Now that the Slovak politicking is over it looks like we will see ratification of the July 21 EFSF changes:
Slovak parties reached an agreement to approve Europe’s enhanced bailout fund, paving the way for a second vote this week that will complete its ratification process across the 17 euro countries.
A second vote will be held on the European Financial Stability Facility tomorrow or on Oct. 14 after lawmakers failed to approve the legislation yesterday, Robert Fico, head of the largest opposition party Smer, said today. Party leaders agreed on elections to be held on March 10, he said.
“We will proceed with ratification of the bailout mechanism immediately after the constitutional law on early elections is approved,” Fico told reporters in the capital, Bratislava today. The timing of the EFSF vote depends on how quickly lawmakers get through tomorrow’s election vote, said Mikulas Dzurinda, the chairman of Prime Minister Iveta Radicova’s party.
And not a second to soon… for the banks:
European authorities plan to set a high-than-expected capital threshold for the region’s banks an give them six to nine months to achieve that level or face government recapitalisations, senior regulators said.
The European Banking Authority’s board of supervisors has approved in principle the idea that banks should be made to raise their core tier one capital ratios – the key measure of financierl strength – to 9 per cent, well beyond the current expectations of banks and analysts, even after absorbing writedowns on the value of their sovereign debt holdings.
But officials cautioned that the 9 per cent threshold – which could see dozens of banks forced to raise a combined Euro 240 billion, according to Morgan Stanley estimates – is still being debated in national capitals and Brussels. Some senior officials at the European Commission, due to unveil its own plan for bank recapitalisations, support the higher levels and could announce their backing today.
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The EBA, which has given banks a deadline of Thursday to submit up-to-date sovereign exposure data, is expected to complete its assessment of the capital shortfall by next week.
Estimates on just how much capital the European banking system will need under these new guidelines vary depending on the haircut they are forced to take on sovereign debt and what the final capital ratio is negotiated down to. I have seen estimates vary from €100bn all the way to €413bn depending on the “tweaking” of those parameters and the assumptions behind them.
If comments by the German Finance Minister are anything to go by then the hit on the sovereign debt is going to be on the high side:
Greece’s overall debt level must be reduced enough to give the country a better outlook if it is seen as unsustainable, German Finance Minister Wolfgang Schaeuble said on Wednesday.
Euro zone countries may ask banks to accept losses of up to 50 percent on their holdings of Greek debt, officials said earlier on Wednesday, as part of a grand plan to avert a disorderly default and try to end a crisis that threatens the world economy.
“If Greece’s debts are really unsustainable … then they must be reduced enough to give Greece a better outlook,” Schaeuble told a party meeting of his Christian Democrat party.
“This can’t be left to taxpayers alone,” he added.
“I know that the participation of private creditors is not welcomed by the markets, but there is no way around having the private sector contribute … if it is to be a sustainable and democratic process.”
Schaeuble’s statements are reminiscent of the comments he made all throughout this crisis and highlight the major point of contention between France and Germany over what to do about this crisis. Schaeuble has been steadfast in his comments on any form of leveraging and/or expansion of the EFSF, and he continued that overnight:
German Finance Minister Wolfgang Schaeuble said that Europe won’t take the “easy way” of “cheap money” to deal with its crisis.
“It has to be clear that we won’t go the easy way of using the printing press or betting on inflation,” Schaeuble said today in remarks in Berlin. “We mustn’t go down the path of cheap money.”
“We can study on the other side of the Atlantic that another way — even with a totally different economic dynamism – – has obviously reached its limits,” he said.
“It is not a pure coincidence that Lehman Brothers had its origins in the U.S. with the subprime crisis. Behind that was the political attempt to solve important tasks of social policy — wider wealth distribution, integration of the socially- underprivileged — by means of monetary policy. This is a dangerous attempt. We can’t evade the difficult political processes by taking the monetary policy short-cut,” said Schaeuble.
So once again we are seeing Europe setting itself up for a Catch 22. Under the new stricter EBA guidelines and sovereign haircuts many European banks will claim they need to lean on the EFSF and lobby for it to be leveraged, while the Germans will resist this. If the banks win then there is less capital available for sovereigns, if Germany wins then banking system remains unstable. This situation ignores the fact that the EFSF in its current form is not big enough to save the larger periphery nations, the macro-economic dynamics of Europe continues to indebt the periphery even as they are being bailed out and Europe as a whole is now slowing.
In a recent interview with German newspaper Handelsblatt Eurogroup Chairman Jean-Claude Juncker set out 10 steps to save Europe:
1 – “(Release) the next tranche, if that’s possible”
2 – “Ascertain the sustainability of Greek debt, otherwise we have to think about other steps that we can only take if we have given thought to all the consequences of those steps — to those outside Europe as well.”
3 – “Strict continuation of course of budget consolidation, with automatic sanctions for repeated failures to meet budgets
4 – “A road map towards bank recapitalisation. The under-capitalised banks have to first try to get refinanced on markets. If that does not succeed, states have to consider whether they can jump in to make available the necessary capital.”
Tax payers should get dividends for rescuing banks.
“We cannot simply hand them the money. We need to make sure that those who provide capital in whatever form are also represented in the decision making bodies — in the supervisory board, the board of directors, in management — and that we participate in the profits.”
5 – Introduce a financial transaction tax
6 – “A growth programme for so-called struggling countries.”
7 – “A different tone in Europe on budgets. It is not acceptable that European Union countries are divided into those who give and those who take.”
8 – “Stronger regulation of financial markets”
9 – “A new way to deal with ratings agencies.”
10 – “We need an economic government. I’m delighted that the number of those supporting this idea has grown rapidly.”
These are admirable goals, but if Europe has shown anything in the last 2 years it is that changes are painfully slow and highly politicised. This is why policy is always chasing down the crisis not heading it off. I do think it is important to have a long term strategy to save Europe but as a time when there are so many unknowns about exactly what the Merkozy plan actually is, this sort of discussion may well be setting unrealistic expectations about what is actually deliverable under the parameters Europe continues to set itself.
Given the equity markets have been rallying for over a week on a “plan for a plan”, it could well be that the actual plan turns out to be far less spectacular than what is now expected. The German Finance minister is quite obviously trying to talk down those expectations, in my opinion it would be prudent for the rest of the Eurocrats to join him at this time.