The summit was told a ‘truly co-ordinated approach at EU level’ is needed on the EU-wide guarantee of bank bonds
SUMMITS FOCUS minds. Before they take place, political leaders and their bureaucrats think harder about what they want from the meeting and how they can achieve it. Contact among the participants intensifies as the date approaches.
A basic rule of summit diplomacy is to ensure a tangible outcome is delivered, otherwise expectations are dashed, credibility is eroded and time wasted. Occasionally summits are called off if it appears that the participants cannot produce a worthwhile outcome.
EU heads of state have held not one but two full-scale summits in just four days. That they have been prepared to court failure and to expose themselves to ridicule twice says two things: first, this crisis could hardly be more serious; second, disagreement on how to address it remains enormous and possibly insurmountable.
As of 10pm last night, leaders in Brussels had made announcements on only one of the planks that could undergird a comprehensive plan worth the name – about Europe’s banks.
Since the euro crisis moved into end-game in July, they have been suffering a partial credit freeze.
Details were limited last night but last night’s banking plans did amount to something new, in addressing both liquidity and solvency problems.
Liquidity refers to banks’ funds, mostly made up of customer deposits and bonds of various kinds. These funds are used to conduct their daily operations, such as filling ATMs and issuing mortgages. In recent months, generalised panic about Europe’s banks has made it more difficult and more costly for banks to raise these funds via bond-issuing.
EU leaders indicated last night that governments would guarantee bank bonds. In 2008, many countries did this, including Ireland, whose guarantee was the most comprehensive.
That led to accusations that the Cowen administration was attempting to attract scarce funds to Irish banks at the expense of their counterparts elsewhere in the bloc. Last night the leaders said that in order to avoid a repetition of 2008, when different kinds of guarantees led to friction, a “truly co-ordinated approach at EU level” would be needed this time.
Bank solvency issues were also addressed last night. Banks can become insolvent if they suffer big losses on their assets (mortgages, loans to businesses and instruments that can be sold easily and quickly if they need cash, such as government bonds).
In order to avoid insolvency, they are obliged by law and regulator to hold reserves of capital to soak up these losses.
The current bout of solvency fears has its root in the hundreds of billions of euros of Greek government bonds scattered around the European banking system. In order to deal with losses on these bonds, and the amplified effects on confidence caused by the uncertainty about who will take the losses, governments last night set deadlines for raising extra capital.
That is some advance, but not a big one, particularly as there was no new detail on how the extra capital would be raised if private investors were not prepared to plough it in.
As a last resort, the bailout fund set up almost 18 months ago – the European Financial Stabilisation Fund – will be tapped to recapitalise banks, the summit confirmed last evening.
Although many wheezes have been proposed to add to the EFSF’s capacity in recent weeks and months, euro zone leaders were still working on a deal late last night on how it could be strengthened.
But almost nothing that they could come up with will do much to fix its main flaw – it is an inherently fragile construct because its foundations rest on the triple A credit ratings of just six of the 17 euro zone sovereigns who retain that exalted status.
Of the six, the microstate Luxembourg is rendered irrelevant by its size, Austria and Finland are too small to really count and the Netherlands makes a difference only at the margins.
That leaves Germany and France, the euro zone’s first and second largest national economies respectively. The latter is flirting with a downgrade of its credit rating. A costly public recapitalisation of its Greece- exposed banking system would bring a downgrade closer.
If it loses its triple A status, the second-most important foundation of the EFSF crumbles. This creates the bizarre situation whereby France may end up having to tap the EFSF to save it. Things get curiouser and curiouser in Europe.
None of last night’s banking announcements affects Ireland in any meaningful way. The Irish State’s guaranteeing of new bank bonds would not be worth much, given its own debt and funding position, while the new capital targets are lower than those already imposed on the pillar banks in March.
Only in the event of even more capital being needed than is anticipated under the current worst-case scenario could Ireland tap the EFSF and nobody can wish for that.