Madrid and Paris stress urgent need for banking supervisor

Thu, Jul 26, 2012, 01:00

SPAIN AND France stepped up pressure for a speedy delivery of a common European bank supervisor as a senior central banker hinted at a policy shift to expand Europe’s firewall against the crisis.

Some of the pressure on Spanish and Italian borrowing costs eased after Austrian central bank governor Ewald Nowotny acknowledged there were arguments in favour of giving a banking licence to the incoming European Stability Mechanism (ESM) permanent fund to boost its lending capacity.

This notion has been promoted by France but it is resisted by Germany and its triple-A-rated allies and by the European Central Bank, on whose governing council Mr Nowotny sits.

“There are pro-arguments for this,” Mr Nowotny was quoted saying by Bloomberg. “There are also other arguments, but I would see this as an ongoing discussion.”

The ESM would be able to draw loans from the ECB if it was given a banking licence but Mr Nowotny said he was not aware of specific talks on the matter within the bank.

Even so, such remarks from one of the most vocal members of the ECB decision-making council were perceived to be significant.

Two-year borrowing costs for Spain and Italy dropped, but a decline in Spain’s 10-year bond yield to 7.38 per cent still left it at an unsustainable level.

The latest developments follow a threat to the top credit rating of Germany, the Netherlands and Luxembourg from Moody’s credit rating agency.

As a result, Moody’s changed the outlook on the triple-A rating of the European Financial Stability Facility temporary fund to “negative” from “stable”. The EFSF uses the triple-A ratings of its main euro zone backers to support the top rating it deploys to borrow at preferential rates for bailouts.

“The EFSF’s rating is sensitive to changes in the ratings of Aaa countries with large EFSF contribution keys, ie Germany, France and the Netherlands,” Moody’s said. “Moreover, a weakening of the commitment among euro area member states to the EFSF could also have negative rating implications.”

Amid market doubt over the viability of Europe’s bailout plan for Spain’s banks, the Spanish economy minister and the French finance minister said the new supervisor should be established by the end of this year.

While such a timetable is considerably more ambitious than many diplomats believe feasible, the pressure for rapid progress reflects the fact that direct European aid for Spanish banks is conditional on the new supervisor being up and running.

The Spanish state is on the hook for the entirety of the bank recapitalisation bill until then, fanning market concern it will soon need a full-blown sovereign bailout to cope with deepening recession and an increasing clamour for emergency aid from autonomous regional governments.

The single banking supervisor – operating within the ambit of the ECB – is an essential precondition for the ESM to take direct equity stakes in Allied Irish Banks, the Bank of Ireland and Permanent TSB.

“Our common strategy for the stability of the euro area includes the adoption, by the end of this year, of a single supervisory mechanism for banks of the euro area, involving the ECB,” said Luis de Guindos of Spain and Piere Moscovici of France after talks yesterday in Paris.

“We expect proposals by the commission by September and commit to a swift negotiation. This supervisory mechanism will open the way for direct recapitalisations with appropriate conditionality.”

These remarks, echoing a joint statement on Tuesday night by Mr de Guindos and German minister Wolfgang Schäuble, come as Spain endures record interest costs.

While not breaking any new ground, such sentiments reflect the view that the Spanish deal as cast should be given an opportunity to work. Eventual direct aid for its banks carries the potential to prevent banking debt from crippling nation states.

After they met in Berlin, Mr de Guindos and Mr Schäuble insisted Spain’s borrowing costs did not fairly reflect the strength of its economy.