COMMENT
BILLJAMIESON
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Executive Editor of The Scotsman
Don’t bank on it Banking union is crucial to the survival of the euro but progress is painfully slow.
F
or a time it seemed a central banker’s words enjoyed more force than policy action. Take, for example, the famous declaration by European Central Bank president Mario Draghi last summer that he would do “whatever it takes” to save the euro from collapse. The words had an immediate and powerful effect, sparking a rally in the euro and in the government bonds of the eurozone’s stricken economies – Spain, Portugal, Greece and Italy in particular. He followed this up in early January of this year with a declaration that “the darkest clouds over the eurozone area subsided” in 2012. This ‘back from the brink’ miracle is even more remarkable when considering how very little the ECB has subsequently actually done. A new ECB bond-purchase plan – Outright Monetary Transactions – was announced to great fanfare. But this mighty howitzer has barely fired a pop as debtstrapped governments took one look at the terms and conditions and lost any enthusiasm to apply. Thus, mere declaration of the existence of a super-plan has apparently done the trick in easing tensions and taking the menace out of the eurozone crisis. But every so often we see reminders that the crisis is as menacing as ever – renewed political crisis in Greece and fresh concerns over the country’s budget credibility. There has also been fresh social unrest in Spain over record levels of youth unemployment. Central to any progress in lifting the euro zone out of this state of constant incipient crisis is the condition of its banks and progress in moving towards European banking union. It is another grand euro aspiration. In the real world of stricken government finances and attendant political tensions it is something else altogether. Yet bank recapitalisation is becoming ever more urgent as non-performing loans continue to climb at an alarming rate. The 6 Industry Europe
non-performing loans of Italy’s banks shot up by 22.3 per cent in April to represent 7 per cent of total lending. The Spanish non-performing loan ratio rose almost 11 per cent in April, with that for mortgage loans rising to 4.2 per cent in the first quarter compared with 3.1 per cent a year ago. As Citigroup’s Europe watchers point out, “the speed of the increase in bad loans in Italy and Spain remains very high, creating a major impediment to extending new lending.”
Central to any progress in lifting the euro zone out of this state of constant incipient crisis is the condition of its banks and progress in moving towards European banking union. It is another grand euro aspiration. EU Commissioner Olli Rehn has called for an immediate agreement by the eurogroup on plans for direct bank recapitalisation. The issue has now been discussed for almost 12 months with little sign of progress. Proposals now centre on plans to open the door for some direct financial assistance to stricken banks – providing, of course, that the ECB has become the effective supervisor by the middle of next year.
Difficulties in the way That looks unlikely, given the difficulties. It would involve the ECB, as a first step, taking over responsibility for supervising around 130 of the largest banks among the 6000 or so banks on the eurozone. And before this can happen, the European Banking Authority (EBA) has to subject the banks selected for ECB supervision to stress tests.
There are both political and regulatory difficulties here. Eurozone member governments are reluctant to hand over bank regulation and control to an agency of the EU which may then use this pressure to enforce further integration. And Germany itself is reluctant to cede regulatory oversight of all but its ‘global’ banks to external control. And the regulatory problems themselves are all too familiar. Given the severe flaws that appeared in previous eurozone ‘stress test’ exercises which did severe damage to their credibility, we are assured that the new stress tests will be stricter than previously. However, guidelines for these have still to be drawn up. As on so many previous occasions, eurozone institutions are incapable of moving at any great speed to deal with the problems facing them. Progress is glacial, at best. Delay in meeting that 2014 deadline now looks increasingly likely. The hope was that banks would have taken the opportunity over the past two years to strengthen their capital position. This is a pre-requisite for further progress towards a banking union. As Monument Securities economist Stephen Lewis points out, there is now a deeper appreciation of the long-term drag on economic activity that banks’ capital weakness imposes and that there can be no sustained recovery in the eurozone economy until the banks take action to achieve a genuine restoration of their capital strength. However, increases in non-performing loan ratios suggest the problem is getting worse. This feeds a further and deeper worry for the European Commission. If the latest stress tests were to prove less than thorough and fresh banking problems were to plague the early months of the new ECB supervisory regime, this might undermine the credibility of ‘banking union’. And this matters to Brussels, because it is one of the EU’s last chances to n establish the viability of the euro.
