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Thursday, June 28, 2012

And They're Off...For the 19th time

The EU summit has officially kicked off in Brussels, and talks are expected to drag on until late night. So far, little seems to be moving, and live blogs covering the summit are languishing a bit. However, courtesy of EurActiv France, we have got hold of the updated version of the draft conclusions of the meeting. The following new bits have caught our attention:

1) The conclusions now mention the €120bn 'growth package' discussed by Angela Merkel, François Hollande, Mario Monti and Mariano Rajoy in Rome last week. The total amount would be given by:
  • a €10bn capital increase for the European Investment Bank, which would boost its lending capacity by €60bn;
  • €55bn worth of structural funds which would be "devoted to growth-enhancing measures in the coming period";
  • €4.5bn investment in transport, energy and broadband infrastructure under the pilot phase of so-called 'EU project bonds'.
However, as we have already discussed here, here and here, none of these investments represents a significant boost in solving the crisis. 

2)  The updated conclusions take account of Herman Van Rompuy's proposals for a banking union (in case you missed our reaction to the proposals, click here). The conclusions state that any upcoming legislation designed to set up a banking union "should allow for specific differentiations between euro and non-euro area member states in areas that are preponderantly linked to the functioning of the monetary union and the stability of the euro area rather than to the single market."

According to the new draft, "Existing legislative proposals on bank resolution and deposit guarantees should be adopted before the end of the year. Building on these, the Commission will submit before the end of 2012 further legislative proposals on a single European banking supervision system covering all banks, a European deposit guarantee scheme and a European bank resolution scheme."

This is in line with the European Commission's objective of having the banking union up and running from 2013, which, as we noted before (see here), looks overly-optimistic.

No mention is made of short-term measures to keep borrowing costs down - which France, Italy and Spain are particularly keen on. Should these be turned into the final conclusions of the summit, markets will likely be disappointed and the ball will once again be back in the ECB's court - which, by the way, seems to already be laying the ground for a new interest rate cut, although we doubt that will suffice either.


speakeezie said...

This is a typical example of bureaucracy at work - clueless, pulling humongous figures out of thin air without any understanding of impact, implementation or outcomes or reference to the workings of the real world.

Politicians have the one stock solution to any problems, throw money at it. As is always the case much of it will be mismanaged and wasted on white elephants that will do nothing to resolve the underlying economic problems.

Their is no understanding or care of duty to future generations who will be saddled with untenable and unsustainable debt.

Only the Mad Hatter in Alice in Wonderland would take this fantasy seriously.

Anonymous said...

So who will be the first country to say "No, thanks." to the banking union and to the deposit guarantee scheme? Germany, Finland or the Netherlands?

Rik said...

Growth pact.
Is simply a joke.
When amounts get huge people generally lose oversight. What is likely happening here.
120 Bn 'buys' probably roughly 1 year 100 Bn growth. The multiplier as the US now shows is likely below 1.0. Which is roughly 1% of the EZ GDP.
Spread over say 5 years, it would be 0.2% annually. Simply rounding off amounts. Not even enough to compensate for the impossibility in the South to do stimuli as the economy is in a recession anyway and would have been stimulated under normal circumstances.
In the unlikely event that all could be done in 1 year, it won't be seen as structural by markets and investors most likely and likely be reversed the next year.
-The money will have to be borrowed, for the major part. Which is more easily said than done. The EFSF shows that that might be difficult.
-Borrowing obo of the projects alone will likely be even more difficult. Say infrastructural projects in Spain simply donot see to make sufficient revenue to pay interst not to mention repay loans. So likely guarantees by creditworthy parties will be required to get this working ( well operational, as said above in the wider context this won't be working).
Not even mentioning the fact that the South and the EU are hardly very successful in their choice of projects.

Another issue it is again mainly moving hot air. The amount of real money going in it is very marginal. Main part should be loans but the 'capital' part is likely to be dodgy as well. Where will Spain get the money from?
This is a crisis that won't be solved by only financial trickery.
The problem is that to much has been consumed on borrowed money and that process has to be reversed to get to a sustainable situation again.

Rik said...

Re using ESM funds to recap banks directly is a bit dodgy.
-It put the pressure of Spain and Italy (which simply are not moving fast enough forward). A lot of things now paid for by their respective government are simply longer term unaffordable. I donot see the advantages in cutting them first in 2020 or so, they should be cut now as they have to be and will be cut anyway.
-From an operational pov it will however have some advantages,
-Likely the countries will have to guarantee the loans anyway. More like OBS financing. However wide experience with commercial cies simply shows that markets not go for these tricks. It is not the percentage of debt that determines yields it is the total picture. And in that picture the debt is likely included whether it is on or off BS.
-Another problem being that the Eu simply doesnot have the mechanism to control banks. You might get the legislation in order in a year or so (doubtful as well as seen in the US right now), but you need the people to do it. And there are not many who can do it and most of those donot live in Ffurt (assume that will be the Headoffice). Totally unrealistic to have that working in a year or so. Extremely likely we see another dysfunctional EU/EZ agency at least for the first years.
And you need boots on the ground as Spain's Cajas show enforcing is likely the most important part not making the rules.

Rik said...

Highly doubtful if anything has been cleared re especially the guarantee scheme more likely that this is simply kicking the can for another year.

Unimpressed as well with the short term measures.

Spain and Italy donot move themselves so simply will have to be pushed. And this will mean less pushing iso more which is required.
The countries need big structural reforms not the marginal stuff we have seen uptil now.
If you look at the financial effect of the measures proposed and adopted it is simply at best 1% stuff. They however need 10% adjustments.
It is a complete wonder why so many people simply stil basically think these are realistic, probably a total lack of competence in, macro economics finance and simple bookkeeping and simple maths.

The Maastricht criteria are by far not complete, Originally there were 3 (next to the 2 present once), also a yield test. When yields of a country simply get to high compared to the frontrunners.
This is likely a much better criterion than the current 2 for the present situation. It takes all things into consideration and gives the final verdict of the markets (not perfect but a much better indicator than the ideas or political interests we see now), plus it will likely determine the costs of borrowing, which will heavily influence the economy anyway. The market might get wild, but that is clearly not an issue now, PIIGS yields have been under pressure for too long. It simply looks also from that respect that high PIIGS yields are as structural and have structural causes as can be.

Another point why it is rubbish. it simply shows again that big EZ countries can get away with things.
And that rules are not written for them. Especially now as 2 of the 4 are simply problemcases and 1 more (France) is simply borderline and moving with trend wrong direction.
While big countries determine much more if the Ez as a whole will be stable.
So simply that at this stage no legal framework will guarantee anything.

Likely we see a first positive reaction (EZ history shows) after 1 or 2 days followed by the reaklisation that it will not work and the downard trend will be continued.
Simple Pavlov. Markets see measures and starts to drivel and buys before it is checked even if the food is eatable or even not spoilt.

Rik said...

What is in my view however the most important point is that Spain and Italy simply have moved to blackmail.

-Which is first of all hardly pointing into the direction of anything stable, au contraire most likely. Makes the EZ simply look very shaky.

-Simply shows they are desperate. The Spanish guy doesnot look the brightest to say it friendly. But Monti is likely by far the most intelligent and knowledgeable PM of the EZ. If he moves to these kind of tactics (hardly anything left of strategy anymore) it is a bad sign.

-Giving in partly by the North, clear sign of weakness. Likely the political fall out first to be seen when things really will go wrong (as most people at home simpluy donot understand a thing about it) so will likely happen via a market reaction.

-If the Italians and Spanish will try to get as much as possible from the rest it simply becomes unaffordable. Look at what Greece has 'costs' as an 'investment'. If you extrapolate that to Spain and Italy you are talking several Tns.
And Greece is of course in much worse shape. However that doesnot really determine the amount necessary. That amount is simply determined by getting over the critical hurdle (basically somewhat longer over 7% on 10Y). If that happens the same train as with Greece starts to move and the costs as a percentage will be rather similar. And as an amount simply unaffordable.

Rik said...

A point I forgot to mention is that I get the idea that the main reason that Merkel has given in a relative lot are 'homeland politics'. She simply needs the growth pact to get support from the German opposition to get ESM 2.0 plus Fiscal Compact approved with a sufficient majority
Things start to get all linked and are partly determined by earlier steps. A great stage/background for the 'Rape of Europa'.