NEWS, 06.06.2012.

European lender plants onus on euro zone governments

 

The European Central Bank today put the onus firmly on euro zone governments to solve the bloc's debt crisis, dashing expectations it could take near-term action despite saying the currency area's economy was under increasing threat.After the ECB left interest rates at 1%, President Mario Draghi said the bank was not open to trading with governments on the policy response to the crisis.Increasingly alarmed by signs Spain's banking crisis is opening a new front in the debt crisis, some in financial markets had hoped Draghi would signal a readiness for the ECB to take fresh action if euro zone governments take bolder action.Instead, Draghi said it was wrong for the ECB to fill a policy vacuum created by others and that there would be no quid pro quo between the central bank and governments."There is no sort of horse trading here," he told a news conference."Some of these problems in the euro area have nothing to do with monetary policy ... and I don't think it would be right for monetary policy to fill other institutions' lack of action."The respite the ECB bought the euro zone early this year by injecting over 1 trillion euros into its banking system with twin 3-year loan operations (LTROs) has faded, with borrowing costs for troubled countries such as Spain soaring again.Draghi played down prospects of any imminent third round of long-term money creation, saying LTROs and the ECB's dormant bond-buying programme were instruments that are in place but temporary and "not infinite"."The issue now is whether these LTROs would actually be effective," he said when asked about another round.Draghi said the decision to leave rates unchanged was taken by "broad consensus". He said a few members, but not many, of the bank had wanted a rate cut.The ECB has never before lowered its main refinancing rate below 1%. Berenberg Bank economist Holger Schmieding said it was an open question whether the ECB would cut rates in July."In addition, the ECB offered no hint today that it may re-activate its two most important non-standard measures, that is the 3-year long-term refinancing operations (LTROs) and the purchases of sovereign bonds," Schmieding said."This suggests that it would take a major further escalation of financial tensions for the ECB to go beyond a possible rate cut in July," he added.Draghi said markets tensions had not returned to the levels of late last year, when the ECB offered the 3-year LTROs, and stressed the euro zone was far from facing a situation like the one after the collapse of Lehman Brothers in September 2008.Although flagging the increasing threat to the currency area's economy, new ECB growth forecasts for 2012 were unchanged - in a -0.5 to 0.3% range. The prediction for the following year was barely changed either."The economic outlook for the euro area is subject to increased downside risks relating in particular to a further increase in the tensions in several euro area financial markets and their potential spillover to the euro area real economy," Draghi said.Markets were unsure how the ECB would react to a recent wave of weak economic data, knowing that the bank also wants to keep the pressure on euro zone leaders to tackle the crisis more effectively.The euro was steady at $1.25 after the decision, Europe's benchmark stock market was up 2% after a recent steep fall.Dilemma Jolted into action by Spain's banking crisis, EU leaders have started considering the form of economic union needed to make the bloc durable as well as more immediate measures to help Madrid.But that end-game is still months or years away and in the meantime investors view the ECB as the institution with the firepower to keep the crisis in check."For the time being, the ECB is sitting on its hands as the bloc's economy and financial markets deteriorate further," said Nicholas Spiro, managing director of Spiro Sovereign Strategy.

"The message from today's ECB meeting is a worrying one: any mutualisation of euro zone debt is a long way off yet credible interim measures to shore up confidence will not be forthcoming for the time being," Spiro added.In the run up to today's meeting, International Monetary Find chief Christine Lagarde said the bank had room to cut rates. Spain and other hard hit parts of the euro zone would also like the ECB to revive its bond buying programme to provide them with cover while they undertake planned repairs to their economies.Euro zone unemployment stood at a record 11% in April, business confidence has slumped and surveys of manufacturing have hit three-year lows, adding to conviction that the bloc's economy is set to drop back into recession.The bank's dilemma is that if does too much, pressure for government action falls. Yet if it does nothing, troubled sovereign debtors could find it harder and harder to finance themselves or maintain confidence in the banks that have bought much of their debt.Draghi said the ECB would continue to supply euro zone banks with all the liquidity they ask for at least until January 15 next year. It had said in October it would give euro zone bank unlimited access to central bank funding at least until July 10.Before the crisis, the ECB allotted a certain amount in its refinancing operations for which banks had to put in bids. Since the crisis began, the ECB has extended the maturity of such operations to as long as 3 years and has lifted funding limits.Most ECB watchers had expected it would keep its powder dry until after June 17 Greek elections and a crunch summit of EU leaders at the end of June, which Draghi and his colleagues hope will dispel any doubts about Europe's commitment to the euro.There are also growing signs that a decision on a bailout for Spain's debt-laden banks will have been taken by the end of the month.

 

EU seeks to shield taxpayers from bank failures

 

European officials proposed Wednesday a new system of financial regulations that aims to keep bank failures from costing taxpayers billions and bankrupting governments.Because many European governments are already overburdened with debts, rescuing their failed banks risks bankrupting some of them. Ireland has had to ask for an international bailout for that reason and investors fear Spain may be next.The banks, in turn, own huge amounts of their governments' bonds, which drop in value when investors lose confidence in the country's financial future. The result is that any fall in confidence in either the banks or the government tends to create a downward spiral requiring foreign financial aid.Under the European Commission's proposal, banks that posed no systemic risk to the stability of financial markets would simply be allowed to fail. Those whose failure did threaten to become unmanageable would be propped up in part by having unsecured creditors of the bank, such as bondholders and shareholders, take losses rather than having governments give them taxpayer money."We're going to break the link between banking crises and public budgets," said Michel Barnier, the European commissioner responsible for the internal market, as he outlined the measures in Brussels. "We don't want taxpayers to have to pay."If he ever achieves that, however, it will be too late to alleviate the current banking crisis afflicting Europe and one of its biggest economies, Spain, where banks are sitting on huge losses that the government cannot afford to plug. The Spanish government's borrowing rates are at painfully high levels around 6.25 percent on fears it will go bankrupt saving the banks.The Commission's complex proposal is not scheduled to take effect fully until 2018. In any event, it also needs the approval of the European Council, composed of the leaders of the 27 EU countries, and the European Parliament, and may be significantly altered in the process of gaining approval.At the moment in Europe there is no central regulator with the power to step in and force weak banks to ask investors for more capital to strengthen finances, or to break them apart and restructure them. There is also no central deposit insurance backstop, making it more likely that a bank failure would exhaust one country's fund to compensate depositors.In the United States, by contrast, state and federal banking regulators have the power to shut down failing banks. The Federal Deposit Insurance Corp. takes over the failed banks and sells their loans and deposits to stronger banks or private investor groups.And unlike in Europe, the FDIC guarantees deposits up to $250,000 per account. That prevents bank runs because depositors are protected if a bank fails.Barnier was at pains to emphasize that he had been working on the proposals for years, and they were not a response to the banking crisis in Spain or other recent bank bailouts.While Barnier said the new rules are necessary because so many banks operate across borders, he did not propose setting up a powerful central banking authority, as the Commission had suggested a weak earlier.Many analysts say Europe needs such a central banking authority, which would have the financial power to bail out banks anywhere in the eurozone, bypassing national governments that are often reluctant to admit the extent of problems in their domestic financial systems. It would also spread the cost of bailouts across multiple countries.The importance of such a measure was made clear in the U.S. bank bailouts in recent years. Insurer AIG, for example, failed financially and had to be rescued. Although it was incorporated in Delaware and headquartered in New York, neither state had to go bankrupt paying for the rescue. The burden was shouldered by the U.S. Treasury.Germany remains opposed to such a measure, however, fearing it will end up paying the bulk of bank rescues.Barnier's proposal is more likely to be welcomed in Berlin. He said it would strengthen the ability of national authorities to hopefully head off bank failures before they happen and to deal with them decisively when they do."If we're going to avoid in the future banking crises, each member state has to be equipped with the appropriate tools to take action in time, not when it's too late," Barnier said.All the national banking authorities would be operating with the same rules rules that would enable them to intervene early, require banks to draw up recovery plans, and even to dismiss the bank's management.If a bank was about to fail, national authorities would have the power to sell or merge the businesses, to create a temporary "bridge bank" to carry out essential functions, to separate good assets from bad ones, and to write down the bank's debts."The resolution tools will ensure that essential functions are preserved without the need to bail out the institution, and that shareholders and creditors bear an appropriate part of the losses," the commission said in an explanatory statement on the proposal.This last part having the bank's unsecured creditors take losses is being termed a "bail-in" in contrast to a taxpayer-funded bailout.Barnier acknowledged that the proposal would not have an immediate effect, but he said EU officials need to take both short-term and long-term actions to regain financial stability.Other measures that senior European officials have floated recently include creating a central deposit insurance scheme to reassure savers across the continent that their money will not disappear in case a bank runs into trouble. A key worry is that rumors of a bank failure might trigger a bank run, fueling panic that could spread across countries.