National debt risk must be distanced from banking debt risk, in hopes that dangerous contagion can be averted. This was the European Union’s priority, its leaders decided at a summit in Brussels on Thursday and Friday – distancing and yet more integration.
At the heart of their agreement, the European Central Bank is to become the overseer of the continent’s banking system by the end of this year, a decisive step towards a banking union.
Once its new role is implemented, the financial rescue organ the EFSF or its permanent replacement the ESM will be able to recapitalise banks directly under certain conditions.
This means financial aid will no longer have to be funnelled through governments, providing some theoretical insulation between the banks and national debts and deficits.
The rescue funds could therefore be used more flexibly, able to buy state debt through secondary markets once countries have met demands for fiscal consolidation.
Following the EU leaders’ summit, euronews spoke to Sony Kapoor, the Managing Director of Re-Define, an international Think Tank and an international finance reference.
Paul Hackett, euronews: We have seen the EU Council President Herman Van Rompuy say this is a breakthrough. Do you think this is a breakthrough: a game changer?
Sony Kapoor, Re-Define: I think it’s a breakthrough given how low the expectations were before. I’m not quite sure if it’s a game changer in the sense that one would regard a game changer to be something that would solve the crisis, and this is not going to be solving the crisis, but it would help slow it down.
euronews: Is this latest agreement to help banks a long-term solution to the crisis?
Kapoor: This agreement is likely to only have a temporary effect, because it involves using the two crisis management funds we already have to buy Spanish and Italian bonds. Now these funds only have limited fire power. So this is not going to give long-term confidence to markets that both Spain and Italy are out of the woods. What would also have helped, of course, is a longer-term solution that guarantees low borrowing costs, for example through the use of euro bonds. That has been rejected outright – completely – by Germany.
euronews: Do you think that Chancellor [Angela] Merkel is being compromised by this deal?
Kapoor: I think this is one of those political ‘fudges’ which will allow President Hollande to claim victory, which will allow [Italian Prime Minister Mario] Monti and [Spanish Prime Minister Mariano] Rajoy to also claim victory, and at the same time will allow Merkel to go back and say, with a straight face, to her voters that “I haven’t compromised”. If you actually look at the details, the agreement (which I think is one of the most substantial parts) is that there will be a direct injection of equity into troubled banks from the crisis funds. But, if you look at the details, it says that this will only happen once the European Central Bank has been made the supervisor.
euronews: Will the European Central Bank have to step in before that?
Kapoor: I think the idea is to keep the ECB out of this for now, so the time frame that it would work in terms of the ESM [European Stability Mechanism] or the EFSF [European Financial Stability Facility] buying Spanish and Italian bonds is supposed to be activated fairly soon. So I don’t think that the European Central Bank is supposed to be a part of that particular deal.
euronews: What about countries like Ireland, Greece, Portugal? They are not really going to be happy about the fact that Spain and Italy for example seem to have been given preferential treatment, just because they are too big to fail.
Kapoor: Well, there is some justification to the idea of preferential treatment. But if you actually look at what the European Commission is saying through national recommendations for Italy and Spain to do is actually not particularly less onerous than what Portugal has explicit conditionality that it must do. So, the idea, which is again a political fudge, is to simply take what Spain and Italy need to do under their legal obligations in any case – which is quite a lot – and put it on a piece of paper and say, “hey, these are your existing obligations: you need to fulfil them in this timeline and in exchange for that, if you behave well, we will give you money”.
euronews: How will this summit be judged? Do you think it will be seen as a success?
Kapoor: I think it is still a little bit too early to tell. We haven’t seen what lies under the headline agreements, but I think a fair summation would be that it is better than expected but worse than needed.