Situation as messy as ever as last month's 'breakthrough' is forgotten

Tue, Jul 10, 2012, 01:00

ANALYSIS:Euro zone finance ministers gathering in Brussels must clear the air – and do so quickly

EURO ZONE finance ministers gathered last night in Brussels in a bid to iron out lingering differences over a summit deal two weeks ago to intensify the battle against the debt emergency.

The mood has turned since heads of state and government resolved to provide direct bank aid to Spain, reopen Ireland’s bank rescue and cleared the way for the euro zone bailout funds to buy up Italian bonds.

Even as Michael Noonan pressed for a rapid new banking deal, Ireland was not the main event last night.

After a few days of respite from the turmoil, Spanish and Italian borrowing costs have slid again into dangerous ground as the doubters in Helsinki and The Hague raise questions over the summit agreement.

Amid growing confusion over the impact on the Spanish national debt of direct European aid for the country’s banks, diplomatic sources spoke of the need for ministers to clear the air and to do so swiftly.

Over the weekend Italy’s unelected leader Mario Monti implicitly rebuked Finnish minister Jutta Urpilainen for threatening to leave the euro rather than pay the debts of other countries. In Monti’s account this kind of loose talk weighs heavily on his all-important bond yields at a vulnerable time.

Urpilainen wasn’t saying anything as she arrived for the talks. The word in the corridors was that economics commissioner Olli Rehn, a fellow Finn, would act as “bridge-builder” between the loquacious minister and the grumbling Italian technocrat.

While euro group members are routinely warned that verbal discipline is sacrosanct, many seem to relish breaking the commandment.

Then there is the matter of the bailout for Spain’s banks.

A senior European official said on Friday that the ministers were poised to sign a draft memorandum of understanding in anticipation of a final deal later once new stress test results came in. The suggestion was that this could be done via teleconference. However, Spanish minister Luis de Guindos landed into Brussels saying yet more round-table talks would be required on Friday week to seal the deal.

This was no wonder as the actual plan for Spain is shrouded in ambiguity.

The European official said Spanish banks would still need a sovereign guarantee even after loans from the EFSF temporary fund were transferred to the permanent ESM fund.

Raising questions over the summit commitment to break the link between sovereign and banking debt, the official said that would happen only in the distant future after a new European bank regulator took office.

Asked about this yesterday, Mr Rehn’s spokesman took a contrary view.

“I would like to clarify that there will be no need for a sovereign guarantee for banks being directly recapitalised by the ESM, which, I repeat, is something that we will be able to move to once a single supervisory mechanism is in place.”

The key point is that near-term aid to sever any sovereign-bank connection is still very much in play, practically the opposite of the impression given by someone else only three days previously.

Yet the precondition of a functioning new regulatory regime still holds, raising abundant political and technical questions for bedraggled officials. Whether these can answered by the end of the year – as decreed by Europe’s leaders – remains in doubt.

At the same time, another bout of haggling over Jean-Claude Juncker’s new term as euro group president raised questions as to whether the top seat would fall vacant when his current mandate runs out in a few days.

In spite of last month’s big “breakthrough”, the situation is as messy as ever.

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