Single policeman
Euro leaders move to dampen risk to bloc
Euro-zone governments capped another tumultuous year onThursday with deals to more tightly control their biggest banks and keep theirbailout of Greece on track, but face a new set of challenges in 2013.
An accord among European Union finance ministers creates asingle policeman to oversee the biggest and riskiest banks in the 17-nation currencybloc. That marks a crucial step toward addressing a root cause of Europe's debtcrisis, and offers the prospect of breaking the mutual dependence between weakbanks and struggling governments that has sapped confidence in Europe's commoncurrency.
Also Thursday, euro zone finance ministers agreed to releasesome €34 billion ($44.45 billion) of new bailout loans for Greece, which shouldease a severe cash crunch and lift concerns about a near-term exit from theeuro-zone. Officials earmarked an extra €14.8 billion of loans for the firstquarter of 2013.
"Those Cassandras have been proven wrong," saidOlli Rehn, the European Union economics commission referring to those whoforecast a Greek exit from the euro this year.
At their last summit of 2012 on Thursday and Friday—whichstarted hours after finance ministers reached the bank-supervisionaccord—European Union leaders backed another element of a proposed euro-zonebanking union: the creation of a single resolution mechanism to be in charge ofstabilizing or winding down failing banks. Talks over that will start inearnest next year.
José Manuel Barroso, president of the European Commission,described the resolution mechanism as "the next important building blockof our banking union."
The leaders also agreed they would discuss further measuresto coordinate economic policies, including the possible creation of a smallcommon budget to provide incentives for economic reform—but not until theirsummit next June, a later date than expected.
German Chancellor Angela Merkel said any common fundingwould involve "a very limited budget. Not three digit billions, rather 10or 15 or 20 billion euros."
The decision on the bank supervisor leaves much work to bedone until the euro-zone bailout fund will be able to effectively shieldgovernments from the fallout of expensive bank failures. That step, key tobreaking the destabilizing link between weak banks and weak governments, seemsunlikely to occur before March 2014.
The prospect of breaking that link had been a major reasonfor setting up the single supervisor—on the basis that devolving some financialresponsibility for banks to the euro-zone bailout fund required banks to bepoliced at the euro-zone level—and has helped to calm financial markets. But richcountries like Germany, Finland and the Netherlands have lobbied to delay thatmove.
"The owners and the investors must suffer first; secondthe country must suffer; and then we have to look if the resolution mechanismfunded by the banks themselves is participating…and then we can look at directrecapitalizations," said Finnish Prime Ministers Jyrki Katainen, in anattempt to explain how direct recapitalization of banks would be a last resort.A raft of challenges, meanwhile, lies ahead to preserve the euro in 2013."To say that everything is over now would be wrong—despiteChristmas," Germany's Finance Minister Wolfgang Schäuble told reporters inBrussels.
Elections in Italy—where former Prime Minister SilvioBerlusconi's return to the political stage upset financial markets thisweek—are due early next year. Investors are watching closely for any signs ofinstability in Italy, the state with the Europe's heaviest debt burden, apartfrom Greece.
Elections in Germany in the fall are also expected to makeMs. Merkel's government—which sets the pace of negotiations—even more reluctantto make financial commitments that would bring the euro-zone economies closertogether.
More fundamentally, the euro zone is again in recession,with unpredictable consequences for national and European politics.
Another test is expected in Spain. The Spanish government'sheavy financing requirements for next year suggest to many analysts that itcan't continue through next year without some form of official help.
That will bring the European Central Bank's untested plan tobuy government bonds—known as the Outright Monetary Transactions—into play.Though it is potentially unlimited in size, it is also conditional—thebeneficiary government must meet economic conditions, which raises the questionof what happens if it doesn't. The OMT also depends on a government continuingto have access to the bond markets, which raises the question of what happensif access is lost.
The ministers also agreed Thursday that their governmentsmust try to hash out the final framework of the supervisor with the EuropeanParliament, and create many of the rules that accompany the new oversightregime, by the end of March. "The earlier we start turning this intoreality…the better," said Austrian Chancellor Werner Faymann, as hearrived for the summit.
Finance ministers said they expected the ECB to take oversupervision of many of the euro zone's banks at the earliest by March 2014 fromnational supervisors. It will start scrutinizing banks as early as March 2013,but in most cases it will still depend on national authorities to enforce itswill. During 14 hours of talks, ministers had to resolve many tricky issues,including what banks would come under direct ECB oversight.
Non-euro states can sign up for the new supervisory regimeif they want to, but so far none has firmly committed, while the U.K., Swedenand the Czech Republic have ruled it out.
Once fully up and running, the ECB will be able to give outand take away banking licenses, force lenders to boost their capital buffers orrestrict risky lending practices. The hope is that closer oversight willprevent systemic banking crises, like the ones that have hit Ireland, Spain andCyprus over the past few years.
In the end, they decided that the ECB would take directresponsibility for banks that fulfill at least one of the following criteria:their assets are bigger than €30 billion or make up at least 20% of their homecountry's gross domestic product, they have already received indirect help fromthe euro-zone rescue fund or have significant cross-border operations.
Those criteria would include around 180 banks in the eurozone, holding some 90% of the bloc's banking assets, according toBrussels-based economic think tank Bruegel.
"Problems coming from 10% of assets can still be verysignificant," Bruegel researchers said in a note. "But overall, it isa big achievement that the ECB will have direct oversight over such a bigproportion of assets."
The deal on the supervisor's scope was a victory forGermany. All but one of its local savings banks, which together hold more than€1 trillion ($1.3 trillion) in assets, will likely remain under the auspices oftheir national supervisor.
German Finance Minister Wolfgang Schäuble said the ECBwouldn't be able to force change on individual lenders outside its reach, butcould make demands for groups of banks.
In return, the euro zone's biggest economy retreated fromone of its other demands, that supervision had to be strictly separated frommonetary policy—the ECB's main task. Final supervisory decisions will stillhave to approved by the ECB's governing council, which also sets interest ratesfor the euro zone.
But Mr. Schäuble said that a new mediation procedure, whichallows national supervisors to appeal against governing council objections,would "at least theoretically" keep the two responsibilities apart.
(Published by WSJ - December 13, 2012)