Mario Draghi says the European Union risks not doing enough to prevent another financial crisis.
As bond-market pressure on policy makers eases, Draghi, the European Central Bank chief who pledged to do “whatever it takes” to save the euro, is urging EU officials to adopt the same attitude in building the next stage of a banking union.
With finance ministers preparing to meet in Brussels today before a summit of EU leaders, Draghi says their efforts to reach agreement by year’s end on how to handle bank failures may end up being too complex to work and saddled with an insufficient backstop.
“The intentions are still there, but we have not had this breakthrough whatever-it-takes moment,” said Carsten Brzeski, senior economist at ING Groep NV in Brussels. “We might be headed toward another summit of broken dreams.”
When leaders pledged in June 2012 to break the link between lenders and government debt that worsened the region’s financial crisis, investors weren’t convinced. Spanish 10-year bond yields reached a euro-era record of 7.6 percent a month later and other periphery-nation borrowing costs surged, spurring Draghi to make his promise to keep the currency intact.
The pressure on policy makers from markets is less severe now. The yield on Spanish 10-year debt was at 4.1 percent today. Italian (GBTPGR10) government bonds, another bellwether of sovereign stress, were at 4 percent, down from 6.6 percent at the height of the crisis. The yield difference between Spanish (GSPG10YR) 10-year bonds and equivalent German debt narrowed to the least in more than two years last week.
EU leaders will expect to see progress toward banking union goals as finance ministers race to meet the year-end deadline for the resolution-mechanism agreement. Any slippage risks missing the chance to adopt the regulations before European Parliament elections in May.
The ministers emerged from talks at about 2:30 a.m. in Brussels today claiming victory on one sticking point -- how to connect a public backstop to their planned central resolution authority. None of the ministers offered details of what EU Economic and Monetary Affairs Commissioner Olli Rehn called a “crucial breakthrough.”
Current proposals would create a board of national representatives and EU authorities to make resolution decisions. That plan calls for a complex voting system that EU financial services chief Michel Barnier and the ECB have warned could make it difficult to agree on decisions that may need to be taken in as short a period as a weekend.
The plan also envisages that, over time, bank levies would fill a common resolution fund that could eventually be tapped to cover costs anywhere in the euro zone. While that takes shape, nations would primarily have access to funds contributed by their own banks, with public backstops limited to resources within their own borders.
Draft documents prepared for Dec. 16 technical meetings show that nations could develop a common government safety net over the next decade, while also looking for ways to adapt EU treaties.
In the short run, governments would need to turn to their own resources and, if necessary, apply for a national bailout from the European Stability Mechanism. Germany has been adamant that the ESM shouldn’t have any ties to the proposed joint fund.
“I am concerned that decision-making may become overly complex and financing arrangements may not be adequate,” Draghi said.
The euro-area financial market won’t start working properly until the single resolution mechanism comes into force, and regulators haven’t considered the combined impact of the levies they plan to introduce, said Riho Unt, head of Stockholm-based SEB AB’s local unit in Tallinn, in a Dec. 13 interview.
“All the financial calculations have been left aside by politicians and the issue is being pursued ideologically,” said Unt, whose bank is one of three Estonian lenders that will face ECB scrutiny next year. “When we get the final bill, it may be a nasty surprise.”
The varying levels of government guarantees present a challenge for the ECB, according to Guntram Wolff, director of the Brussels-based Bruegel research organization. Banks in countries with weaker public finances or a relatively large banking system would be at a disadvantage, and monetary policy signals might not be able to penetrate the downturn in southern nations, he said in a Dec. 13 report.
“What if, in five years, a major bank faces massive capital shortfalls but the national fund and the government behind it would not have the resources to stem the problem?” Wolff said. “Should the ECB really risk another crisis and an ESM financial assistance program or rather keep the bank alive with liquidity? Failure to agree on a strong banking union will push more responsibilities onto the ECB.”
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