In the Eurozone, the more things change the more they stay the same: structural adjustments remain elusive

Back in early July we saw the post-EU-summit euphoria quickly fade as the new initiatives discussed at the meeting stalled at the implementation stage (see discussion). It certainly feels as if so much has happened since then. But has it? Other than Draghi's backstop to support short-term sovereign paper, what has really changed in terms of the union's structure and other summit initiatives? Here is the latest on some of these efforts.

1. Spain has not seen a cent of the €100bn bank bailout funds that were pledged by the Eurozone's leadership so far. The funds are surely coming, but it has been almost four months (see discussion). We are seeing the best of the EU's bureaucracy in action.

2. Pan-Eurozone bank supervision implementation has also stalled.

Reuters: - Euro zone finance ministers meeting in Cyprus last weekend failed to agree on the framework for banking union, with Germany and others concerned that deposit guarantees will put them on the hook for banks in Greece or Spain by using deposits in their local banks to fund rescues in other countries.

... The European Commission unveiled sweeping plans for the ECB to supervise all euro zone banks last week as a first step toward a banking union, though Germany immediately raised objections that the proposals risked overstretching the ECB.

... The euro zone risks disintegration unless governments can agree on a banking union underpinned by a universal deposit safety net, former European Central Bank policymaker Athanasios Orphanides said on Saturday.

The bickering is now at the Merkel - Hollande level. This development sent the euro lower by a percent last week after a strong rally.

Bloomberg: - Chancellor Angela Merkel and President Francois Hollande underlined Franco-German disagreement over the weekend as they clashed on a timetable to introduce joint oversight of the region’s banking sector, with Merkel rebuffing Hollande’s appeal to activate it “the earlier, the better.”

3. The ability to scale the ESM's buying power using leverage is also in question. Der Spiegel reported that the vehicle could be levered as high as €2trillion - the ultimate "bazooka". Not so fast, says Finland.

Reuters: - If the ESM gets approval to use the same leverage techniques as the EFSF, it would have a lending power of around 2 trillion euros without countries having to contribute any more capital to the fund.

But these leverage options have not been approved by all euro zone member states and Finland is especially reluctant to agree to them.

German Finance Minister Wolfgang Schaeuble supports the plan but Finland is preventing the Eurogroup from passing it quickly, the report said.

With the ECB's backstop in place, the ultimate size of the ESM doesn't really matter any more, but it points to a continuing discord in the Eurozone.

4. To add to the tensions, Der Spiegel also brought up the fact that a preliminary troika report shows a €20bn gap in Greece’s budget. This is setting the stage for another "debate" on whether the austerity requirements attached to the EU/IMF loans to Greece (and/or the loans themselves) should be restructured to give Greece more time. Today France said yes. It's not clear how the rest of the Eurozone leadership will respond tomorrow.

FT: - France has said Greece should be given more time to meet the terms of its international bailout, in the clearest call yet by a leading eurozone country for an easing of the stringent conditions attached to the €174bn rescue package. Jean-Marc Ayrault, the prime minister, taking a clear swipe at those in Germany insisting on a hard line against Athens, warned that a Greek exit from the eurozone would be “unmanageable” and could be “the beginning of the end of the European project”

5. In the mean time frustrations grow over Italy's and particularly Spain's reluctance to ask for the official ECB-led bailout. Business leaders understand that locking in a revolving credit line, while the going is good, is a prudent strategy (rather than begging for it under duress). Spain's leadership apparently does not (see discussion).

WSJ: - The Spanish government should apply for financial aid from its euro-zone partners "as soon as possible," Banco Bilbao Vizcaya Argentaria SA [large Spanish bank] Chairman Francisco Gonzalez said Thursday.

The Spanish government said earlier this week that it is studying the conditions attached to seeking a bailout.

Spain has already asked for a loan for up to 100 billion euros ($129.5 billion) to recapitalize its banks, but as its finances deteriorated over the summer, pressure mounted for the country to seek help to lower its sky-high borrowing costs.

Mr. Gonzalez, who was speaking at an event in Madrid, said a request for a credit line by Spain would activate the European Central Bank's sovereign bond purchasing program, known as Outright Monetary Transactions, which would push down borrowing costs.

A great deal has been accomplished in the Eurozone in terms of easing the financial strain (see discussion) since the summit back in June. But as these recent developments show, this progress has been mostly due to the ECB providing an unlimited backstop to the periphery governments. Without this (what is turning out to be long-term) "bridge" financing, the actual progress on restructuring the Eurozone's financial and fiscal union/institutions has been painfully slow.

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