Wednesday, June 27, 2012

Strangely, Mario Monti may object to a full blown banking union

As expected, the bickering over the proposed Eurozone banking union has begun. And as discussed, the stronger economies will object to the scheme.
WSJ: - The idea of closer European banking ties gained steam earlier this month when European Central Bank President Mario Draghi raised the issue in testimony to the European Parliament.

But Ms. Urpilainen said Finland couldn't accept a system that was based on shared liability.

"It is important to develop EU banking regulations and supervision and to safeguard depositors. However Finland cannot accept a banking union based on shared responsibility," she said in a written response to a question tabled by the opposition Finns Party.

She said the European Banking Authority could be mandated with new powers to oversee the European banking system, but added that national governments should still be the ultimate regulator of their financial systems.

"The European Banking Authority could be provided with stronger measures to ensure stronger national oversight. But this cannot change the principle that supervision should be implemented at the national level in the first instance," she said.
But even some in the Eurozone periphery may object to this banking union idea. Here is why.

It has been suggested that the euro area leaders should dip into the EFSF/ESM funds to provide a backstop to the yet-to-be-created entity that would guarantee Eurozone's deposits.
Reuters: - The euro zone's permanent bailout scheme, the European Stability Mechanism, could be used to backstop a fund to protect bank deposits or wind up failing lenders, according to a document prepared for European leaders meeting this week.
Without additional capital, such backstop would dramatically raise ESM's credit risk by increasing its exposure (with rapid downgrades by the rating agencies, etc.) If funds are diverted to guarantee depositors, there will be far fewer resources to support periphery governments. Funds going to Spain's banks, for example, are already taking a bite out of EFSF/ESM capitalization. And now the entity will be asked to guarantee  €11 trillion of deposits across the euro area?

Italy's banks are not nearly as troubled as Spain's, making Italy's objective different from its troubled neighbor. Italy needs investor confidence in its fiscal situation. Mario Monti has done a decent job in making some headway on this front by increasing taxes, cutting pensions, and pushing through significant labor reforms. But Italy also needs ESM's help in rolling its massive amounts of debt. Monti's goal therefore has been to release some of ESM funds specifically to buy periphery government debt - not to engage in rescuing banks or backstopping deposits
Reuters: - Italy put forward a proposal at a G20 summit in Mexico on Tuesday for the euro zone's rescue funds to start buying the debt of distressed European countries, and the idea is expected to be discussed at a meeting of leaders in Rome on Friday.
Therefore as strange is this may sound, Italy might actually side with Finland in objecting to the banking union in order to preserve EFSF/ESM. And with Italy objecting, the chances of the scheme being implemented as proposed are close to none.
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