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New revelations of the EFSF set-up - Eurostat makes a decision

(27 January 2011) The EU Statistical Agency Eurostat, made a decision today. In that announcement, Eurostat decided that the funds raised in the framework of the European Financial Stability Facility must be recorded in the gross government debt of the euro area Member States participating in a support operation, in proportion to their share of the guarantee given. EFSF with initial capital of 30 million euros is not considered a financial institution in Luxembourg and therefore not regulated by the local PSF regulation. For making loans it uses the technical assistance of other institutions, notably the European Investment Bank (EIB) and the Finanzagentur (the German public debt agency). EU has yet to decide if there shall be a European Debt Agency, but that is currently too political to be practical, ask Merkel. EIB did not dare to take care of the crisis fund themselves, hence creating this SPV called EFSF. Without raising an eyebrowe Eurostat considers that the EFSF is an accounting and treasury tool acting exclusively on behalf of the Eurozone Member States and under their total control.

Commission seeks views on possible EU framework for bank recovery and resolution to deal with future bank failures

Following the publication of a Communication on 20 October 2010 on a European crisis management framework for the financial sector, the European Commission has yesterday (6 January 2011) launched a consultation on technical details underpinning that framework. Internal Market and Services Commissioner Michel Barnier said:

"Although our first objective is better prevention, banks will fail in the future and must be able to do so without bringing down the whole financial system. That is why we must put in place a system which ensures that Europe is well prepared to deal with bank failures in an orderly manner – without taxpayers being called on again to pay the costs. A clear framework to manage cross-border banking crises is an essential complement to our work on supervisory and bank reforms."

European Stability Bank - Take 2 - Asymptotix analysis ahead of the EU summit tomorrow

It will be interesting to see how this European summit on rescue funds and euro bonds pans out John and I have had another one of my logic stream thought processes late in the night as to how to deal with the Euro zone mess far more effectively and permanently than currently is proposed anywhere.

To keep you up-to-date with our position in this field I recommend you also read:

http://www.asymptotix.eu/content/lunatix-are-grass-new-bretton-woods-proposition-europe-now and

http://www.asymptotix.eu/content/european-stabilisation-bank-proposal-asymptotix

Given the differences between the 750 billion fund (less the Ireland bailout costs of course) and the doubling to 1,500 billion proposed by the IMF and the utter rejection of this by Merkel and Zarkozy who cant afford it despite the crowing from Deutschland to mask the reality of their exposure to sovereign debt and debt to gdp ratio and the peripheral exposure of a number of their banks to PD and sovereign default as recently mentioned, it will be interesting to see what is finally decided.

The rough politics of European adjustment

If Europe is going to “resolve” the current crisis in an orderly way, it is going to have to move very quickly – not just for the obvious financial reasons, but for much narrower political reasons.  I am pretty sure that the evolution of European politics over the next few years will make an orderly solution progressively more difficult.

For ten years I have used mainly an economic argument to explain why I believed the euro would have great difficulty surviving more than a decade or two.  It seemed to me that the lack or fiscal centrality and full labor mobility (and even some frictional limits on capital mobility) would create distortions among countries that could not be resolved except by unacceptably high levels of debt and unemployment or by abandoning the euro.  My skepticism was strengthened by the historical argument – no fiscally fragmented currency union had ever survived a real global liquidity contraction.

 

What is 750 bn euro EFSF compared to 4,5 trillion euro state aid in the EU finance sector?

What is 750 bn euro EFSF compared to 4,5 trillion euro state aid in the EU finance sector? The volume of national support to the financial sector approved by the European Commission between October 2008 and October 2010 amounted to around € 4.5 trillion, the autumn State Aid Scoreboard shows. The amount actually taken up by banks in 20091 is around € 1.1 trillion. The bulk (76%) of this support comes in the form of State loans or guarantees to maintain interbank financing which would only have an impact on public finances, if they were called upon, whereas recapitalisation represents 12% and impaired asset relief 9%2. Excluding the crisis-related support, total aid remained relatively stable at € 73.2 billion in 2009 or 0.62% of GDP and continued to re-focus on less distortive horizontal objectives such as aid for research and innovation, protection of the environment and support to SMEs.

Commission Vice-President in charge of competition policy Joaquín Almunia commented: "The financial crisis led Member States to commit huge amounts of money to preserve financial stability. Whilst vital state aid to the financial sector has been permitted under specially adapted, crisis-specific rules, state aid to the non financial sector has remained broadly stable, and a positive aspect is that, in these circumstances, Member States have continued to re-orient State subsidies to research, environmental protection and other general-interest objectives, which create growth and jobs."

 

Group of banks by exposure to sovereign risk (% of TBV), includes Greek, Irish and Portuguese sovereign bonds

Figure: Groups of banks by exposure to sovereign risk (% of TBV). Includes Greek, Irish and Portuguese sovereign bonds (identified).

EU, Internal Markets commissioner Michel Barnier, plan gives regulators more power to avert collapse of ailing banks

The European Commission wants to give regulators the power to convert debt issued by ailing banks into equity as they try to avert the collapse of failing institutions without leaning on taxpayers. In the latest in a long line of far-reaching reform proposals from internal markets commissioner Michel Barnier, the EU executive also wants to give regulators the power to depose the management of vulnerable institutions, suspend dividend payments, force asset sales and compel an institution to implement a recovery programme.

Mr Barnier’s plan, which also foresees powers to install a special management team in distressed banks, is designed to prevent a repeat of costly episodes such as the Irish banking crisis by introducing new resolution procedures to facilitate an “orderly” wind-down of institutions that have no prospect of survival. In anticipation of legislative proposals next year, he set out his thinking yesterday in a communiqué on “crisis management” in the financial sector. While some of the measures he proposes have already been deployed by EU governments on an ad hoc basis – Ireland among them – the commissioner wants to have common rules throughout Europe for phased resolution procedures.

The Business Cycle and Basel III

I have been reading an interesting synopsis of Basel 3 this week. I noted this analytic of Basle III in relation to what asymptotix has been publishing about Ben Bernanke yesterday; 

Monetary Policy Objectives and Tools in a Low-Inflation Environment 

Ben S. Bernanke - Monetary Policy Objectives and Tools in a Low-Inflation Environment - full speech 15 October 2010

The topic of this conference--the formulation and conduct of monetary policy in a low-inflation environment--is timely indeed. From the late 1960s until a decade or so ago, bringing inflation under control was viewed as the greatest challenge facing central banks around the world. Through the application of improved policy frameworks, involving both greater transparency and increased independence from short-term political influences, as well as through continued focus and persistence, central banks have largely achieved that goal. In turn, the progress against inflation increased the stability and predictability of the economic environment and thus contributed significantly to improvements in economic performance, not least in many emerging market nations that in previous eras had suffered bouts of very high inflation. Moreover, success greatly enhanced the credibility of central banks’ commitment to price stability, and that credibility further supported stability and confidence. Retaining that credibility is of utmost importance.

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