European Union leaders are set to scale back promises of support for ailing banks when central euro-area bank supervision starts next year, raising questions about the scope of their crisis-fighting plan.
A June 26 proposed statement for a two-day Brussels summit dropped a commitment from earlier drafts for EU states to put “credible backstops” in place for restructuring and recapitalization before the European Central Bank conducts asset-quality reviews of lenders prior to taking command of oversight of banks in the currency bloc in 2014.
Instead, governments should “make all appropriate arrangements” before the ECB reviews, according to the draft that leaders will discuss when the summit continues at 10 a.m. today. The document also left out language describing the ECB balance-sheet reviews and subsequent stress tests as “particularly important to complete the process of strengthening bank balance sheets.”
The summit’s diminished aspirations came less than 24 hours after finance ministers struck a deal on when and how to help troubled banks. Germany led calls to limit their recourse to government funds, securing commitments that private investors should absorb losses before governments or the European Stability Mechanism, the euro zone’s rescue fund, are tapped.
Youth Unemployment
As the banking ambitions ebbed, the leaders played up a decision made during the first day of talks to spend 8 billion euros ($10 billion) on fighting youth unemployment and pledged to enlist the European Investment Bank, the EU’s project-finance arm, in efforts to steer more loans to credit-starved small and midsized companies, especially in southern Europe.
While countries such as France, Spain and Italy urged that the EIB be allowed to use maximum leverage to boost the lending volume, Germany and its allies insisted that nothing be done to endanger the bank’s AAA credit rating.
“No ambiguity: everyone is fully aware that the bank’s AAA status is essential for it to play its critical role,” EU President Herman Van Rompuy told reporters after the first round of talks concluded. “It wasn’t subject to any doubt.”
While the leaders stuck by a target of starting the lending programs in January 2014, a proposed July deadline for designing them was dropped. Germany also objected to language that implied that it would have to assume debts incurred by the EIB in lending to other countries.
Senior Debt
The summit marked the first anniversary of a commitment to break the cycle of contagion between banks and sovereign borrowers. Following the finance ministers’ deal, the cost of insuring against losses on senior bank debt fell for a third day, with the Markit iTraxx Financial index of credit-default swaps dropping 5 basis points to 163.4 basis points.
Speaking yesterday in Hachenburg, Germany, as leaders debated their statement in Brussels, ECB Executive Board member Yves Mersch warned political leaders against steps to weaken or delay progress toward a banking union.
“The different elements of banking union are bound symbiotically with each other,” Mersch said. “Forgetting or watering down individual parts endangers the success of the whole project.”
The expectation that the ESM will be ready to provide direct aid to banks when the results of the ECB’s reviews are made public was also left out of the draft.
“Banking union is, to all intents and purposes, dead,” said Nicholas Spiro, managing director at Spiro Sovereign Strategy. “EU leaders are sleepwalking to the next banking crisis. The speed at which plans for further European integration are unraveling is striking.”
