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The euro crisis - Less disunion

2012-07-04 03:40:27

Jun 29th 2012, 11:16 by Charlemagne | BRUSSELS

AFTER yet another late-night summit, filled with threats and bluffs, Europe s

leaders for once exceeded expectations. Just before dawn, they staggered out to

announce they had agreed (statement is here) that the euro zone s rescue funds

could directly recapitalise troubled banks.

The decisions heralds the start of a euro-zone banking union and marks the

first step in trying to end the dance of death in which weak sovereigns and

weak banks progressively stifle each other especially in Spain. Not for the

first time, markets rejoiced on the news, even though much of the detail

remains to be settled.

Before banks can be recapitalised directly, the euro zone will have to create a

strong central supervisor, centred on the European Central Bank (ECB). This

will take time, with several thorny problems to settle not least the question

of which banks should be supervised. Germany has tried to limit scrutiny to big

cross-border banks. But in Spain, and probably in Germany too, the worst

problems lie in smaller regional banks. Another issue will be the relationship

with banks and supervisors in non-euro countries, such as Britain (which does

not want to join the euro) and eastern European members (many of whom are

committed eventually to adopting the single currency).

So the new system may not be immediately applicable to Spain, which has put in

a request for 100 billion of loans from the temporary rescue fund, the

European Financial Stability Facility (EFSF) to recapitalise its banks. For now

the loan will add to Spain s debt burden. But European officials say that once

the supervision system is up and running, the permanent rescue fund, known as

the European Stability Mechanism (ESM) could assume the burden back from Spain.

The new arrangement may eventually be of assistance to Ireland, which is

saddled with the debts of its collapsed banking sector.

Another gesture of reassurance to markets is the commitment that the debt owed

by Spain to the EFSF, if and when it is transferred to the ESM, will not gain

seniority. The prospect had spooked private investors, who feared subordination

if the official sector became involved. When Greek debt was restructured

earlier this year, bonds held by the ECB were not subjected to losses.

These decisions mark a real concession by Angela Merkel, the German chancellor,

who had drawn the line at assuming other countries liabilities until more

progress was made toward political union. This may complicate the ratification

in the Bundestag of the treaty establishing the ESM.

It is also a victory for Mariano Rajoy, the Spanish prime minister who, along

with Italy s Mario Monti, had threatened to block any agreement at the summit

unless their demands were met. Mr Rajoy obtained satisfaction, but the same is

not quite true of Mr Monti, who had been the most adamant of the two.

The technocratic Italian prime minister had wanted a semi-automatic system for

the rescue funds to buy the bonds of virtuous yet troubled states, such as

Italy and Spain, without placing the countries under Greece-like programme. Mr

Monti appears to have avoided the overt involvement of the dreaded troika of

the ECB, the IMF and the European Commission. But any country benefiting from

bond-buying will still have to sign a memorandum of understanding with the euro

zone, and comply with a raft of existing conditions monitored by the European

Commission.

Mr Monti declared himself satisfied, but caused considerable irritation to

partners. Among the deals he had blocked was the "growth pact", a mixture of

stimulus measures. "Who needs the growth pact? Not Germany," said one bemused

participant. The euro zone s fiscal hawks say the bond-buying mechanism will be

little different from the existing system. Mario Monti raised a gun to his

head and threatened to shoot himself. In the end he wounded himself in the

shoulder, said one scornful diplomat.