. As some countries intervene in currency markets and imbalances grow, floating exchange rates are “feeling the gap,” he added, concluding: “The world recovery itself is at risk.”
Mr Draghi, who is a contender to succeed Jean-Claude Trichet as ECB President next year, said the only option is for countries to co-ordinate their economic policies more closely. That co-ordination could include limiting current account imbalances, avoiding protectionist policies, encouraging flexible exchange rates and reducing the volatility of capital inflows to emerging markets. He also indirectly supported calls for semi-automatic sanctions in the eurozone.
The health of eurozone banks faces a fresh test this week when they are due to roll over €225bn in loans, the largest amount at the ECB since early July, when €442bn of one-year loans matured.
The return of liquidity could put upward pressure on market interest rates, while the volumes that are converted into new loans will be an important guide to levels of financial market confidence within Europe’s monetary union. The results could help determine the pace at which the ECB pursues its “exit strategy” to unwind exceptional measures.
Mario Draghi, Italy’s central bank governor, has struck a tough tone in an article written for the Financial Times. His target was “systemically important financial institutions” – the largest banks whose collapse would threaten the global economy. Lehman Brothers was the first such institution that was allowed to fail. It was also the last, Mr Draghi pointed out. “The public will not, and should not, accept more such bail-outs.” Regulators had also to turn their attention on the “shadow banking sector” hitherto beyond their reach.
His comments will have been noted carefully by colleagues on the governing council of the European Central Bank, which is meeting in Frankfurt on Thursday for its regular monthly non-interest rate decision meeting. Mr Draghi is a possible candidate to succeed Jean-Claude Trichet when the ECB president’s eight-year non-renewable term expires in October 2011 (another is Axel Weber, Germany’s Bundesbank president).
Mr Draghi, who chairs the global Financial Stability Board, has kept a low profile on ECB monetary policy issues. But his call for a tougher regime to deal with wayward banks underlines his “hawkish” credentials.
Further jitters at the eurozone periphery today with Irish, Spanish and Greek sovereign yields higher, and news that Spanish banks tapped the ECB for €140bn during July.
Of particular interest, demand for Italian bonds dropped significantly. This matters because European banks are exposed very heavily to Italian sovereign debt – the top 91 banks own €100bn of the stuff in their trading books. This is quadruple the trading holdings of Spanish debt, and 22 times holdings of Irish debt. Indeed, Italian debt is held in the trading books of Europe’s banks more than any other European sovereign – even German-issued debt totals just $70bn.
Italian banks Intesa and Unicredit carry the greatest trading exposure to Italy, as we would expect. After that come Deutsche Bank and Credit Agricole, each with about €10bn. See the data, split by bank, below:
The Dutch finance minister Jan Kees de Jager has called on the Dutch National Bank to formulate a remedial plan within the month, after a commission found their internal supervision wanting.
Investigating the bankruptcy of small Dutch bank, DSB, the Scheltema commission concluded that the DNB should never have issued them a banking licence in 2005. While the financial position of the bank was sound, the report concluded that fundamental improvements in corporate structure had been needed and should have been identified. (DNB aside, the 348-page report blamed unprofessional management and poor governance for DSB’s collapse.)
Responding to the commission’s report, Mr de Jager said: “The internal supervision within DNB needs to be changed, for instance via the supervisory board … the supervisory board needs to exercise more control of DNB’s supervisory tasks. The law needs to be changed and I will change the law.”
Spanish banks have been lobbying the European Central Bank to act to ease the systemic fallout from the expiry of a €442bn ($542bn) funding programme this week, accusing the central bank of “absurd” behaviour in not renewing the scheme.
On Thursday, the clock runs out on the ECB financing programme – the largest amount ever lent in a single liquidity operation by the central bank – under the terms of the one-year special liquidity facility launched last summer. One senior bank executive said: “We are fighting them every day on this. It’s absurd.”
£2bn, €1bn… and $19bn. Proposed bank levies so far from the UK, France and US. The tide of ever smaller bank levies appears to be turning.
American banks with assets exceeding $50bn and hedge funds with assets over $10bn would be liable to pay the costs associated with financial reform. This from a proposal by Barney Frank late last night during discussions to finalise Wall Street reform. More on ft.com.
Investor worries over eurozone banks resurfaced on Tuesday after a warning by a European Central Bank governing council member that some faced funding difficulties.
Sector shares were also hit by concern over a credit downgrade for BNP Paribas and a writedown by Crédit Agricole of the value of its Greek unit. The worries increased the cost of buying protection against bond default in the sector.
Sir John Vickers has just been confirmed as head of the Independent Banking Commission
Sir John Vickers is warden of All Souls College, Oxford University, but has long been a core member of the British economic establishment. Until recently he was president of the of the Royal Economics Society and rare among economists in having held jobs in supervising both overall economic policy, as chief economist of the Bank of England, and detailed regulation and promotion of competition in individual industries, as chairman of the Office of Fair Trading.
His initial reputation was made in his analysis of privatisation in the 1980s, in which he argued that competition and effective regulation was generally more important than ownership in seeking to improve the efficiency of companies.