Today’s newsbriefing focuses on the results of last night’s summit, which ended in the early hours of this morning. Eurozone leaders reached an important agreement on a timetable for the first step of a banking union, the establishment of a Single Supervisory Mechanism (SSM). Timetables matter in EU diplomacy because they set leaders on firm path. The agreement is that the SSM would become operational at some point during – but not at the beginning- of 2013.

The statement of eurozone leaders – as ever the best source – had this to say:

“We need to move towards an integrated financial framework, open to the extent possible to all Member States wishing to participate. In this context, the European Council invites the legislators to proceed with work on the legislative proposals on the as a matter of priority, with the objective of agreeing on the legislative framework by 1 January 2013. Work on the operational implementation will take place in the course of 2013.”

 

There is still some uncertainty about the precise timing. The FT reports that Mario Draghi had told the meeting that it would take between six and twelve months to get this running. Francois Hollande spoke about a few weeks and months, while Merkel would only say that it would be sometime in 2013, but not at the beginning. The German press – to the extent that they covered it – could not decide whether this was a German victory, or not. It looked like Merkel was able to push this back until after the German elections (but it is not clear to us why the precise date matters, given that there is no automatism anyway between the setup of the SSM and a conversion of the Spanish bank programme into an ESM bank programme, something Germany wants to avoid.)

There is, as yet, no agreement on the other outstanding issues, including the number of banks that become subject to the SSM, and how the SSM exercises its resolution powers, and the precise legal base. The FT, however, reported that Germany is ready to concede the principle that the SSM should have ultimate control over each eurozone bank, while national supervisors remain in charge of day-to-day supervision for the smaller banks. (That means that the ECB can, if it wants to, march into a German or Spanish bank and close it down, an important principle without which a banking union would have no economic meaning especially since resolution is the key to crisis resolution. But this has yet to be decided.)

The statement only said the leaders had noted the Commission’s intention to propose a single resolution mechanism – which means that resolution will be on the agenda, together with deposit insurance. The leaders also spoke about the “paramount importance” to establish a single rulebook.

The leaders reiterated their wish, in principle, to  separate bank and sovereign debt – but gave no specific guarantees that the Spanish bank programme will be converted. Spain now seems resigned to not receiving a direct ESM bailout for its banks. Le Monde quoted a Spanish diplomat as saying that Spain “had already taken into account that it will not receive a direct recapitalisation of its banks.”

El Pais’ headline reads that Berlin imposes a delay on banking union – a reflection that Spain had a very different understanding of what was agreed at the June 28/29 summit. The article noted that a transfer of the Spanish bank recap programme into a direct ESM programme will be complicated. It said the agreement is probably too late for Spain, and constitutes bad news for the Rajoy government.

The statement had this to say:

“When an effective single supervisory mechanism is established, involving the ECB, for banks in the euro area the ESM could, following a regular decision, have the possibility to recapitalize banks directly.”

 

The rest of the statement referred to a need for fairness towards non-eurozone members, who want to participate in the regime, especially in light of the European Council’s legal opinion, see yesterday’s briefing, that only the ECB’s governing council is entitled to take a vote.

To summarise, leaders agreed:

1. to set up a timetable by the end of the year that allows the SSM to become operational, probably in the second half of 2013.
2. that the ESM will then be in a position to recapitalise banks directly.

Leaders did not agree:

1. The number of banks subject to the resolution regime.
2. The resolution powers.
3. The deposit insurance mechanism.
4. The transfer of the Spanish bank recapitalisation programme to the ESM – not even after the supervisor becomes operational.

(As ever, the devil is in the detail. The success of this venture will depend on the scope of the SSM, the nature of the resolution regime to be agreed, the credibility of deposit insurance, and the ability of the SSM to do its work unhindered by national authorities. But yesterday’s meeting was no doubt important because it agreed a timetable for the first step in this long process – the setup and legal framework of the SSM. In European diplomacy that means a lot, because leaders are now firmly committed to a process. But it is also clear that a banking union should be seen more as an long-term institutional reform, which will ultimately also require treaty change, rather than as an immediate instrument for crisis resolution. Spanish debt will remain Spanish debt. The interpretation by the media, and by financial commentators of the outcome of the June 28/29 summit was thus false. It also that the vicious cycle between bank and sovereign debt will persist.)

Non banking union issues

Leaders didn’t hold lengthy discussions on the financing problems of Greece and Spain, Wall Street Journal reports. They offered a statement of support for the Greek government’s efforts while Antonio Samaras lobbied for a release of the next bailout tranche in full and as soon as possible. The Greek government hopes to wrap up talks with the troika at the beginning of next week so that an extraordinary meeting of the Eurogroup can be held on October 29, when eurozone finance ministers will examine the measures and the troika’s progress report, according to Kathimerini.  This would have to be followed by the Greek Parliament giving its approval of the austerity package and the 2013 budget. Following this, a regular meeting of the Eurogroup on November 12 would lead to the disbursement of the loan tranche being approved.

Von Rompuy’s background note on fiscal union

The FT Brussels blog got hold of a copy of a background note sent von Herman van Rompuy to delegations. It is quite interesting because it makes a number of frank statements about the malfunctioning of the eurozone, and raises some important questions. It said that the reliance on national stabilisers was inefficient in a monetary union, which a joint fiscal capacity would address. It says it would fulfil two economic functions: improve the absorption capacity of country-specific economic shocks through an insurance-type mechanism, and support structural reform . It then proceeds to a Q&Q, starting with: Why is fiscal discipline not sufficient for the smooth functioning of EMU? And: Why may the ESM not be a sufficient instrument to ensure a smooth functioning of the EMU? (Have they hired an economist? This the stuff you would normally read in an IMF or OECD report.)

France needs €22bn more in savings if it wants to respect its 3% deficit target in 2013

If France wants to keep its deficit target of 3% next year, it needs to make €22bn more savings and risks falling into recession, Les Echos cites the forecasting institute OFCE. For next year the OFCE expects 0.1% growth implying a deficit that is more likely to be 3.5%. The government underestimates the recessive impact of its €36bn austerity measures, according to the OFCE.  If the government sticks to its target of 3%, an extra €22bn of austerity measures  the French economy will contract by 1.2% next year, so their calculations.

A make-or-break party congress for Venizelos

The Greek Socialist party will hold a make-or-break congress in February, in the attempt of its leader Evangelos Venizelos to shape PASOK according to his vision but only if he manages to fend off the rising opposition to his leadership within the party, Kathimerini reports. During Thursday’s meeting, it emerged that several of PASOK’s 33 MPs want the party to take a more active role in the coalition government. Venizelos had prevented any of the party’s lawmakers from joining the Cabinet following the June elections. Venizelos also gave clear public backing to Prime Minister Antonis Samaras. Several MPs expressed concern at Thursday’s talks about the way PASOK is being run reflecting a discontent with Venizelos’s leadership that peaked with his awkward handling of the memory stick containing the details of some 2,000 Greek depositors at the Geneva branch of HSBC.

Portugal’s junior coalition partner confirms vote  for 2013 budget

In Portugal, the junior coalition partner CDS assured in a written statement that the party will vote for the 2013 budget, considering that a “political crisis would exacerbate even further the extremely sensitive economic and social situation,” Jornal de Negocios reports. The Prime Minister Passos Coelho stressed that while the Parliament can suggest changes to the draft state budget, the scope is tight. Political tensions came up after the finance minister presented the budget on Monday saying there is no room for changes.

Mark Schieritz on the escrow account idea

In his blog Herdentrieb Mark Schieritz makes the point that the German idea to pay the next Greek tranche into an escrow account implies a significant fiscal tightening, as Greece is still running a primary deficit. The idea is thus not to save Greece, but to save our banks, while leaving the Greeks without salaries. The escrow account idea would work only after Greece had reached a primary balance.

10-Y Spreads, Forex, ZC Swaps and Euribor-Ois

Market sentiment improves further.

 

10-year spreads
	Previous day	Yesterday	This Morning
France	0.501	0.504	0.497
Italy	3.130	3.149	3.150
Spain	3.843	3.720	3.744
Portugal	6.057	6.058	6.116
Greece	15.784	15.359	15.29
Ireland	3.102	3.120	3.163
Belgium	0.778	0.782	0.782
Bund Yield	1.641	1.631	1.63
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.311	1.306
Yen	103.870	103.58
Pound	0.811	0.8142
Swiss Franc	1.209	1.2084
ZC Inflation Swaps
	previous	last close
1 yr	2.01	1.99
2 yr	1.81	1.8
5 yr	1.92	1.9
10 yr	2.15	2.02
Euribor-OIS Spread
	previous	last close
1 Week	-7.757	-8.157
1 Month	-4.371	-4.071
3 Months	1.971	4.071
1 Year	48.400	48.4
Source: Reuters