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Neutral Stupidity

The EU lawmakers are about to finalize rules for a single supervisory mechanism (SSM) coordinated by the ECB. The European Commission is expected to table legislation for a resolution mechanism to wind up ailing banks within the coming months. European Central Bank (ECB) chief Mario Draghi said on Monday in the European Parliament that a euro zone banking union will need a common resolution fund, and that it has to be “fiscally neutral over the medium term.” How can another European bank bailout fund be fiscally neutral?

 “The European Resolution Fund should be backed by a public backstop mechanism to ensure that it would be fiscally neutral over the medium term.”

Mario Draghi


Yup..neutral, but only over the medium term. Sooner or later the taxpayers will have to pay for this bailout, too…

Speaking with MEPs on the monetary affairs committee, Draghi said that the resolution fund should be financed via levies to safeguard against having to “recourse to taxpayer money,” the EUobserver.com reports.

Levies, hu?

ESMHere are some related words:

Also, the European Resolution Fund “should be backed by a public backstop mechanism,”  Mr. Draghi added, to ensure that it would be “fiscally neutral over the medium term.”

I’m sorry, but this sounds like pure nonsense to me.

There’s nothing new here – just another way to ensure that the bailout mechanisms already set up by the EU  leaders – the European Stability Mechanism (ESM) and the European Financial Stabilisation Mechanism (EFSM) – will still be in place when the European banking union becomes a reality.

But the need for a pan-European resolution fund is widely accepted among most EU lawmakers. However, some countries fear it could lead to their taxpayers financing bank rescues in other countries.

Well, I think they’re on to something….

Meanwhile, Draghi continues to kick the can, downplaying the recent diplomatic row over the exchange rate policy of the euro, dismissing it as “excessive” talks of a currency war involving the euro zone, Japan and the US.

He also said that the ECB did not regard the euro zone exchange rate as “a policy target, but it is important for growth and price stability.”

Important, but not a target….

And, according to the bank’s economic forecasts, the euro zone economy will fall by 0.3 percent in 2013, although Draghi indicated that he expected “a gradual recovery later this year.”

Heard that one, too…..quite a few times over the last five years.


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EU To Release Greek Debt Test Results Thursday

The European Commission, International Monetary Fund and European Central Bank will Thursday  outline the results of an inspection that will determine whether debt-ridden Greece will receive the second installment of rescue loans to keep it from bankruptcy, AP reports.

“The government welcomes the conclusions made by our partners.”

Giorgos Petalotis

Greece is set to receive euro9 billion ($11.8 billion) in loans by Sept. 13 under a three-year program worth euro110 billion set up by the IMF and by other EU countries using the euro currency. In return, the country has been implementing a strict austerity program that has seen it cut civil service pay, trim pensions and increase taxes, and has been under quarterly review by the IMF, ECB and the EU Commission.

Greek officials said on Wednesday that they expected to pass the inspection, which lasted two weeks, AP reports.

“The government welcomes the conclusions made by our partners … but there is still much work ahead,” government spokesman Giorgos Petalotis said as the inspectors concluded consultations in Athens, holding a six-hour meeting with Finance Ministry officials.

In an interim report in June, the delegation, known as the “troika,” said Greece was on track with its reforms.

Press reports indicate that the delegation will set a deadline for improvement on slipping revenue targets and ask for a speeding up of public utility privatizations.

Related by the Econotwist:

Fitch: Banks Need More Capital Than Stress Test Shows

Jim Rogers Says CNBC Is A PR Agency

Wolfgang Münchau: A Cynically Calibrated Test To Fix The Result

EU Bank Stress Test: Commentaries & Market Reactions

Financial Authorities See No Point In Stress Testing Norwegian Banks

The EU Stress Test: Working The Media


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A Candid Love Letter From G8 To G20

There doesn’t seem to be any disagreement between the leaders of the eight richest countries in the world and the almost-richest-countries, the Group of Twenty. On the contrary, they are absolutely on the same page when it comes to what to be done about the financial situation. At least; that’s the impression you get when reading the introductory remarks by President of the EU Commission, José Manuel Barroso, to the G20 representatives meeting in Toronto right now.

“We had an excellent G8 meeting – very informal, with candid discussions.”

José Manuel Barroso

“This Summit proved that global governance is working. There was a strong willingness to understand each other and work together. I presented the situation of the European economy. There was a lot of mutual understanding on how to bolster fragile economic growth, and recognition that the EU has reacted with appropriate and bold action,” president Barroso says in his opening statement.

“I highlighted the main strands of Europe’s three-fold action,” Mr. Barroso said according to a transcript just released by the EU Commission.

“Measures taken to guarantee the financial stability of the EU and the euro area  – stabilisation mechanism and economic governance.  All agreed Europe had taken decisive action on this. I stressed the contribution Europe was making through fiscal stimulus in 2008 – 2010, and the need to return to fiscal consolidation (as of 2011), so to maintain confidence and growth. Nobody questioned this at all.”

“I explained the decisions we had taken on the stability of our banking system through disclosure of banks’ positions (stress tests). This was welcomed by all.”

“We now move on to the G20-Summit. I expect same spirit to continue. It is the first time we meet as premier forum for our international economic cooperation,” Barroso stated, in an attempt to bolster the G20 meeting’s authority.

“The EU comes united to the G20 leaders meeting. Herman Van Rompuy and I will work with our partners on three priorities in particular.”

The three priorities of Barroso and Van Rompuy are as follows:

1) We will strive for a coordinated approach at global level that combines growthfriendly fiscal consolidation and following through on fiscal stimulus. Discussions in the G8 have shown that it is possible to reconcile the conceptual differences. We are hopeful that it will be possible also within the G20 to agree on coordinated gradual and differentiated exit strategies. We expect the G20 to agree on concrete targets for deficit reduction and the stabilisation and reduction of debt. We need these targets to be credible and we want them to be minimum targets.

2) We need to keep the momentum in our action for financial repair and reform. We must stick to the agreed timeframe for reform, or accelerate it. We must remind financial services of what they actually are: services for the benefit of our economies. We must make the financial sector more resilient to crises and risk, and avoid that tax payers have to bail out banks in the future. Financial sector must make a fair and substantial contribution. Europe will continue its efforts to convince partners to agree on ways to make the financial sector participate in the costs of repair, resolution and prevention. In Europe we have agreed to set up a bank resolution framework. And we agreed to introduce systems of levies and taxes on financial institutions to ensure a fair burden sharing and to give incentives to contain systemic risks. We hope to see similar approaches from our partners. And we see already positive developments from the US.

3) Thirdly, we need to strengthen the quality of bank capital and liquidity to face future difficulties. We welcome and support the progress made by the Basel committee. We are confident that in the end the amount of capital will be significantly higher and the quality of capital will be significantly improved. We urge the G20 to reach agreement at the time of the Seoul summit on the new capital framework.

Here’s a copy of the full letter from G8 to G20, just released.

For more information about the EU strategy, here’s a copy of  Barroso and Van Rompuy EU goals at the G20 summit in Toronto.


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