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Brussels to unveil controversial plans for new eurozone banking authority Eurozone finance head questions Brussels power bid over banks
(about 3 hours later)
The European commission is to unveil controversial draft legislation on a European resolution authority charged with deciding the fate of troubled eurozone banks. A fresh eurozone power struggle has broken out after the head of the group of eurozone finance ministers promptly questioned Wednesday's attempt by Brussels to turn itself into the final referee on the viability of eurozone banks.
In the proposals, to be released on Wednesday, the commission will reserve to itself the last resort powers to order the closure of a eurozone bank. In draft legislation unveiled on Wednesday the European commission controversially proposed giving itself the last resort power to order a troubled eurozone bank to close.
The proposals are certain to run into opposition from national governments – particularly Germany – the European Central Bank and eurozone finance ministers, signalling months of power struggles ahead over the key new authority. But the president of the eurogroup, the Dutch finance minister Jeroen Dijsselbloem, immediately challenged the commission's proposals.
Officials say the plan foresees tapping banks to build a warchest of €55bn-€70bn (£45bn-£60bn) but that is expected to take a decade, leaving the agency largely dependent on national schemes in the meantime. In an interview with the Guardian and four other European papers, Dijsselbloem, who has led a radical policy shift in recent months on the eurozone's response to four years of crisis, said it was not yet clear who would be granted the key powers to resolve, wind up, and close down failing eurozone banks, but that the new authority had to be "decisive, effective, and impartial".
"We have seen how the collapse of a major cross-border bank can lead to a complex and confusing situation," said Michel Barnier, the commissioner in charge of regulation. "It's not completely decided what that authority should look like," he said. "The main thing is it should be effective. You need to be able to decide overnight, over a weekend."
"We need a system which can deliver decisions quickly and efficiently, avoiding doubts on the impact on public finances, and with rules that create certainty in the market." The European commission in Brussels, the European Central Bank in Frankfurt, the German government in Berlin and others are all at odds over who is to be granted the powers of deciding what to do about struggling eurozone financial institutions whose dismal performance have contributed hugely to four years of sovereign debt crisis that have shaken the single currency to its foundations.
The EU's executive will not, however, call for giving a backstop role to the eurozone's rescue fund, the European Stability Mechanism. The eurozone's answer is a new permanent banking union, making the ECB the single supervisor of Eurozone banks, alongside a banks resolution authority – and perhaps eventually a common Eurozone system of guarantees for depositors.
Any suggestion of putting such a safety net in place faced stiff resistance from Germany, which feared that it could be left on the hook for problems uncovered in Spain's banks or elsewhere, when the ECB starts policing the sector next year. Wednesday's gambit to leave in Brussels the final decision on whether to order a bank closed down will be hotly contested in Berlin and Frankfurt. But Dijsselbloem, president of the eurogroup or the key committee of eurozone finance ministers since the beginning of the year, ruled out granting the powers to the ECB.
Furthermore, the planned "resolution board" to execute bank wind-downs would be forbidden from imposing decisions on countries if that would result in a bill for that nation's taxpayers. "The supervisory and the resolution authorities should not be the same," he said.
Analysts were critical. "The key problem is that without the ultimate access to fiscal resources it will be very difficult to agree to shut down a bank," said Guntram Wolff of Bruegel, a Brussels thinktank. While the various actors tussle over who gets to take some of the biggest decisions in the single currency area, it is already clear the Dutch social democrat has already helped engineer a strategic shift during his first six months presiding over the crucial meetings of eurozone finance ministers.
This scepticism was echoed by Sven Giegold, an influential German member of the European parliament. In recent weeks the policy U-turn from bailouts to so called "bail-ins" has crystallised, shifting the onus of rescuing banks and propping up governments from public money and taxpayers to the banks themselves and their creditors, who will suffer big losses in future emergencies.
"Behind all this is an unholy alliance between Germany, which is scared about talk of common liability (for banks) before elections, and France, scared of giving up sovereignty," he said. "It's the best way to address risk in the financial system," said Dijsselbloem, "the only way to get a healthy responsible financial sector."
The reform will be presented as the second pillar of a banking union, a scheme designed to underpin confidence in the eurozone and end the previously chaotic handling of cross-border bank collapses such as Dexia. The policy shift means that the eurozone's €500bn permanent bailout fund, the European Stability Mechanism (ESM), is to serve as a backstop for the troubled currency, but unlike in the past may never be used. As the ECB prepares to oversee the banking sector, €60bn of that fund has also been set aside for bank recapitalisation. It is also clear that there is very little intention of using that instrument either.
"The €60bn cap is mainly to give a signal that the direct recapitalisation is a means of last resort," said the Dutch minister. "Once again for too long we have been thinking public backstops are standing right in front … We want to change that. The €60bn is basically a political message saying it's going right to the end. Private means private investors. So resolution funds have to be used first. The €60bn is a political statement saying let's not start with the ESM."
If the new system comes into effect late next year, as expected, countries such as Greece, Spain or Ireland will not be able to make retroactive claims on the fund to clean up their government balance sheets after ploughing tens of billions into the banking sector.
The ESM and direct bank recapitalisation should be targeted at future problems, not the past, said Dijsselbloem. "Any requests for retroactivity will soon use up the fund … It would mean a massive claim on the ESM. I don't see enough political support for it generally."
Dijsselbloem was strongly criticised for his handling of the €10bn Cyprus bailout in March and ran into more problems when he described the Cypriot package as the template for future eurozone rescues.
But it has since become clear that Cyprus has indeed become a form of model, signaling the shift in emphasis away from taxpayer-funded bailouts to large haircuts for investors, a change intended to encourage more responsible banking, punish excessive risk-taking and curb the casino capitalism of international finance.
Critics say the policy shift may simply deter investment in the fragile periphery and promote a rush to eurozone safe havens, such as Germany, the real driver of the policy U-turn articulated by Dijsselbloem.
He conceded that the Cyprus experiment was a gamble and that governments and the media anticipated a negative reaction in the markets because of the losses being inflicted on investors.
"It had a shock effect," he said. "But it was very short. It was not justified. The reaction in the markets was moderate and short."