December 13 2012

Finance ministers have agreed to hand the European Central Bank powers to police eurozone banks in a new phase of closer integration. The Eurogorup decided to release the next €49.1bn tranche of aid to Greece, with €34.4bn given this month…

Powered by article titled “Eurozone crisis live: EU clinches breakthrough deal on banking union” was written by Josephine Moulds, for on Thursday 13th December 2012 14.25 UTC


Osborne at the TSC

George Osborne is making his delayed appearance before MPs on the Treasury select committee. He is being asked about comments by Bank of England governor elect Mark Carney that the UK should drop its inflation targets in favour of more radical monetary policy.

But Osborne says that if you were to move away from inflation targets you need to see “very significant rewards”. He adds that he doesn’t think it would be sensible for him to openly speculate about any new Bank framework. He says:

If you want to change the regime you have to make a pretty strong case for doing so.


Meanwhile, the Greek media is replete with positive reports that the debt-stricken nation is on course to get even more rescue funds than expected – thanks to Germany (yes, that’s right). Our correspondent Helena Smith writes:

Even before today’s euro group meeting, the leading daily, Ta Nea, had summed up the decision it was likely to yield with the following headline: Last Act for the mammoth installment.”
“The amount of aid that will be given by the eurozone [to Greece] by the end of March, and whose disbursement is expected to be approved by the euro group, will be up to €49.1bn.”

The last Eurogroup, it reminded readers, had decided to disburse €34.4bn in December (which has now come true) and €9.3bn in three separate installments through to March. Factor in the contribution from the IMF, the paper trilled, and the total amount would come to €52.5bn (the additional amount being used to cover the repurchasing of Greek debt). “In Germany the finance ministry has come out in favour of the installment being disbursed,” it enthused. “It said indications show that the buy back program ‘went very, very well.’”
EU diplomats, based in Athens, however, have a more reserved outlook. One cautioned against Greece over-interpreting the decision as a “vote of confidence in its efforts when it’s more about the EU not wanting Greece to go under.”

Foreign observers worry that, as had been the case before, Athens will see the disbursement as an excuse to relax implementation of long-overdue structural reforms.


The centre-left candidate Pier Luigi Bersani, who is leading the polls to become the next prime minister, has already said that he could offer Mario Monti a role in his government, according to a report in the Italian press.


Here comes Italian PM Mario Monti. Some say his appearance at the summit suggest he will be running in the elections. With Berlusconi already inside, the dynamics could be interesting.


Jean-Claude Juncker, on the other hand, is looking somewhat preoccupied.


Here come the pictures of the politicians arriving. EC president Jose Manuel Barroso, for one, looks like a happy man.


The Greek prime minister, Antonis Samaras, is not missing out on the euphoria, reports Helena Smith. Samaras told reporters in Brussels:

Solidarity in our Union is alive. Grexit is dead. Greece is back on its feet. The sacrifices of the Greek people have not been in vain. Today is not only a new day for Greece, it is indeed a new day for Europe.


Lunchtime round-up

So for a quick lunchtime roundup and, to make a change, there’s a lot of good news around today…

Eurozone finance ministers have agreed to give the ECB powers to act as supervisor to the region’s biggest banks. The so-called single supervisory mechanism (SSM) will kick in in March 2014. (see 9.25am for Ian Traynor’s take on the deal)

The Eurogorup has decided to release the next €49.1bn tranche of aid to Greece, with €34.4bn to be released this month. (see 11.02am and following)

Spain and Italy’s borrowing costs came down at bond auctions earlier today. (see 9.59am and 10.17am)


Now the current Italian prime minister, Mario Monti, is speaking in Brussels but will not be drawn on his future. He says:

It seems more important that the next Italian government stays committed with the EU policy than to speak on my personal situation.


The decision has prompted rather more muted jubilation on Twitter.


Jubilation in Greece over aid release

In Greece, today’s decision to release €41.9bn of aid to the crisis-hit country has been greeted expected with joy and jubilation, reports our correspondent Helena Smith. She writes:

All’s well that end’s well. Greek officials, predictably, are both thrilled by the announcement. After an endless summer of nail-biting negotiations the relief both in Athens – and among the Greek delegation in Brussels – is almost palpable.

“This is a big day for Greece,” the country’s finance minister Yiannis Stournaras told reporters. In Athens one senior official described the decision to release the aid as “a dream come true.”


In Brussels, the European commission president, José Manuel Barroso, has told journalists he has spoken to Berlusconi. He said:

I spoke with Mr Berlusconi yesterday early afternoon. It was a personal conversation. I stressed importance of stability in Italy.


Survey suggests UK manufacturing stabilising

Back in the UK, the CBI industrial trends showed a small improvement in December, suggesting that manufacturing output may have stabilised towards the end of the year.

The survey shows that the balance of manufacturers reporting that their orders are at normal levels jumped to -12% in December from -21% in November and -23% in October. This took it appreciably above the long-term average of -17% for the orders balance.

Howard Archer of IHS Global Insight said:

A significantly improved December CBI industrial trends survey offers some grounds for optimism for manufacturers going into 2013 after they suffered a pretty torrid end to a largely difficult 2012. However, domestic and international conditions clearly remain challenging for manufacturers and they are unsurprisingly cautious over the outlook.

Furthermore, it still looks highly likely that manufacturing output will see appreciable contraction in the fourth quarter and will weigh down on GDP. Given that manufacturing output plunged 1.3% month-on-month in October with most sectors suffering, it will have taken a substantial pick up in output in November and December to prevent marked contraction in the fourth quarter and the survey evidence from the CBI and the purchasing managers suggest this has not happened.


Leaders arrive for pre-Council summit

The leaders are arriving for an enlarged summit of the European People’s party. This involves EU and non-EU heads of state and government and opposition leaders along with the presidents of the European council and the European commission, to prepare for the European council later in the day, which continues tomorrow.

And among the star guests, none other than former Italian prime minister, Silvio Berlusconi.


The Eurogroup has issued its statement on Greece and one on Cyprus. Some highlights…

Re Greece:

The Eurogroup welcomed the result of the debt buy back operation, which will lead to a substantial reduction of the Greek debt-to-GDP ratio.

The Eurogroup reaffirmed that this, together with the initiatives agreed by the Eurogroup on 27 November and full implementation of the adjustment programme, should bring Greece’s public debt back on a sustainable path, to 124% of GDP in 2020. Greece and the other euro area Member States are prepared to take additional measures, if necessary, to ensure that this objective is met.

Re Cyprus:

We are confident that agreement on the programme could soon be reached, and we call on the international institutions and Cyprus to finalise negotiations accordingly.


Lagarde confirms IMF’s participation in Greek aid

The IMF chief, Christine Lagarde, has confirmed that she will recommend the disbursement of aid to Greece.

She also says additional debt relief for Greece was possible.

I expect that a Board meeting could take place in January, for the first review of Greece’s Fund-supported program.

These steps will ensure that Greece’s debt-to-GDP declines to 124% by 2020 and to substantially below 110% by 2022, she adds.


Can we have a decision on Cyprus in January? asks another journalist. Juncker says he doesn’t want to be held to a timetable but they will work to find a solution as quickly as possible.

And with that they are gone. With Juncker in this kind of mood it’s not wonder the meeting was so quick.


Juncker is asked when there will be discussions over who will take over from him. He says:

I am still alive. I will talk to Van Rompuy today and all the initiatives needed will be taken.


Juncker is being rather laconic in his responses. On Cyprus he says:

I don’t want to draw an alarming picture of Cyprus. The problem of Cyprus is serious and we are tackling this problem in a serious way.


Juncker says it is not certain that we will need additional measures to help Greece get its debt down. But if we do we are prepared to use them. He said the IMF is, of course, participating in distributing aid to Greece.


Klaus Regling, chief executive of the bailout fund the EFSF, says the fund has issued bonds worth €120bn this year. Half of that raised directly in the markets. €40bn in long-term, €20bn in short-term bills.


So total aid paid out to Greece between now and March will be €49.1bn, which all falls within the overall €109bn package previously agreed. €34.4bn of that will be disbursed in December.


We also discussed a reform programme for Cyprus. The Cypriot authorities have moved swiftly to adopt measures. An encouraging sign.

We are now looking forward to receiving final results of due diligence on Cyprus’ banking sector in January.

After focusing on disagreements in negotiations on single supervisory mechanism for eurozone banks, let me ask you how many people would have believed that we could have agreed this so quickly.

Today we have put in an essential block of the banking union.


We hardly made it to the full time (of the meeting) – only 90 minutes long, says Rehn. (They are obviously very pleased with how short this meeting was.)

He said the decision to release aid to Greece will open the way for a return of confidence of growth and job creation for the Greek people. As we approach the end of this turbulent year, Cassandras have been proven wrong. (Plenty of classical references here). Greece has got its programme back on track. Eurozone has made good on its word to support Greece.

Message to Greece (from Rehn) – the EU stands by you and will continue to do so.


They were also discussing Cyprus. We consider that progress has been made towards a possible macro financial assistance programme for Cyprus. We welcome their commitment to reforms – Juncker.

He’s now passing over to Olli Rehn.


More money will be disbursed subsequently. We are prepared to take additional measures if necessary to ensure Greece gets on a sustainable path to reduce deb – Juncker.


This was the shortest meeting ever of the Eurogroup, says Juncker. With the strong resolve of the Greek government we are convinced the programme is back on track. We are willing to take measures to make sure it stays that way.

Money will be flowing to Greece as early as next week.


Eurogroup approves aid to Greece

As expected the Eurogroup has agreed to disburse a €34.4bn tranche of aid to Greece (plus more early next year), which has been delayed since June.


Live stream from Eurogroup press conference

This morning’s Eurogroup meeting of eurozone finance ministers is over and its president, Jean-Claude Juncker, will give a press conference shortly alongside European commissioner Olli Rehn. You can watch it live here and we’ll be reporting all the key points.


Bersani says Berlusconi is out to distract the public

The head of Italy’s centre-left Democratic party, Pier Luigi Bersani, said Berlusconi’s goal is to distract the public, but that he will lose.

Bersani, whom polls tip to be Italy’s next leader, said the rigour brought in by current prime minister, Mario Monti, “must continue”. That sounds a touch contrary to his assertion yesterday that Monti should not run in the next elections. He also warns that Germany is at risk of a bubble with negative real rates.


Reports are coming through on Twitter that the Dutch finance minister, Jeroen Dijsselbloem, says banks will be restructured before the ECB takes on its role as banking supervisor.


Italian borrowing costs down

And Italy’s borrowing costs have also come down. It sold a 2015 bond at a yeild of 2.5% compared with 2.64% in November, the lowest yield since October 2010.


Greek unemployment rate hits 24.8%

And still the Greek unemployment rate continues to climb. Data shows almost one in four are unemployed, with joblessness up at 24.8% in the third quarter from 23.6% in the second. That is up from 17.7% this time last year.

Unemployment among young people (between 15 and 24 year olds) is 56.6%.


The president of the European commission, José Manuel Barroso, has welcomed the deal as a “crucial and substantive step” towards banking union.

On behalf of the European Commission, I warmly welcome this exceptionally important agreement on the Single Supervisory Mechanism reached by the Council.

Based on the proposal tabled by the Commission on 12 September, this is a crucial and very substantive step towards completion of the banking union and a timely step forward in the integration of financial supervision for the euro area and for the other Member States which the Commission hopes will also participate.

We now hope that the co-legislators are able to finalize the agreement on the Single Supervisory Mechanism as quickly as possible. I want to underline that in four months we have moved from a Commission proposal to political agreement by the Council, which demonstrates once again that the European Union has the political will and capacity to act quickly on momentous issues.


Spain’s borrowing costs come down

Spain’s borrrowing costs have come down after an auction of more than €2bn of bonds.

It sold bonds maturing in 2015 with a yield of 3.358%, down from 3.39% on 5 December

Bonds maturing in 2017 with a yield of 4.2% compared with 4.766% previously

And bonds maturing in 2040 with a yield of 5.893%.


And Angela Merkel’s fake Twitter account has an entertaining take on the EU deal.


George Osborne has been delayed in Brussels so won’t be appearing before the Treasury Select Committee to defend his autumn statement at 10am as planned. The select committee said:

No decision has yet been taken as to when it will take place. The session may still happen this afternoon, if not it will likely be next week.


Bullet points of the EU banking deal

Sticking with the banking union, Eurointelligence has provided another helpful summary of what has been agreed so far…

  • The ECB will be the regulator of banks with assets of more than €30bn, or banks constituting at least one fifth of their home country’s GDP. The thresholds were chosen to include the three biggest banks in each country. The estimates last night range from a total number of 150 to 200 banks in the eurozone.
  • The ECB can intervene in smaller banks (under a procedure that has yet to be made known, or yet to be worked out)
  • The governance structure will consist of a separate supervisory body, the ECB governing council as final arbiter, and a steering committee to solve disagreement.
  • Agreement to be finalised in February 2013 – as this requires support from the European parliament. The single supervisory mechanism (SSM) kicks in March 2014.
  • The EBA will continue to be in charge of harmonising rules at EU-level, and there will be safeguards for the non-eurozone members through a double majority – one inside the banking union, one outside.
  • No direct bank recapitalisation by the ESM until at least 2014.

It also poses some questions that still need answering:

  • Is the €30bn a fixed nominal sum, will it get adjusted over time?
  • Will banks automatically switch regime once they exceed the total? How and when this is determined?
  • Does the threshold include off-balance sheet vehicles? If No, then the arrangement would give banks an incentive to circumvent the rule;
  • Can the ECB decide whether to usurp authority over a smaller bank on its own, or does it need approval of any other body?
  • Do banks have legal redress to such a decision under national law?
  • Can the SSM give, and enforce, instructions to national supervisors?
  • Does the SSM have full access to all information held by national supervisors?

Via the FT.


Our European editor, Ian Traynor, writes of the deal from Brussels:

Another late night/early morning in Brussels, another hard-fought compromise that will be dubbed “historic”, “pioneering”, “critical” by EU policy-makers and officials. They might even be right.

After more than 14 hours of fractious negotiations, finance ministers agreed to embark on a new era of single banking supervision in the eurozone, putting the European Central Bank in Frankfurt in a position of authority over, to begin with, up to 200 eurozone banks.

The single supervisor is supposed to be the first stage of a more comprehensive “banking union”, which should also entail a single eurozone resolution authority for winding up weak banks and a common guarantee system for eurozone depositors.

These next two stages may turn out to be difficult to realise because of German-led reluctance to bow to the mutualisation of risk involved. But without them, it will also be difficult to see the new regime being effective.

That’s for the future. For the moment, despite the marathon session, a similar session last week that failed, and the tremendous frictions between Paris and Berlin over the scheme, this morning’s agreement has been relatively quick.

The idea was only first proposed in June at an EU summit when France, Italy, and Spain exploited the euro drama to hijack Germany into agreeing that the eurozone’s bailout fund could be used to recapitalise directly ailing banks, say in Spain.

The Germans were arm-twisted into agreeing, but insisted the recapitalisation could only take place if eurozone banks were placed under ECB authority. Within hours of that huge concession, the Germans got cold feet and have been rowing back ever since, seeking to delay the bank supervisor and restrict its powers and scope.

The overnight deal indicates it will be another 15 months before the new regime starts operating and probably considerably longer before any direct bank recap can take place.

It is a fiendishly complex business, legally and logistically. Six months from proposal to draft legislation and agreement among 27 governments is very quick by EU standards.

George Osborne, whose key aim from outside the eurozone, was to safeguard the UK financial sector against ECB and eurozone interference by being automatically outvoted on rule changes, standards-setting, and regulation, claimed he got a good deal for Britain.

This will all come out in the wash.

The French argued they could not tolerate a system where “Britain and some others” could exercise a veto over eurozone decision-taking. Britain argued it would not be made a hostage of eurozone “caucussing”. For the moment it looks as though neither can happen. Time will tell.

When the dust settles, it should be clearer that the eurozone has embarked on one of the biggest systemic changes in three years of fighting to save the single currency, as well as moving towards a much more integrated and federated eurozone, financially, economically, and therefore politically.


Who will pay?

And back to today’s main story, the breakthrough banking union agreed by Euorpean finance ministers in the early hours of this morning. Reuters has written a very handy factbox on the deal.

This highlights one of the big unanswered questions: who will pay? The Reuters reporters write:

Any agency [to close down failing banks] would need to be backed by a fund to cover the costs involved in winding down banks. A resolution fund provides emergency financing so that when a bank fails, those parts of the bank are kept alive to continue payments and lending, while the rest is liquidated. But Germany does not want to find itself on the hook for costs associated with closing a bank in Spain, for example, which will make it difficult to set up such a fund.

They also contradict earlier reports of a common deposit guarantee.

The third and final pillar of a banking union is a combined scheme to protect deposits to stop bank runs. But this has little political backing and there is no prospect of such a framework in the near term.


Italian CPI 2.6%

And a quick post on Italian consumer price inflation, which has come in at 2.6% for the year to November. That’s down 0.3% on the previous month, confirming preliminary estimates.


Market reaction mixed

European markets show an interesting mix this morning: shares in the southern, crisis-hit countries are up, while those in the northern, creditor countries are down. Fears that deeper integration will end in bigger bailout bills perhaps.

UK FTSE 100: down 0.2%, or 12 points at 5934

Germany DAX: down 0.54%

France CAC 40: down 0.19%

Spain IBEX: up 0.5%

Italy FTSE MIB: up 0.3%


Decision expected on Greece not Cyprus

Eurozone finance ministers are arriving for their meeting to discuss Greece and Cyprus.

President of the Eurogroup, Jean-Claude Juncker, has said on his way in that he does not expect a financial aid package for Cyprus to be agreed today but that it will probably come early next year.

I don’t think that we can find a definitive solution for Cyprus today. It will probably be done in January.

Reuters reports:

Cyprus, one of the smallest economies in the 17-nation euro zone, sought aid in June to buffer banks substantially exposed to debt-crippled Greece.

It says it has agreed a preliminary aid deal with the European Union and the International Monetary Fund.

The cost of recapitalising the island’s banking sector could be as high as 10 billion euros – more than half of Cyprus’s annual output.

But Olli Rehn of the ECB is confident of a decision on the way forward for Greece. Rather poetically, he says the Eurogroup decision will “remove clouds”.


Europe will emerge stronger from crisis – Merkel

Meanwhile, Angela Merkel has added some rousing comments to her speech to the German parliament.

She is convinced Europe will emerge stronger from its crisis, and hopes the EU will agree a roadmap for more concrete steps to strengthen competitiveness at today’s summit.

She reiterates Germany’s opposition to the long-term mutualisation of debt in any form ie Germany is not willing to foot the bill for Greek borrowing.

She says Europe cannot live on the services sector alone, but also needs industrial production.

Europe has come a long way towards stability but there is still more work to do, she says.

And on Greece, she believes the bond buyback agreed this week qualifies it for the delayed tranche of aid that the finance ministers are discussing today.


Swiss national bank keeps rates at 0%

And the Swiss national bank has kept rates on hold at 0%, as expected, but says it is ready to take further measures any time.


Today’s agenda

It’s a busy day today. It looks like the poor eurozone finance ministers will have to get up again and hold yet another meeting at 9am (after a few snatched hours of sleep), this time to agree on whether to let Greece have its next slice of aid.

The EU leaders are holding a summit in Brussels; and the ECB and IMF are holding a joint conference on fiscal governance.

  • Angela Merkel addresses Bundestag: 8am
  • Eurozone finance ministers meet on Greece: 9am
  • ECB publishes report for December: 9am
  • Italy inflation for November: 9am
  • George Osborne in Treasury select committee to defend autumn statement: 10am
  • Italy’s Democratic leader Pier Luigi Bersani (Silvio Berlusconi’s main rival) holds press conference: 10am
  • UK CBI industrial trends: 11am


More Merkel coming through on the wires (see below). She says she hopes the Eurogroup (of eurozone finance ministers) will agree today to pay out the next Greek aid tranche. Greek state and banks need the money to revive the economy.

And she says that the efforts of the Greek government to reform deserve Germany’s support. Supporting individual member states helps the entire eurozone.


Merkel hails Germany’s concessions

Angela Merkel is speaking in the German parliament and has hailed the concessions won by her finance minister Wolfgang Schäuble.

She says he managed to push through Germany’s main demands on the EU bank supervision deal. She also says she cannot overstate the importance of the deal.

It looks like this push for greater integration could make it harder for new countries to join the union. Merkel is saying the EU needs tougher admission rules for new members.


Concessions made to UK and Germany

There have been concessions made to both Germany and the UK in the new eurozone banking union. Germany was concerned the ECB would wield too much power under the new regime.

The fear was that the ECB’s dual roles of bank supervisor and guardian of monetary policy could throw up a conflict of interest. For example, the ECB might be inclined to keep rates low to prop up the banks, which may not be prudent with regards to inflation etc.

So it was agreed to introduce a mediation panel to resolve disputes with national supervisors to provide a counterbalance to the ECB’s power. That was, apparently, enough for Germany’s finance minister Wolfgang Schäuble.

The UK, for its part, was concerned that any new union would undermine the authority of the City of London, in terms of defining the capital buffers banks must have and so on.

So, it was decided that when the European Banking Authority votes on these measures, there will be a double vote: one for those in the banking union and another for non-euro countries.


There has been a long road to get to this point, with months of tortuous negotiations, culminating in last night’s meeting, which lasted for more than 14 hours.

The deal was struck in the early hours of this morning, so there were probably some bleary-eyed finance ministers staggering back to their hotel rooms just a few hours ago. (It remains to be seen if they will still be meeting later today to discuss Greece and Cyprus).


EU banking union agreed

[Correction: the agreement this morning is on bank supervision. While the rest may come at some stage, it has not yet been agreed. Apologies.]

But first some detail on the nature of the deal, which can be broken down into three main pillars:

1) A common banking supervisor

The European Central Bank will be given the power to supervise all the major banks within the eurozone, and intervene if any gets into trouble.

This could then lead to…

A common resolution scheme: This would come into play if any eurozone bank gets into trouble. The common resolution scheme would decide whether to bail the bank out or let it go bust, with eurozone governments jointly bearing the cost of any bailout.

A common deposit guarantee: A European version of the Financial Services Compensation Scheme. Anyone who puts money in an ordinary bank account anywhere in the eurozone would have their money guaranteed by a eurozone fund, up to a limit, expected to be €100,000.


Good morning and welcome to our rolling coverage of the eurozone crisis. The big news this morning is that eurozone finance ministers have agreed to give the ECB powers to police eurozone banks, marking the first step on the road to closer integration.

We’ll have market reaction, analyst comment and all the ramifications of this huge step during the day. © Guardian News & Media Limited 2010

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