Having studied the statements emerging this morning after yet another marathon EU summit, I am still scratching my head to see what all the fuss is about.
The markets certainly believe something has agreed which strengthens the debt sustainability of Spain, Italy and Ireland with bond rates tumbling this morning. Though having said that, Ireland’s benchmark 9-year bond is presently at 6.77% down from 7.1% yesterday, but 6.8% is the same as just a few weeks ago before Spain asked for a bailout or “credit facility”. Spain’s 10-year bond is at 6.6% which is down from the 7% yesterday, but still at an elevated unsustainable level.
So has there been a Big Bang, a new dawn in Europe and the seeds of a solution to the four-year old crisis?
If there is, I can’t see it.
There is no development apparent in the announcements which will see Ireland’s bank-bailout generated debt shared or reduced. And in Ireland’s case, that’s the issue – the 40% of debt:GDP which the country is shouldering to bail out banks. What we get is a fund which will loan money directly to banks. The fund will not absorb losses. The fund will want its loans back. There is no Santa Claus.
The summit statement from European Council president Herman van Rumpuy goes as follows:
“We affirm that it is imperative to break the vicious circle between banks and sovereigns. The Commission will present Proposals on the basis of Article 127(6) for a single supervisory mechanism shortly. We ask the Council to consider these Proposals as a matter of urgency by the end of 2012. When an effective single supervisory mechanism is established, involving the ECB, for banks in the euro area the ESM could, following a regular decision, have the possibility to recapitalize banks directly. This would rely on appropriate conditionality, including compliance with state aid rules, which should be institution specific, sector-specific or economy-wide and would be formalised in a Memorandum of Understanding. The Eurogroup will examine the situation of the Irish financial sector with the view of further improving the sustainability of the well-performing adjustment programme. Similar cases will be treated equally.”
Ireland’s banks are already recapitalized, in fact we have the most capitalized banks in the EU. There is a distinct possibility of additional capital being required for Irish banks – Matthew Elderfield has flagged €4bn of additional requirements, and if the mortgage crisis results in the crystallization of losses at the banks, then that too will generate a need more capital, as will a deterioration in the economy. But there is absolutely no indication that some Santa Claus will shoulder losses in individual countries’ banks.
What does this mean for us? Nothing, as far as I can see. No-one is suggesting any new fund will foot the bill for bank losses – past, present or future losses/losses in Ireland, Spain or elsewhere. Think about it – who would pay for such losses? Germany? France? China? Santa Claus?
Ireland gets a specific mention in the summit statement. And there is a compliment for our “well-performing adjustment programme” – so far we have met all financial targets in the Memorandum of Understanding, but with another €5,000 per household of adjustment needed with the “low hanging fruit” well-and-truly picked, that adjustment programme will be increasingly difficult to comply with. But what is meant by the “situation of the Irish financial sector”? We have bailed out the banks to the tune of €68bn – €28bn of extant promissory notes, €5bn in NAMA bonds and the rest in cash, which given we are running deficits, is borrowed. There is no suggestion of a refund for cash already injected into the banks, and if there is some debt writedown on the promissory notes, who will pay for that?
What we have got today from the EU is some more L’Oreal skin cream which smells pleasant, moisturises the skin and leaves a nice texture. What we have, however, is skin cancer and these announcements by themselves don’t deal with the disease of actual bank losses.