Can The Eurozone Survive This Weekend?
Vicky Ford's stress levels are rising as the European Banking Authority try to solve the banking crisis this weekend. Will their plans be credible?
14 Jul 2011, 22:00
Are we heading for another banking crisis?
The Greek situation has re-focused minds on sorting out banks. You can't solve the sovereign debt crisis without sorting out the bank crisis. In many countries, not just on the periphery of the Eurozone, confidence in banks is far from solved.
The initial line from the Commission was that there could be no restructuring of Greek debt held by banks. I disagreed. It would break the primary rule of any debt restructuring that all creditors are equal. You shouldn’t let all the private creditors jump on the lifeboats leaving the public debt holders below decks sinking as the ship goes down. Furthermore the size of the Greek debt still held by private banks (around € 60 billion) is not huge in the context of the Eurozone as a whole - but the precedent of taxpayers still continuing to step in and pay out bad bank debts in a covert, piecemeal fashion two years after the banking crisis started is huge. Are banks in Europe’s highest rated countries still not able to stand on their own two feet?
Last years Bank Stress Tests were obviously a farce. I sat up into the early hours of the morning on the day of their announcement compiling a spread sheet of the results. In the months ahead we then had almost comical situation where I could literally track the nationality of an MEP submitting amendments to capital requirements legislation, through the spread sheet of results, to try work out which bank they were trying to protect.
Last year, the high values attributed to many banks’ asset books failed to predict issues like the pending Irish crisis and instead of focusing attention on large banks that just scraped through the tests, the media and markets focused on the handful of tiny banks that failed.
Since then many banks have shored up their capital bases. But when I was told a couple of months ago that this years stress tests were not going to stress sovereign debt held by banks on their banking books it felt like another farce brewing. There is a fundamental flaw of European legislation on bank capital requirements that banks lending to Eurozone sovereigns “issuing in their own currency” do not have to hold any capital against those loans - once a country was in the Euro their debt could no longer be re-valued through foreign exchange devaluations.
The European Banking Authority then changed its rules and now will be testing sovereign risk on both banking and trading books. Some banks are squealing saying the tests are too severe. But these are meant to be stress tests not whose towel is out relaxing by the pool tests, they should push to the extreme, squealing should be expected. On the other hand it is important to try to read the stress results with a large dose of keep calm dear. A bank that just fails the stress, or just passes it, is not necessarily bust - though it is likely to need a remedial action plan or else suffer a crisis of confidence.
The stress tests however are not just a numerical exercise. Greece does have too much debt on its books, though I hope that it will be Greece's choice how, when and if to restructure. Portugal and Ireland have made laudable efforts to bring their deficits under control, but the recent rating downgrades of Ireland and Portugal reflect that they too many be carrying too much high interest debt. Market confidence is paper thin in Spain and Italy, even though Spain’s national debt doesn’t look like an Everest sized mountain and Italy has some of the lowest private sector debts around. For every sovereign borrower there is a multitude of lenders - do the banks in other wealthier countries have the capital to weather their exposures?
This year I will again stay up late and read through the results. I will start by looking at the big banks in big countries. I will be looking out for the statements on the remedial action backstop plans each country is meant to have in place to cope with banks that fail. Will the plans be credible? This will doubtless be a busy weekend in board rooms, central banks and between finance ministers. Will the decisions made over the weekend stand the stresses of the markets when they open on Monday.
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Vicky Ford
Vicky Ford MEP is the Conservative Party spokesman on Industry & Research in the European Parliament.
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But what happens if the markets react badly? Since the EU reaction to Ireland being downgraded by dismissing the agencies as unimportant, I've been trying work out what it would take to bring the euro down. Its long past the point where we could pretend the euro was a strng currency, an alternative to the dollar as a reserve currency even. But I am beginning to wonder what would be required to actually bring it down.
14/07/2011 23:19But what happens if the markets react badly? Since the EU reaction to Ireland being downgraded by dismissing the agencies as unimportant, I've been trying work out what it would take to bring the euro down. Its long past the point where we could pretend the euro was a strng currency, an alternative to the dollar as a reserve currency even. But I am beginning to wonder what would be required to actually bring it down.
14/07/2011 23:19But what happens if the markets react badly? Since the EU reaction to Ireland being downgraded by dismissing the agencies as unimportant, I've been trying work out what it would take to bring the euro down. Its long past the point where we could pretend the euro was a strng currency, an alternative to the dollar as a reserve currency even. But I am beginning to wonder what would be required to actually bring it down.
14/07/2011 23:20But what happens if the markets react badly? Since the EU reaction to Ireland being downgraded by dismissing the agencies as unimportant, I've been trying work out what it would take to bring the euro down. Its long past the point where we could pretend the euro was a strng currency, an alternative to the dollar as a reserve currency even. But I am beginning to wonder what would be required to actually bring it down.
14/07/2011 23:20But what happens if the markets react badly? Since the EU reaction to Ireland being downgraded by dismissing the agencies as unimportant, I've been trying work out what it would take to bring the euro down. Its long past the point where we could pretend the euro was a strng currency, an alternative to the dollar as a reserve currency even. But I am beginning to wonder what would be required to actually bring it down.
14/07/2011 23:20But what happens if the markets react badly? Since the EU reaction to Ireland being downgraded by dismissing the agencies as unimportant, I've been trying work out what it would take to bring the euro down. Its long past the point where we could pretend the euro was a strng currency, an alternative to the dollar as a reserve currency even. But I am beginning to wonder what would be required to actually bring it down.
14/07/2011 23:20But what happens if the markets react badly? Since the EU reaction to Ireland being downgraded by dismissing the agencies as unimportant, I've been trying work out what it would take to bring the euro down. Its long past the point where we could pretend the euro was a strng currency, an alternative to the dollar as a reserve currency even. But I am beginning to wonder what would be required to actually bring it down.
14/07/2011 23:20But what happens if the markets react badly? Since the EU reaction to Ireland being downgraded by dismissing the agencies as unimportant, I've been trying work out what it would take to bring the euro down. Its long past the point where we could pretend the euro was a strng currency, an alternative to the dollar as a reserve currency even. But I am beginning to wonder what would be required to actually bring it down.
14/07/2011 23:20But what happens if the markets react badly? Since the EU reaction to Ireland being downgraded by dismissing the agencies as unimportant, I've been trying work out what it would take to bring the euro down. Its long past the point where we could pretend the euro was a strng currency, an alternative to the dollar as a reserve currency even. But I am beginning to wonder what would be required to actually bring it down.
14/07/2011 23:20oops. It didn't seem to take. Can I delete multiple comments?
14/07/2011 23:23Notice that Vicky Ford devotes her entire article to analysing how the Euro can be made to survive and the ECB to work better. There is no sign of concern for the plight of the member states which are being forced to take unsupportable loans.
There is no discussion of the democratic deficiency in forcing the peoples of the member states who are to provide the funds. The German people are not consulted but recent elections suggest they do not want to bear the reported EUR100 billion a year to maintain an EU with fiscal integration (aka the north subsidises the south).
There is no reference or consideration of the plight of Britain, which chose not to join the Euro but is nevertheless paying for it, despite a clear majority now responding to pollsters' questions "Better Off Out".
At the IOpen Europe debate on Monday Ms Ford took a similar line to that of the integrationists from the FT and Barclays Capital. It was left to Álvaro Nadal MP, Secretary of Economy and Employment of Partido Popular (PP) in Spain to inject some realism into the debate (albeit from a pro-EU stance). Only Megan Greene made it clear that the choice was between fiscal integration and a breakup of the Euro.
Fudged banking stress-tests and yabs (yet another bailout) will not solve the problem. They will make it worse for the insolvent members and provoke civil disorder which Ms ford should be working to avoid.
15/07/2011 10:27Andrew - that is a bit harsh as I don't at any point mention the ECB or "how the Euro can be made to survive". Indeed I completely agree that fudged banking stress-tests and yet another bailout will not solve the problem. And said so on Monday. I also mentioned the ECB's provision of liquidity to banks across Europe as a "can of worms".
As for fiscal integration this is one of the areas which I and the Conservative and Reformists Group in the European Parliament continually oppose - including no European level taxes. On Monday I also told the audience that the use of common "Eurobonds" to jointly guarantee the debt of other countries was in my view a fiscal transfer (although this does not directly involve the UK as we are, thankfully, not in the Euro).
I agree that there is a democratic deficiency in the bailouts. Indeed forcing the UK through the qualified majority voting system to participate in the EFSM to guarantee debts of Eurozone countries goes well beyond the legal basis of the treaty. I do NOT agree with the Federalists that the way to correct this democratic deficit would be to give more powers to the European Parliament and European Commission.
However this article is about bank stress tests. If they are fudged again they will not solve the banking crisis let alone the sovereign debt crisis.
15/07/2011 13:06http://www.bbc.co.uk/news/business-14169940
EIGHT BANKS FAILING,but what if they changed the parameters ? During a visit to Brussels in 2008 for London Chartered Accountants we were given a talk by Commission officials who had been strees testing banks.British and Swiss banks fared well but according to the EU boys in suits many of the continental ones were a bit iffy.In fact one major German bank was bust using certain parameters.I do hope the stress tests incorporate sophisticated sensitivity analysis.
15/07/2011 17:56It's interesting to see (from a Euro country) how this discussion hardly exists outside of the UK. Partly that may be because no one really wishes to consider the consequences, but the fierceness with which many in the UK *wish* the Euro to fail does amaze me.
16/07/2011 09:41I don't know anyone here who has wished for the Euro fail. I do know lots of people who believe the Euro as already failed and that what we are witnessing now is the fall-out from this. Every fudged respones to today's crisis, sows the seeds of the next (deeper) crisis We will all have some real horrors to face soon, but the longer that the inevitable is postponed, the worse it will be. The sooner it is dealt with, the sooner we can start to recover from it.
Now would be a good time to concentrate on a future EU that is structured to reflect the diverse wishes of the people's of Europe. Political union for those that want it, a free trade zone for those that don't.
16/07/2011 10:44There is certainly a 'I told you so' element there, however. And a brief glance at recent financial history tells you that that isn't always called for.
To be sure, the EU hasn't only brought misery, on the contrary. Especially a lot of legal harmonisation has done many countries a world of good. But the EU's growth rate and ever-increasing bureaucracy are caving in on themselves, and the political inability and unwillingness to act on that has brought this whole sorry mess about. The Euro crisis is only the most visible sign of a much wider problem.
16/07/2011 10:53The stress tests this weekend will have the same impact as the last ones. A few Unknown Spanish and German banks. We had the golf and cycling on TV on the trading floor. The stress tests had very little impact because we know they don't test fir sovereign defaults.
The big event recently was watching Trichet blazenly state "we at the Euro say Non to default". Or Put another way I can buck the markets.
If anything the stress tests will signal the REAL failing banks relaxing their guard. They will see this as a time to ask for a bailout because the ECB can say they had published the tests and therefore say "non to see them defaulting too"
17/07/2011 09:25Sorry I just noticed you're a Euro MP. Unfortunately you just don't seem understand the structure of the actual situation. Ireland, Portugal and Greece are involent. If you look at their tax receipts they can't pay for their debts and never will do. Italy is almost insolvent too. I work on a trading floor and I can tell you that is the reality. Please dont think otherwise.
The best political commentary was by Anthony Hilton in the Evening Standard last week who said Germany is to Greece as London is to Cornwall. We all know Cornwall is insolvent, it receives money from London. If Cornwall could lower it's exchange rate we would all pour money into it for cheap houses and holidays.
Greece is poor because it shares the same currency as Germany but not the same infrastructure, culture or resources. The European Union has made the peripheral countries poor (by definition). This is what the Euro has done. Without political consensus by Greeks to stay poor or Germans to subsidise them the Euro won't work. It is obvious. It has been obvious to me since the Euro was first suggested. Why has it taken a crisis in a massive global scale to show a few simple headed politicians selling snake oil to war fearing Europeans for us to come to this?
17/07/2011 09:45Let me put it another way. Either you believe that each region in the UK should keep it's own tax receipts or you believe in the Euro. The Euro represents elitism for tax rich regions. The Euro has created a European feudalism. The Euro has created poverty in the peripheries. The Euro has created more stresses and arguments between it's members than WW2. The Euro embodies the centralisation of wealth. The Euro keeps the poor weak and the rich powerful.
17/07/2011 09:59Can the Eurozone survive this Weekend?
Hopefully not.
17/07/2011 11:20I'm focusing on the Euro Debt Summit on the 21st of July. Whats interesting is the impasse between Trichet (saying he wont accept bonds with selective default as security to borrow against) and Merkel saying the private sector 'should' get involved (which the rating agencies say will create a standard default).
So the way around the impasse are either (1) he accepts defaults bonds (against his given authority) or (2) Merkel gets political backing to bail out Greece. Of course neither will happen.
Which leaves the issue of Trichets authority - and the Eu members allowing him to accept loans against defaulted sovereign debt. Which will kick the can further down the road by meaning the EU Central Bank is now accepting liablities directly onto the books.
So the argument will shift from whether the ECB will bail out Greece to whether Germany will bail out the ECB? As I said on John Redwoods blog - Could the ECB default - NO - because it had no liabilities. But I think the answer might soon become - possibly.
18/07/2011 10:45