Several advances….
L ast weekend in Dublin, the Eurogroup finance ministers reached an agreement on easing the bailout conditions granted to Ireland and Portugal, which will be paid out in full by the end of 2013 and mid-2014, respectively. The Eurogroup also finalised the terms of an agreement on the Cyprus rescue package.
The average maturity of loans granted by the European Financial Stability Mechanism (EFSM) to Ireland and Portugal were extended by 7 years maximum, on condition that the two countries continue to pursue their adjustment programmes scrupulously. The same agreement also applies to loans granted under the European Financial Stability Facility (EFSF). The press release stated that Portugal would have to enumerate new spending cuts to offset part of the savings measures invalidated by the Portuguese Constitutional Court, which the government had been counting on to reach its deficit reduction targets. A formal agreement should be signed on 12 May. As to Ireland, the extension of loan maturities will be approved once the Troika has submitted its conclusions as part of the 9th review of Ireland’s adjustment programme. The Cyprus question was also discussed. A formal agreement is to be signed on April 24, calling for EUR 23bn in funding, including EUR 10bn financed by the Troika (i.e. EUR 1bn by the IMF and €9bn by the European Stability Mechanism) and EUR 13bn by Cyprus. The first tranche is to be paid mid May and the remainder spread out over 3 years.
….. but an unexpected move by Germany
For the Cyprus crisis, the authorities finally opted for a bail-in by banks, as opposed to a bail-out in which governments are solicited. If we can learn but one lesson from the Cyprus crisis, it is the urgent need for a single bank resolution mechanism. According to the IMF a certain number of eurozone banks are still handicapped by high financing costs, deteriorating asset quality and low profitability. To strengthen financial stability and reinforce crisis management in the eurozone, it is now vital to carry through banking union. To do so, the IMF esteems that a single bank resolution mechanism must be operational at basically the same time as the single supervision mechanism. This should go hand in hand with a roadmap agreement, complete with milestones for setting up a single bank resolution authority and a joint system of deposit guarantees funded through mutualised resources.
Faced with this urgent need, negotiations have continued within the Eurogroup. The press release at the end of the Dublin summit indicated substantial progress on three key points: 1) the principle of fairly sharing the outlay of capital injections between countries involved and the European Stability Mechanism (ESM); 2) management of legacy assets; 3) and the architecture of the resolution mechanism. Michel Barnier, European Commissioner in charge of financial services, will present his proposals next June to try to speed up the implementation of deposit guarantee and bank resolution mechanisms. The European Directive on the bank resolution mechanism is to be transposed into national law by December 31 , 2014, at the latest. The application horizon is set for January 1, 2018. Numerous voices are now calling for the application process to be accelerated. On the fringes of the Eurogroup meeting, Jörg Asmussen, member of the ECB directive committee, stated that it would be preferable to have a single bank resolution mechanism in place by 2015 rather than 2018.
In the eyes of the Commission, will this shortened period give banks enough time to adapt the structure of their resources and to facilitate the conversion of debt instruments into equity capital if necessary? Germany, the largest contributor to ESM (EUR 190bn, 27% of the total), does not share this sense of urgency. Finance Minister Wolfgang Schaüble says he favours the creation of a simple network of national bank resolution authorities, notably in case of cross border bankruptcies. He claims that European treaties would have to be revised to create a single bank resolution mechanism. This would probably mean holding an intergovernmental conference and its ratification by all member states, in compliance with their respective constitutional regulations. As for Germany, the Karlsruhe Constitutional Court could be asked to rule on the conformity of the law with the Basic Law, which stipulates that fiscal sovereignty must remain in the hands of the Bundestag. Note that the Court validated the treaty creating ESM in September 2012, on condition that Germany’s participation was limited to EUR 190bn. Above that amount, Parliament would have to be consulted.
BY Caroline NEWHOUSE
L ast weekend in Dublin, the Eurogroup finance ministers reached an agreement on easing the bailout conditions granted to Ireland and Portugal, which will be paid out in full by the end of 2013 and mid-2014, respectively. The Eurogroup also finalised the terms of an agreement on the Cyprus rescue package.
The average maturity of loans granted by the European Financial Stability Mechanism (EFSM) to Ireland and Portugal were extended by 7 years maximum, on condition that the two countries continue to pursue their adjustment programmes scrupulously. The same agreement also applies to loans granted under the European Financial Stability Facility (EFSF). The press release stated that Portugal would have to enumerate new spending cuts to offset part of the savings measures invalidated by the Portuguese Constitutional Court, which the government had been counting on to reach its deficit reduction targets. A formal agreement should be signed on 12 May. As to Ireland, the extension of loan maturities will be approved once the Troika has submitted its conclusions as part of the 9th review of Ireland’s adjustment programme. The Cyprus question was also discussed. A formal agreement is to be signed on April 24, calling for EUR 23bn in funding, including EUR 10bn financed by the Troika (i.e. EUR 1bn by the IMF and €9bn by the European Stability Mechanism) and EUR 13bn by Cyprus. The first tranche is to be paid mid May and the remainder spread out over 3 years.
….. but an unexpected move by Germany
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For the Cyprus crisis, the authorities finally opted for a bail-in by banks, as opposed to a bail-out in which governments are solicited. If we can learn but one lesson from the Cyprus crisis, it is the urgent need for a single bank resolution mechanism. According to the IMF a certain number of eurozone banks are still handicapped by high financing costs, deteriorating asset quality and low profitability. To strengthen financial stability and reinforce crisis management in the eurozone, it is now vital to carry through banking union. To do so, the IMF esteems that a single bank resolution mechanism must be operational at basically the same time as the single supervision mechanism. This should go hand in hand with a roadmap agreement, complete with milestones for setting up a single bank resolution authority and a joint system of deposit guarantees funded through mutualised resources.
Faced with this urgent need, negotiations have continued within the Eurogroup. The press release at the end of the Dublin summit indicated substantial progress on three key points: 1) the principle of fairly sharing the outlay of capital injections between countries involved and the European Stability Mechanism (ESM); 2) management of legacy assets; 3) and the architecture of the resolution mechanism. Michel Barnier, European Commissioner in charge of financial services, will present his proposals next June to try to speed up the implementation of deposit guarantee and bank resolution mechanisms. The European Directive on the bank resolution mechanism is to be transposed into national law by December 31 , 2014, at the latest. The application horizon is set for January 1, 2018. Numerous voices are now calling for the application process to be accelerated. On the fringes of the Eurogroup meeting, Jörg Asmussen, member of the ECB directive committee, stated that it would be preferable to have a single bank resolution mechanism in place by 2015 rather than 2018.
3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or remove ads.
In the eyes of the Commission, will this shortened period give banks enough time to adapt the structure of their resources and to facilitate the conversion of debt instruments into equity capital if necessary? Germany, the largest contributor to ESM (EUR 190bn, 27% of the total), does not share this sense of urgency. Finance Minister Wolfgang Schaüble says he favours the creation of a simple network of national bank resolution authorities, notably in case of cross border bankruptcies. He claims that European treaties would have to be revised to create a single bank resolution mechanism. This would probably mean holding an intergovernmental conference and its ratification by all member states, in compliance with their respective constitutional regulations. As for Germany, the Karlsruhe Constitutional Court could be asked to rule on the conformity of the law with the Basic Law, which stipulates that fiscal sovereignty must remain in the hands of the Bundestag. Note that the Court validated the treaty creating ESM in September 2012, on condition that Germany’s participation was limited to EUR 190bn. Above that amount, Parliament would have to be consulted.
BY Caroline NEWHOUSE
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