EU
Europe Discusses Bank Wind Down Deal

March-09Eurozone governments are approaching a possible deal on how to close the failing banks that have emerged since the financial crisis. No conclusion has currently been reached and talks aimed at reaching a concrete deal regarding the banks are likely to continue throughout the week.

Negotiations regarding the Eurozone’s failing banks are scheduled to continue until Wednesday in order to address the European Parliament’s wishes. The negotiations could be the last step in the establishment of a European banking union which could result in a single supervisor for the Eurozone’s banks.

This would also produce a single fund to restructure failing Eurozone banks, as well as one consistent set of regulations regarding the restructuring or closure of failing financial institutions. An agreement needs to be reached by mid-April, else the slow negotiations could delay the new Eurozone banking law by seven months or more.

The European banking union is planned as a way to restore confidence between the Eurozone’s banks. Increased confidence could result in a restoration of lending that would help improve growth among the 18 countries that use the euro. Lending has currently been held back as many European banks attempt to raise more capital.

Banks based in the Eurozone hold approximately 1.7 trillion euros worth of public sector debt. Due to the assumed default of Greece and the high levels of government debt in countries such as Spain and Italy, the high levels of exposure have concerned many in the financial sector.

In order for the banking union to go ahead, it needs the approval of the European Parliament. The countries that make up the Eurozone have hesitated to hand over authority regarding banking to the EU government in Brussels, and wish to create an intensive system of assessments before governments can decide to close banks.

The negotiations will continue this week as governments and European parliament leaders reach a decision regarding bank closures.

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Government Bonds Increase Exposure for European Banks

december-23Economists are concerned that many European banks may face the same outcome as their governments. New data suggests that Europe’s banks are overexposed to the risk of a government failure, as overdependence on government bonds has put many of the Continent’s leading financial institutions in a risky position.

New figures from the European Central Bank indicate that Europe’s banks have been engaged in a large-scale purchase of sovereign bonds, which are seen by a large portion of the European economic community as a safer investment than lending. Economists believe this could create serious additional risks for banks.

Huw van Steenis, a senior analyst with Morgan Stanley, says “as lending shrinks and deposits grow, banks will invest the surplus in treasuries.” He believes that further increases in sovereign bond purchases are likely to occur, putting banks in Italy and Spain in a precarious position in which banks are affected by turbulent markets for sovereign debt, while governments are affected by the actions of European banks.

Mr van Steenis believes that the growing “feedback loop” between European banks mirrors that which grew in Iceland, Cyprus, and Ireland over the last few years, and warns that the fallout could be just as bad. Over the last two years, banks in Spain have increased their government bond holdings from 5 to 9.4 per cent.

Other banks have followed suit. In Italy, banks have increased their sovereign bond holdings from 6.4 per cent to 10.3 per cent. In Portugal, from 4.6 per cent to 7.8 per cent. Economists are concerned that the rapid surge in government bond holdings puts the Continent’s financial future at risk.

Over the next year, European authorities will perform “stress tests” of several major European banks. Sovereign debt holdings currently do not adjust risk under the EU’s CRD IV rules.

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In the words of the BoE governor, Sir Mervyn King, the EU is quite literally “tearing itself apart” and this is having a huge impact on the economy of the UK. Inflation will stay higher longer and it may not be until 2014 that the UK sees itself back to a pre-crisis economy. As a result, the Bank significantly lowered its growth forecast from the previously stated 1.2% to just 0.8% for the year.

Conversely, inflation is expected to stay above the target of 2% at least for the next year which is not good news for households that are already struggling financially. According to Sir Mervyn, the economy will remain slow as well as uncertain and he refers to the current crisis in the eurozone as being a ‘storm’ heading in the direction of the UK.

He goes on to say that the UK has survived the biggest downturn since the 1930’s and that the loss of the eurozone, the UK’s leading trading partner, there will be a huge impact on the economy at home. There is no way to ‘quantify’ what the dissolution of the EU would do to the economy of Great Britain, but it will certainly have a dire consequences.

Although there is no way of telling when this dark ‘cloud’ will move past, again his metaphor, but he has every reason to expect that growth in the UK will indeed recover and that inflation will drop once again. Sir Mervyn then says that Great Britain will be ‘buffeted by winds’ and there is no way to know from which direction they will come, but come they certainly will.

In the end, recovery is made harder because of the uncertainty in the EU, but once the story unfolds, it will be easier to get a grasp on what needs to be done.

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Market news is not good as investors are spooked over recent events in Greece and France. Both countries have been at the heart of the ever-present debt crisis in the EU, but recent events have plunged them even further into controversy. There are still fears that Greece will default and exit the EU whilst the recent triumph of France’s Hollande on an anti-austerity ticket.

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New fears that Spain is succumbing to debt crisis

Although there has been some degree of progress in both Greece and Italy, it is feared that Spain will be the next sovereign nation in the EU to succumb to the debt crisis. Around the world markets began gaining as news spread that political leadership in Greece and Italy had been revamped.

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France and Germany may be undermining the eurozone

Recent news suggests that France and Germany may be seriously planning to form a new zone within the eurozone, further deteriorating the UK’s influence in that region. Although some sources believe that France is the main ‘instigator,’ there is growing evidence that Germany may well be a party to what could very well lead to the demise of the EU as we know it today.

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IMF and US Treasury Officials Express Doubt over Europe’s Plan to Deal with Debt Crisis

According to US Treasury Secretary, Tim Geithner, European leaders “have more work to do” in regards to devising a plausible “grand plan” that can effectively deal with the eurozone crisis and restore confidence in financial markets.

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The Great Debate: Should Greece default inside or outside the eurozone?

As recently as the beginning of this summer, financial analysts were still debating whether or not Greece would default. The line was drawn and the battle raged as politicians and financial analysts took sides. Some said a default was imminent whilst some claimed Greece would never default.

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