the European economy

All banks of euro area to be subject to single control mechanism since 2014

All banks of the euro area will be subject to joint control mechanism since 2014, but the European Central Bank will give time for its entry into force - these are the main results of EU summit, which ended in Brussels, Euronews reports.

Trend,

20 October, 2012

France and the European Commission arrived at the summit keen to run ahead with a new European bank supervisory mechanism to be in place by January, but the cautious German chancellor, Angela Merkel said she thinks baby steps are needed first: "Concerning the move towards banking supervision, we have decided to move forward with the principle that quality is more important than rapidity. This means we will not have a working banking supervision at the beginning of 2013."

According to the German Chancellor, it is necessary to develop a legal framework for the new system first and then specify time frame.

Under the new agreement, the ECB will have the right to monitor regulatory compliance levels of capital and liquidity of six thousand banks in the eurozone.

European Council President hailed the result of the summit as highly successful: "This is a small revolution, it means that we'll have only one supervisor for the whole Europe, who - to a certain extent - will replace all the national supervisors. If we had this in 2008 I don't think the crisis would have reached this level."

"The art of compromise has prevailed once again in Europe, but there is still much more that needs to be done, as the Spanish and Greek emergencies are still waiting," our special correspondent Audrey Tilv reports from Brussel.

Compromise to Nowhere; Germany Mulls Greek Debt Buyback; More Haircuts Coming?

Mish's Global Economic Analysis,

21 October, 2012

Late last week, following a bitter feud between German Chancellor Angela Merkel and French President Francois Hollande, a compromise of sorts was reached at the latest summit.

Please consider Berlin and Paris Compromise on Bank Oversight. 

 European leaders have reached agreement on the roadmap to a banking oversight regime in the euro zone. Following a public back-and-forth between German Chancellor Angela Merkel and French President François Hollande, the 27 European Union heads of state and government on Thursday night found a compromise at their two-day summit in Brussels.

The agreement calls for the legal framework for financial sector oversight to be completed by the end of the year, but actual implementation won't come until later. The oversight regime will be introduced "in the course of 2013," the summit's closing statement reads.

The compromise is a victory for Merkel. Both France and Spain had been emphatic that bank oversight begin on Jan. 1, 2013. Berlin, however, insisted that any such regime be thoroughly planned and resisted efforts to move quickly, receiving support from such non-euro-zone countries as Sweden and the Czech Republic. Over a dinner of roast veal and spinach, Hollande and his allies backed down.

As the week progressed, it seemed as though the conflict between Europe's most important protagonists had escalated.

The French president in particular seemed to be on the war path. He gave a joint interview to several European dailies which included what seemed to be a direct attack on the chancellor. "Those who speak most passionately about political union are often the ones who hesitate the most when it comes to making pressing decisions," he said. His feistiness did not abate immediately upon his arrival in Brussels. Before meetings began, he insisted that the summit would be focusing on the planned banking union and not on fiscal union, Merkel's preferred project. He also accused Merkel of dragging her feet on bank oversight due to the approaching 2013 general elections in Germany.

Merkel didn't shy away from confrontation either. During her speech to German parliament on Thursday prior to her departure for Brussels, she threw her support behind Finance Minister Wolfgang Schäuble's proposal, made earlier in the week, for a super commissioner to monitor, and even veto, national budgets of euro-zone member states.

Compromise to Nowhere

Bear in mind last June the Euro leaders agreed to do this by the end of this year. Now the target, minus details, "will not come until later". The oversight regime will be introduced "in the course of 2013."

Is "introduced" the same as "implemented"? The more important question is "Does it even matter".

Catch A Falling Knife

In his Weekly T-Report Peter Tchir sums up the situation nicely. 

 I would love to be able to say that Europe is fixed. It isn’t and this particular summit was particularly disappointing. They announced some vague plan to plan a bank supervisor. I still don’t understand why people really think a bank supervisor would change anything. Just think about the Spanish bank bailout. Money was supposed to be available in July, then August, then September and as far as I can tell, not a single distribution has been made.

Spain is not asking for a bailout yet, and allegedly it wasn’t even discussed. I cannot tell whether it would be worse if it wasn’t discussed or that they are lying to us and it was discussed but no conclusion was reached.

Talk about various ways to manipulate the Greek debt problem. Plans range from further punishing the PSI bonds which I think would meet with incredible resistance and accomplishes nothing, to ways to get the ECB off the hook and dump losses on ESM. I am not sure there is any particularly good solution to the official sector problem because owning 10′s of billions of mismarked bonds and loans is a difficult problem to overcome.

Then there is news that France is in more frequent disagreement with Germany. That will make any longer term solution more difficult to achieve.

So why didn’t markets sell-off more? At this stage everyone still believe the ECB will intervene with OMT and the ESM will provide some form of PCL along the lines of the IMF’s programs (my ultimate goal is to write and entire paragraph with just acronyms).

One of these days, Europe will fail to catch the falling knife. Europe has let the situation deteriorate and then the EU cobbles together some sort of program that kicks the can for a little while. OMT and ESM should be the ultimate in can kicking, but every delay means that resistance will mount. If ESM gets immediately saddled with ECB GGB losses, how will the countries react? Will there be an immediate capital call? The ESM is supposed to be leveraged at 6.66 times and any losses that hit capital would limit how much it could currently borrow.

I see a likely scenario that the market starts to question the resolve of Europe and the dissent amongst all the various organizations and the countries rewards those who bet against Europe now. I would be selling Italian and Spanish bonds here or even short.

Meaningless Plans Roll On

Slowly but surely Greek bondholder losses approach 100%. There have been several haircuts already and now the German Finance Ministry Mulls Yet Another Debt Buy-Back Scheme. 

 Germany's Finance Ministry is considering a debt buy-back as a possible way of reducing Greece's huge debt pile which threatens to rise well above a target level of 120 percent of GDP by 2020, according to German news magazine Spiegel.

The Greek government could borrow money from the euro zone's permanent bailout fund and use this to buy back its own debt, which at present trades at around 25 percent of its face value. Buying just 10 million euros worth of Greek bonds could reduce the debt mountain by 40 million, Spiegel said.

Talks would have to take place with debt-holders to see if they would accept such a price for their Greek paper.

Ho Hum

 

Would bond holders agree to another haircut? Even if they did,  would it matter? 

In a report earlier this week Tchir estimated a buyback would save Greece less than a billion euros a year.

His math "Greece pays 2% on these bonds and the first maturity is 2023. Other than meeting some artificial Troika target, this plan has no meaningful impact. Greece will have to borrow money from the ESM to pay for these bonds. Depending on the price they pay and the coupon on the new debt, they will likely receive cost savings of far less than €1 billion per annum. If the average price paid is 50% of par (seems likely once the deal starts) and the borrowing rate on the ESM loans is 2%, the cost savings would be €600 million."

There's your answer: no it would not matter.

Spanish Regional Bailout

Fund Runs Out Of Money

Just As Regional Elections

Begin

Zero Hedge,

21 October, 2012

Today is an important day for Spain, where two benchmark regions - the separatist inclined Basque region and Rajoy's own Galicia - are holding the first of many elections for regional government in what will be seen as a harbinger of popular (lack of) support for Mariano Rajoy's policies (and further explanation why any incremental steps taken by the increasingly unpopular PM to hand over Spanish sovereignty to foreign could well be his last).

AP explains:

"Two northern regions in Spain are holding elections for their legislatures Sunday in the first popular test of the central government's stringent austerity policies since it came to power late last year.

 

A deepening financial crisis and how best to address the nation's separatist tensions are the main issues facing political leaders and voters in the turbulent Basque region and in northwestern Galicia. With 2.7 million voters, Galicia is a traditional stronghold of the ruling Popular Party and the homeland of Prime Minister Mariano Rajoy, so an upset there would rock the PP regionally and nationally.

 

Spain has separatist groups in Galicia, the Basque region and prosperous and influential Catalonia. About 1.8 million Basque voters are likely to oust Socialist leader Patxi Lopez — who ruled thanks to an agreement with the PP — from the 75-seat legislature in the industrious and well-off northern region that borders France. The Basque region has been wracked by decades of separatist violence.

 

"We hope this election succeeds in bringing us peace, so we can reach an understanding between ourselves and let us know how to make concessions," said Sister Teresa Ormazabal, a nun in the Basque region's largest city, Bilbao. Lopez was jostled by demonstrators carrying placards backing violent Basque separatist group ETA as he voted early Sunday."

None of this is news. What may however surprise many is that as of Friday, Spain's "temporary" €18 billion regional bailout fund is now practically empty: a discovery which will hardly make any additional regions, who have so far dragged their feet in demanding a national bailout, happy with the Prime Minister's handling of Spain's creeping bankruptcy.

Calculating:

• Total bailout fund size: €18 billion

Bailouts already requested:

• Cataluña: €5.023 billion
• Andalucía: €4.906 billion
• C. Valenciana: €4.500 billion
• C. La Mancha: €0.848 billion
• Canarias: €0.757 billion
• Murcia: €0.528 billion
• Baleares: €0.355 billion
• Asturias: €0.261.7 billion

Subtotal: €17.179

Bailout funding left: €0.821 billion. Oops.Those who waited in hopes things will get better: tough luck.

And as we observed last week, here is why the regional "bailout issue" is only going to get much worse.

To summarize: Spanish regions: broke; Spanish banks: broke: Spain itself: on the verge of being bailed out by Europe. => Time to buy more SPGBs.

Commerzbank Plan May Spur €1 Billion in Cost Cuts

Fox Business,

21 October, 2012

Commerzbank AG's (CBK.XE) will say that it wants to avoid any increase in costs until 2016 when it published its strategic plan on Nov. 8, weekly magazine Der Spiegel reports Sunday.

Based on the assumption that costs will rise by between 3% and 5% annually, this could translate into cost cuts of more than 1 billion euros ($1.3 billion), the magazine says.

A Commerzbank spokesman declined to comment on the report.

Since September, more detail has emerged about Commerzbank's strategy plan. The bank is considering cutting between 1,000 and 1,800 retail banking jobs as part of its aim to boost the unit's efficiency, people familiar with the matter told Dow Jones Newswires in September.

A further merging of neighboring retail branches, more flexible branch opening hours and a better integration of the online banking business helped by a "low-three-digit-million euros' investment in information technology are also being considered, the individuals had said.

The German government holds a 25% stake in Commerzbank.