Mike Shedlock

Battle Between Germany and France Over Spain Bailout Application; Numerous EU Ministers At Odds Over Banking Union

France has encouraged Spain to apply for aid as soon as possible. In Germany, Wolfgang Schäuble wants anything but a timely application.

Note that unless a country requests a bailout, and agrees to terms set by the IMF (something Spain does not want to do), the entire OMT plan of Draghi is useless.

On September 12, José Manuel Barroso, European Commission president unveiled his European banking union proposal with a goal of having it approved by December.

All 27 EU member states have a veto on Barroso's plan, not just the eurozone countries.

Numerous EU Ministers At Odds Over Banking Union

The odds of approval by December are zero percent given battles between eurozone and non-eurozone countries erupted over the banking union erupted in Cyprus at an EU meeting on Saturday.

Germany, Sweden, Poland and the Netherlands called for a more “realistic” negotiating timetable to resolve the problems, suggesting talks will run into 2013. Anders Borg, Sweden’s finance minister, said it was “undecidable and not acceptable” to aim for a deal by the end of the year.

Germany is in favour of the ECB having some responsibility for monitoring big financial institutions, but is resisting the broad scope and high degree of centralisation proposed by the European Commission.

Germany also objects to what it says is hasty implementation, with the ECB taking over supervision for all banks by 2014.

After the meeting Wolfgang Schäuble, the German finance ministers, threw out a further complication by demanding a pan-eurozone stress test for banks before supervision is passed to the ECB.

This step-by-step approach is at odds with France, which is pressing for the eurozone to move rapidly towards a centralised system for supervising all 6,000 lenders in the single currency area.

Sweden, Poland and the UK are concerned about the legal anomaly of the European Banking Authority being unable to impose binding decisions on the ECB, while it could force sovereign states to comply when it adjudicates in a dispute. The commission argues that, in the rare event of the ECB failing to comply voluntarily, banks would be bound to comply with EBA decisions.
Battle Brews Between Germany and France Over Spain

Eurointelligence reports Germany now actively discourages Spanish EFSF application.
Among the many narratives from the informal Ecofin over the weekend, the one that struck us the most has been the active discouragement by Wolfgang Schäuble of a Spanish aid application, while France has been reported to be pressuring Spain to make an application. Last week, on his visit to Madrid Jyrki Katainen made the same point. Germany appears to be siding with Finland and other small countries, according to Bloomberg, which writes that France exerts pressure in the opposite direction.

(We think this is quite remarkable, and a certain way to end the current phase of optimism. Schauble does not want a Spanish EFSF/ESM vote in the Bundestag, but by encouraging a delay, or worse an attempt to forego an application indefinitely, the entire OMT programme by the ECB will soon be exposed to be fraud, as it is premised on the idea of an aid application.)

The other big theme from Cyprus is the sharpening dispute over a banking union.

The FT quotes Anders Borg of Sweden as saying it was “undecidable and not acceptable” to aim for a deal by the end of the year. Cinco Dias quotes Borg as saying "we cannot accept banking supervision centered on an ECB we cannot belong to without joining the Euro". El Confidencial arrives at the logical conclusion that Spain is failing to secure its objective to extract a commitment to bank recapitalization on the timetable agreed in June.

As reported by EUObserver last Tuesday, the 10 EU countries outside the Euro have strong misgivings about the banking union and might withhold the necessary unanimity, though not only over being forced to submit to ECB supervision but for instance out of concern that being backed by the ESM would give Eurozone banks a competitive advantage over non-Euro banks in the eyes of depositors.

The Wall Street Journal [in Slow Path to Policing Europ Banks] writes that Jörg Asmussen presented the ECB's proposals for a banking union to the Ecofin, which he said must include common supervision, resolution regime, and deposit insurance. Wolfgang Schäuble is opposing joint supervision of all banks, advocating instead ECB supervision of "systemic" institutions. The German savings bank association is said to oppose plans for joint resolution and deposit insurance on the grounds that this would "raid Germany's financial safety net to bail out shaky foreign banks". The Sparkassen and Volksbanken have, in fact run ads in the German press last week in the form of an open letter to Angela Merkel, as reported by Handelsblatt on Thursday.
Non-euro countries raise concerns on banking union

Let's take a closer look at the EU Observer article Non-euro countries raise concerns on banking union, mentioned above by Eurointelligence.
EU ambassadors from Bulgaria, the Czech Republic, Denmark, Hungary, Latvia, Lithuania, Poland, Romania, Sweden and the UK met on Monday evening (10 September) in Brussels to share concerns regarding the European Commission's banking union plans to be unveiled on Wednesday.

The 10 'euro-outs' each have a veto over the banking union plans, as they will require unanimity in the EU Council of ministers to pass.

A level playing field between banks inside and outside the eurozone is the main sticking point.

For central and eastern European states - where 65 percent of the banking sector is in the hands of Austrian, German, French and Italian banks - the worry is the move will create unfair competition of big banks versus local ones.

"If the choice is between an Austrian and a Romanian bank, where would your grandmother put her money? Clearly having the might of the ESM and Germany behind it creates a competitive disadvantage for the local ones," one EU diplomat said.

Another issue is that non-euro countries can opt into the banking union, but would have no say in the governing council of the ECB which is made up of eurozone members only.

The debate about having a parliament - or a special committee within the European Parliament - just for the eurozone is being followed with deep concern among the 'outs,' as it would cement a two-speed Europe already taking shape.

For Britain, having a more powerful and united eurozone is also problematic when it comes to banking regulation or the balance of powers within the European Banking Authority, the London-based body pooling all 27 national banking supervisors.

Estonia - a eurozone member - is a special case, as its whole banking sector is in Swedish hands. But Sweden is outside the eurozone, so Estonia will be in the banking union, but its banks will remain under national supervision from Sweden.
List of Countries Having Problems With Banking Union Proposal

  • Germany
  • Netherlands
  • UK
  • Sweden
  • Poland
  • Bulgaria
  • Czech Republic
  • Denmark
  • Hungary
  • Latvia
  • Lithuania

As I have stated before, the UK ought to decide to leave the EU entirely. To place itself at risk of having to comply with EU banking regulations and restrictions in London, financial transaction taxes, and eurozone bailout funding, on top of numerous silly trade agreements and absurd farm policy agreements is pure insanity.

Since any one country can sink this thing, it sure cannot pass as is, nor can all of this possibly be ironed out by December.

Infinite QE; Central Bank Balance Sheets as Percent of Nominal GDP; Euro Demand Deposits; Break-Even Inflation Trends

Here are a few very interesting charts from Steen Jakobsen, chief economist at Saxo Bank in Denmark.

click on any chart for sharper image

Central Bank Balance Sheets



Demand Deposits



Capital flight from Spain, at least in terms of demand deposits, has stabilized even if other types of deposits or transfers have not.

Infinite QE

Steen writes ...

The following chart shows my main theme since "QE Infinite": Inflation expectations continue to rise. Note the 10-Year break-evens rates from Germany and the US. However some of this is of course the result of Draghi's put.

Breakeven Rates



Here is an explanation of Break-Even Inflation.

If you currently own bonds, you’ve already made a bet on inflation, whether you know it or not. Traditional fixed-income investments may not provide the real return investors need during periods of high inflation. It’s important to know whether your traditional fixed-income investment breaks-even with inflation.

Break-even inflation is the difference between the nominal yield on a fixed-rate investment and the real yield (fixed spread) on an inflation-linked investment of similar maturity and credit quality. If inflation averages more than the break-even, the inflation-linked investment will outperform the fixed-rate. Conversely, if inflation averages below the break-even, the fixed-rate will outperform the inflation-linked.

Calculation Formula: Comparable Fixed-Rate – Inflation-Linked Real Yield = Break-Even Inflation

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com 


Mike Shedlock

Mike Shedlock is a registered investment advisor representative for Sitka Pacific Capital Management.
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