Yep, another euro acronym that may or may not take real form.
Notwithstanding resistance in Berlin, President Barroso and his team in Brussels have published details of the Single Resolution Mechanism which the European Commission wants to see as part of an eventual banking union across Europe. Read more
Earlier this week the European Commission’s proposed a whooping 6.8 per cent increase for next year’s EU budget. Cue outrage and fury. Finance minsters around Europe stamped their feet while their assistants dialled journalists to explain just how outraged and furious they were.
The European Central Bank has made key concessions over its holdings of Greek government bonds, says the WSJ, citing people briefed on the country’s debt restructuring talks. The ECB has agreed to exchange the government bonds it purchased in the secondary market last year at a price below face value, provided the debt-restructuring talks have a successful outcome. The central bank won’t take a loss on the transaction, but it isn’t clear whether it will exchange the bonds at the below-par price at which it purchased them or whether it will make a profit, the newspaper says. The concession could reduce Greece’s debt by up to €11bn — difference between the price at which the ECB bought the bonds in the secondary market and their face value. The sources said that another option was discussed for eurozone national central banks to also take part in the debt reduction exercise had been rejected. Greece missed another deadline to approve conditions for a second €130bn bail-out on Tuesday night, the FT reports, after a meeting between the country’s political leaders was postponed until Wednesday because of last-minute haggling with international lenders over emergency spending cuts. In Brussels, José Manuel Barroso, president of the European Commission, insisted that eurozone leaders would continue to strive to keep Greece in the euro, an apparent rebuke to Neelie Kroes, the Dutch member of his commission who was quoted in her country’s press as saying a Greek exit would not cause significant shockwaves.
The European Commission has unveiled a plan to use joint European bonds to help kick-start infrastructure projects, introducing a variation of a fundraising scheme that state governments have opposed, the FT reports. Announcing the plan on Wednesday, José Manuel Barroso, the European Commission president, predicted that the European Union could use €230m ($317m) from its own budget to mobilise some €4.6bn in private investments for European infrastructure projects, including roads, railways, gas pipelines and broadband networks in the next two years. The Commission sees the bonds as a way to supply funding to infrastructure projects that can no longer find bank loans or access capital markets on their own. Although the EU’s 27 member states are sympathetic to their plight, they have opposed initiatives to use the EU budget to raise money for infrastructure, including a 1993 effort by then-Commission president Jacques Delors to launch so-called Delors Bonds.
France’s president Nicolas Sarkozy flew to Frankfurt on Wednesday night for an emergency meeting on the eurozone crisis at Jean-Claude Trichet’s farewell party, while his wife Carla Bruni was giving birth to their first child. Bloomberg reports that with just four days before the summits that are supposed to announce a solution, there was Franco-German tensions appear to be persisting. The FT reports other attendees at the meeting, held in the wings of the festivities at the Alte Oper in Frankfurt, were German chancellor Angela Merkel, along with Mario Draghi, Mr Trichet’s successor, and Christine Lagarde, head of the IMF. Herman Van Rompuy, president of the EC, and José Manuel Barroso, president of the EC, were also involved, as were François Baroin and Wolfgang Schäuble, the French and German finance ministers. The meeting broke up after two hours with neither the German or French leaders making any comment. German officials on Wednesday reaffirmed the country’s opposition to the ECB providing the European rescue fund with a line of credit. Ms Merkel, who has little room to manoeuvre on the EFSF in Berlin, will address Bundestag with Mr Schauble on Friday morning. Earlier, the FT reported that EU bank recapitalisation plans may fall well short of expectations, with a level of €80bn being discussed. The finance ministry denied a report in FT Deutschland that Mr Schauble had talked of the EFSF firepower being increased to €1,000bn, says Bloomberg.
European Commission president José Manuel Barroso will soon present his own plan for Europe-wide bank recapitalisations, the FT says. Although the Commission does not have the power to impose capital injections by national governments, Mr Barroso’s comments on Thursday echoed those by Angela Merkel, the German chancellor, who this week said her government was prepared to prop up German banks and urged a co-ordinated European effort. Mr Barroso did not say whether he believed the effort should be done by national capitals or through the eurozone’s €440bn bail-out fund, the European financial stability facility. But senior Commission officials are known to support using national funds before the EFSF is employed. France, whose banks have been under the most stress in recent months, has insisted any Europe-wide effort be run through the EFSF, but there were mounting signs Paris was becoming isolated on the issue after German and Finnish leaders on Thursday said theybelieved countries with sufficient resources should mount their own recapitalisation efforts before turning to the EFSF. Also on Thursday, US president Barack Obama said he hoped European leaders would have a concrete plan to overcome the debt crisis by creating enough “firepower” to help weaker member states in time for a G20 summit on November 3-4, Reuters reports.
A European Union proposal to impose a tax on financial transactions has been attacked by financial and business groups as an assault on the City of London and companies seeking to protect themselves against market uncertainty, the FT says. Unveiling the proposals in Strasbourg on Wednesday as part of his annual State of the Union address, José Manuel Barroso, the European Commission president, said the tax could raise some €55bn ($75bn) a year to replenish government coffers. Under the proposal, trades in bonds and shares would be taxed at 0.1 per cent, while more complex derivatives would face a 0.01 per cent levy. Both parties to a transaction would usually be charged, even for transactions where one was based outside the EU. The thresholds would be minimum levels to be put in place by all EU member states but national authorities could opt to “top up” the tax with domestic charges. Germany and France back the proposal but the British government said a financial transaction tax could only work if it were implemented globally. The UK CBI employers’ group attacked the tax plan as a “crude instrument” that would divert trading activity to New York and Hong Kong.
European Council President Herman Van Rompuy has called an emergency meeting of top officials dealing with the eurozone debt crisis for Monday morning, Reuters says, on concerns the crisis will envelope Italy after a sharp sell-off on Friday. Attendees will include Jean-Claude Trichet, Jean-Claude Juncker, Jose Manuel Barroso and Olli Rehn, sources told the news agency. The FT reports that US hedge funds are placing large bets against the value of Italian government debt, directly shorting the bonds of the eurozone’s third-largest economy. The funds have increased the size of short positions in the last month, speculating that investor concerns over the country’s ability to fund itself may spread from Europe’s periphery to Italy, according to investors in the funds briefed on the strategy. Meanwhile Bloomberg says Consob, the Italian regulator, has moved to curb short-selling by ordering short sellers to reveal positions of more than 0.2 per cent.
Europe must accelerate the pace of structural reform over the next year to consolidate an uneven economic recovery, José Manuel Barroso told the European parliament in his first “state of the union” address, the FT reports. The European Commission president regularly addresses the parliament, but the state of the union format was intended to capture some of the sizzle of the US president’s annual speech to Congress and to energise Mr Barroso’s political programme. Mr Barroso said on Tuesday that European Union economic growth would be higher than forecast this year and that concerted action had allowed the bloc to withstand the test of the economic crisis. But he urged member states and MEPs to use the breathing room to push for deeper reforms on several fronts, from economic governance to the bloc’s financial and energy sectors.
European Union leaders moved closer on Thursday to approving the publication of ‘stress test’ results for European banks amid the continent’s sovereign debt crisis, the FT reports. José Manuel Barroso, the European Commission president, told the EU’s 27 national leaders at their Brussels summit on Thursday that he supported full disclosure of the test results on a bank-by-bank basis.
José Manuel Barroso, European Commission president, has challenged Berlin over its opposition to an early Greek rescue plan, insisting that this should be finalised this week to prevent further instability in currency and bond markets. He called on Monday for rapid agreement on financial assistance to the debt-strapped Athens government, while admitting that no deal could be done without support from Germany.
Angela Merkel, the German chancellor, called for EU institutions to be given “more teeth” both to control speculation and to police the deficit spending of member states, while France’s François Fillon said after talks in Berlin that both governments were “very much in agreement in tackling extreme speculation”. The two have dispatched a letter to EU commission president José Manuel Barroso demanding an immediate investigation of the role and effect of speculative trading in CDSs on sovereign bonds.
Deutsche Bank has published the 12th edition of its annual ‘Default Study’, and while it’s worth a read in its entirety, we found the following passage most intriguing. Emphasis FT Alphaville’s:
one of the problems in this study is that for the cash credit market we benchmark everything off the risk free rate which has typically been Government Bonds. For us credit started to be a stand-out buy after the Lehman’s default because that event marked the acceleration of the deterioration in Government balance sheets around the world. Most Governments had to stress their own balance sheets to save the global economy and their financial sector from collapse. Given that spread is simply the difference between the supply and demand of one asset against the other, this period marked the period where credit spreads were set to rally hard. However 18 months on and we are increasingly questioning what is the appropriate risk free rate in an era of perilous Government finances, especially in the Developed World. Going forward, the CDS market may provide the purest way of analyzing what default risk is priced into credit. However with future regulation possible in this market we may be debating how to accurately benchmark default risk for years to come. Read more