The Euro cup 2012 is all set for the sunday and we have Spain Vs. Italy. So It’s debt Vs debt in the euros final. As I am sure a zillion of you have already noted. In the noise of the Euro cup there was the nineteenth,
EU summit to save the Euro has, quite remarkably, agreed to do something to try and save the Euro.
The whole build-up and conclusion to this summit have brought a sense of nostalgia to some observers; the disillusionment in advance, the insistence by national leaders that absolutely nothing would be sacrificed, the dervish-like spinning of “informed sources” and unnamed officials, the late-night brinkmanship, and then the
highly personal process of striking a deal amongst heads of government.
There are unanswered questions.
Will the bank supervisor have real powers?
In particular will the bank regulator be able to close down banks, even if those banks are national champions? They should have this power, otherwise the threats that they can make are going to be largely impotent.
Ultimately, we would need to see the regulator able to force changes to banks even if they have not asked for capital injections (as happens in every other functioning monetary union). Are Euro area nations prepared to
surrender their sovereignty to the extent that “foreigners close our banks / foreclose our mortgages”?
Chancellor Merkel of Germany has declared that there must be conditions for direct bank recapitalisation.
This does not, perhaps, occasion much surprise in financial markets as Chancellor Merkel of Germany is very keen on conditions. But how are these to be imposed? There needs to be a set of “standing conditions”,
rather than case-by-case conditions, if the mechanism is to work properly – per the need for an apolitical capital injection process, outlined above.
What about those countries that have already bailed out banks with Euro area assistance?
Assuming that direct recapitalisation does not take place before the end of this year, that list is Greece, Ireland, Portugal, Spain and Cyprus (countries that have or will have used EFSF money to bail out their banking
systems). Other countries have bailed out their banks with national funds. Where does the process stop? This is absolutely critical to resolve, and of course has a huge potential impact on sovereign bond markets
(because it impacts individual sovereign debt to GDP considerations).
Who guarantees deposits?
This has not been clarified. If deposits are guaranteed nationally, but the banking regulator is supranational, why should a domestic sovereign have to bear the cost (deposit insurance) of a decision (close a bank) that
is taken at a supranational level. However there is obviously a cost burden to guaranteeing banks’ deposits at a pan Euro level – and the question “why is our tax money being used to guarantee lax foreign banks’
depositors?” is bound to arise.