By Rebecca Christie & James G. Neuger - Jun 28, 2013 4:50 AM GMT+0400
European Union leaders are set to scale back promises of support for ailing banks when central euro-area bank supervision starts next year, raising questions about the scope of their crisis-fighting plan.
A June 26 proposed statement for a two-day Brussels summit dropped a commitment from earlier drafts for EU states to put “credible backstops” in place for restructuring and recapitalization before the European Central Bank conducts asset-quality reviews of lenders prior to taking command of oversight of banks in the currency bloc in 2014.
A European Union (EU) flag flies outside of the headquarters of the European Central Bank (ECB) in Frankfurt, Germany. Photographer: Hannelore Foerster/Bloomberg
Instead, governments should “make all appropriate arrangements” before the ECB reviews, according to the draft that leaders will discuss when the summit continues at 10 a.m. today. The document also left out language describing the ECB balance-sheet reviews and subsequent stress tests as “particularly important to complete the process of strengthening bank balance sheets.”
The summit’s diminished aspirations came less than 24 hours after finance ministers struck a deal on when and how to help troubled banks. Germany led calls to limit their recourse to government funds, securing commitments that private investors should absorb losses before governments or the European Stability Mechanism, the euro zone’s rescue fund, are tapped.
As the banking ambitions ebbed, the leaders played up a decision made during the first day of talks to spend 8 billion euros ($10 billion) on fighting youth unemployment and pledged to enlist the European Investment Bank, the EU’s project-finance arm, in efforts to steer more loans to credit-starved small and midsized companies, especially in southern Europe.
While countries such as France, Spain and Italy urged that the EIB be allowed to use maximum leverage to boost the lending volume, Germany and its allies insisted that nothing be done to endanger the bank’s AAA credit rating.
“No ambiguity: everyone is fully aware that the bank’s AAA status is essential for it to play its critical role,” EU President Herman Van Rompuy told reporters after the first round of talks concluded. “It wasn’t subject to any doubt.”
While the leaders stuck by a target of starting the lending programs in January 2014, a proposed July deadline for designing them was dropped. Germany also objected to language that implied that it would have to assume debts incurred by the EIB in lending to other countries.
The summit marked the first anniversary of a commitment to break the cycle of contagion between banks and sovereign borrowers. Following the finance ministers’ deal, the cost of insuring against losses on senior bank debt fell for a third day, with the Markit iTraxx Financial index of credit-default swaps dropping 5 basis points to 163.4 basis points.
Speaking yesterday in Hachenburg, Germany, as leaders debated their statement in Brussels, ECB Executive Board member Yves Mersch warned political leaders against steps to weaken or delay progress toward a banking union.
“The different elements of banking union are bound symbiotically with each other,” Mersch said. “Forgetting or watering down individual parts endangers the success of the whole project.”
The expectation that the ESM will be ready to provide direct aid to banks when the results of the ECB’s reviews are made public was also left out of the draft.
“Banking union is, to all intents and purposes, dead,” said Nicholas Spiro, managing director at Spiro Sovereign Strategy. “EU leaders are sleepwalking to the next banking crisis. The speed at which plans for further European integration are unraveling is striking.”
By Jonathan Burgos - Jun 28, 2013 8:08 AM GMT+0400
Asian stocks headed for their biggest three-day gain since December 2011, with the regional benchmark index paring the first quarterly slump in a year, amid signs the Japanese and U.S. economies are improving and assurances on stimulus efforts by the Federal Reserve.
Toyota Motor Corp. (7203), the world’s biggest carmaker, rose 2.4 percent in Tokyo, pacing gains among the exporters as the yen weakened. Mitsubishi UFJ Financial Group Inc., Japan’s No. 1, climbed 5.3 percent after the nation’s industrial output and retail sales exceeded expectations. Sands China Ltd., a Macau casino operator controlled by billionaire Sheldon Adelson, added 2.8 percent in Hong Kong after saying revenue from high-stake gamblers hasn’t declined as China’s economic growth slows.
Visitors look at an electronic board displaying stock figures at the Tokyo Stock Exchange in Tokyo. Photographer: Junko Kimura/Bloomberg
June 28 (Bloomberg) -- Takahiro Sekido, a strategist in Tokyo at the Bank of Tokyo-Mitsubishi UFJ Ltd. and formerly a Bank of Japan official, talks about the nation's economic outlook. Consumer prices excluding fresh food were unchanged in May from a year earlier, a report released by the statistics bureau in Tokyo showed today. Sekido speaks with John Dawson on Bloomberg Television's "First Up." (Source: Bloomberg)
June 27 (Bloomberg) -- Kathryn Koch, head of global portfolio solutions international at Goldman Sachs Asset Management, talks about emerging-market and Japan stocks. She speaks in Hong Kong with Rishaad Salamat on Bloomberg Television's "On the Move." (Source: Bloomberg)
June 27 (Bloomberg) -- Neil Dwane, chief investment officer for Europe at Allianz Global Investors, talks about stocks in the region, Asia and the U.S. Dwane also discusses the outlook for gold and European economies. He speaks in Hong Kong with Rishaad Salamat on Bloomberg Television's "On the Move." (Source: Bloomberg)
The MSCI Asia Pacific Index climbed 1.9 percent to 130.65 as of 12:56 p.m. in Tokyo, with all 10 industry groups on the measure rising. The measure is down 3.2 percent for June. U.S. shares rallied yesterday as reports showed consumer spending rebounded, pending home sales soared to the highest level since 2006 and jobless claims declined last week. Fed Bank of New York President William C. Dudley said the central bank may prolong its asset-purchase program should the economy fail to meet the Fed’s forecasts.
“The U.S. is recovering, but the rate of growth isn’t matching expectations,” Peter Esho, investment adviser in Sydney at Wilson HTM Investment Group, which oversees about $11.8 billion, said in a telephone interview. “The Fed know what’s happening on the ground so I think they will act within reason. The Japanese government is very serious at getting their economy back to a reasonable rate of growth. Japan will continue to surprise on the upside over the next few years.”
Japan’s Topix index and the benchmark Nikkei 225 Stock Average both jumped more than 3 percent, extending gains for a second week. Reports today showed the economy strengthened in May as industrial production rose the most since 2011, retail sales climbed and consumer prices halted a six-month slide, bolstering Prime Minister Shinzo Abe’s push to end a deflationary malaise.
A survey published by the Nikkei newspaper this week found 55 percent of respondents approved of Abe’s economic policies, and 66 percent supported the cabinet. The paper surveyed 918 people by telephone between June 21-23 and did not give a margin of error.
South Korea’s Kospi index gained 1.4 percent and Taiwan’s Taiex index added 0.6 percent. Singapore’s Straits Times Index increased 1 percent and New Zealand’s NZX 50 Index rose 0.3 percent. Australia’s S&P/ASX 200 Index added 0.1 percent.Hong Kong’s Hang Seng Index advanced 1.2 percent.
China’s Shanghai Composite Index (SHCOMP) climbed 0.8 percent, heading for its first gain in eight days, ahead of the release of the June manufacturing purchasing managers’ index next week. Fitch Ratings yesterday cut its 2013 growth forecast for the world’s second-largest economy on concern a surge in money market rates will curb demand.
“The Chinese market is close to a turnaround as sentiment is at rock bottom,” HTM Investment’s Esho said. “Even if there are issues around the financial system, there might be short-term fixes from the government.”
The MSCI Asia Pacific Index is headed for a second month of losses after China’s money-market rates surged to a record and Fed Chairman Ben S. Bernanke said policy makers may start dialing down U.S. stimulus. Shares on the gauge traded at 12.5 times average estimated earnings compared with 14.6 for the Standard & Poor’s 500 Index and 12.7 times for the Stoxx Europe 600 Index, according to data compiled by Bloomberg.
Futures on the Standard & Poor’s 500 Index rose 0.1 percent. The gauge yesterday advanced 0.6 percent, completing its biggest three-day rally since January.
Japanese exporters led gains as the yen headed for a second day of decline. A weaker yen boost the value of overseas income at carmakers and electronics manufacturers when repatriated.
Toyota, the biggest contributor of the MSCI Asia Pacific Index’s advance today, gained 2.4 percent to 6,040 yen in Tokyo. Honda Motor Co., the Japanese carmaker that gets about 83 percent of sales overseas, rose 3.1 percent to 3,715 yen. Panasonic Corp., Japan’s second-biggest television maker, jumped 6.6 percent to 796 yen.
Nintendo Co., the world’s biggest maker of video-game machines, surged 5.8 percent to 11,570 yen as it plans to revive demand for its Wii U through the release of its own new titles as sales of the console failed to meet forecasts amid a lack of software.
Japanese lenders advanced. Mitsubishi UFJ climbed 5.3 percent to 619 yen. Sumitomo Mitsui Financial Group Inc. (8316), the nation’s second-largest lender by market value, advanced 3.7 percent to 4,585 yen. Mizuho Financial Group Inc. gained 4.1 percent to 205 yen.
Sands China rose 2.8 percent to HK$37.15 in Hong Kong. The company’s business is expected to be “very strong” going forward and the second half is traditionally better than the first, Sands China Chief Executive Officer Edward Tracy said. Mainland China holidays in the latter half of the year will boost growth, he said.
By James G. Neuger - Jun 27, 2013 2:01 AM GMT+0400
A year ago, European leaders pledged “immediate action” on growth and jobs. Since then, theeuro-area economy has shrunk nonstop and unemployment has risen to a record 12.2 percent from 11.4 percent.
The solution, according to a draft statement prepared for a European Union summit starting today at 4:30 p.m. in Brussels: “determined and immediate action” on growth and jobs.
Jobseekers enter an employment office after the opening in Madrid, Spain. Photographer: Angel Navarrete/Bloomberg
An employee, left, assists a jobseeker at a desk inside a recruitment center operated by ManpowerGroup Inc. in Toulouse, France. Photographer: Balint Porneczi/Bloomberg
Neither forecasters nor the euro zone’s 19 million unemployed expect the renewed vow to turn around an economy weighed down by the debt crisis and now endangered by rising interest rates in the U.S. and China, the world’s pacesetters.
“Just shifting the rhetoric to a focus on growth is not going to give us growth,” said Paul Hofheinz, president of the Lisbon Council, a Brussels research group. “The working assumption is that we’re going to have a traditional 1930s-style infrastructure-based stimulus, and that’s going to give us growth. It’s just not working.”
The main undelivered promise from last June’s summit involved using the European Investment Bank, the EU’s project-finance arm, to channel loans to smaller businesses that were starved of credit, especially in southern Europe.
While governments did their part by supplying 10 billion euros ($13 billion) of fresh capital, the EIB is only just getting started with its souped-up lending program, snagged by its own rules that permit loans only to high-quality borrowers. How to loosen or get around those standards is up for discussion at today’s summit.
European emphasis on freeing up labor markets and cutting health-care and pension costs reflects Germany’s experience with a structural overhaul that made businesses more competitive and relaunched an economy struggling with the burdens of unification in 1990.
Launched in 2003, the German initiative trimmed unemployment and social benefits and made it easier to fire workers. The effort took years to bear fruit, coming too late for the project’s author,Gerhard Schroeder, who in 2005 ceded the office of chancellor to Angela Merkel.
Economic desperation has forced southern European countries to do a German-style remake in a hurry. Greek Prime Minister Antonis Samaras got a taste of the resulting frictions last week when the Democratic Left party quit his three-party coalition to protest his order to shut public broadcaster ERT, axing 2,600 jobs.
Soon-to-be-fired TV personalities and technicians occupied the broadcaster’s headquarters, in the sort of publicity stunt that masked economic progress. Greece, at the origins of the debt crisis, topped the Organization for Economic Cooperation and Development’s international reform rankings for 2011-12, followed by Ireland, the second bailed-out country during the crisis.Portugal, Spain and Italy also figure in the top 10.
Not everyone buys that assessment. One critic is Jean-Claude Trichet, who spent eight years as European Central Bank president sparring with governments over deficits. Political leaders have done too little to unleash the forces of growth, squandering the benefits of low interest rates and “unconventional” monetary stimulus, the ex-ECB chief said.
“I would put the blame on the governance of the euro area,” Trichet said at an Institute of International Finance panel discussion on June 25 in Paris. “There is a great disappointment because we know what we have to do, we have a consensus on the avenues we should go, and we do not deliver.”
European rules on the mutual recognition of professional qualifications show how even ideas that don’t require money can be controversial. At last June’s summit, the leaders pledged “as soon as possible” to strengthen a 2005 EU law that, for example, enables doctors or architects trained in one country to work in another.
No “radical change” was intended, the European Commission said when proposing the amended law in 2011. The main innovation was a European professional card, offering portable proof of the holder’s qualifications. Still, the wrangling dragged on. A provisional deal wasn’t struck until this month. The rules won’t take effect until after a European Parliament vote in October.
Political leaders are acting faster -- or are being seen to act faster -- on the jobs crisis in southern Europe, where unemployment in the under-25 age bracket is 56.4 percent in Spain, 42.5 percent in Portugal, 40.5 percent in Italy and 62.5 percent in Greece.
In February, the EU agreed to retarget 6 billion euros from its 2014-2020 budget for programs to fight youth unemployment. At the summit, the leaders will pledge to pay out that sum in the first two years of the period, according to a draft communique that calls youth joblessness “a particular and immediate priority.”
Singling out youth unemployment is misplaced, partly because the statistics overstate the problem, said Daniel Gros, director of the Centre for European Policy Studies in Brussels. He said teenagers and college-aged people can continue their education, increasing their future earnings power -- an option not available to older workers.
“You are really attacking the wrong problem if you focus specifically on youth unemployment,” Gros said. “To the extent you make special funding available to mitigate youth unemployment, you have to take that money away from somewhere else.”
Most European stocks climbed, following the benchmark Stoxx Europe 600 Index’s largest two-day rally in 11 months, as global equities gained. U.S. index futures also advanced.
Bankia SA gained 2.7 percent as the lender sold its 12.1 percent holding in IAG SA, the owner of Iberia. Repsol SA fell after its board rejected a $3.5 billion offer by Argentina to compensate the company for the expropriation of a stake in YPF SA last year. Subsea 7 SA tumbled 15 percent after saying full-year earnings won’t “show progress” from 2012.
The logo of Bankia SA branch sits on the bank's offices in Las Rozas, Spain. Photographer: Angel Navarrete/Bloomberg
The Stoxx 600 slipped less than 0.1 percent to 284.43 at 8:06 a.m. in London as more than three stocks rose for every two that fell. The benchmark MSCI Asia Pacific Index jumped 1.9 percent, heading for its biggest advance in nine months. Standard & Poor’s 500 Index futures increased 0.1 percent after the gauge climbed 1 percent for a second consecutive day.
“Equity indices have continued to claw their way back towards what hopefully will still prove to be support levels,” said Ian Williams, a market strategist at Peel Hunt LLP in London. “U.S. equities added another 1 percent and Asia followed suit and this time China joined in. This has set up a solid start in Europe today.”
Europe’s Stoxx 600 has lost 3.1 percent this quarter, its first drop in a year. The gauge has pared its advance so far this year to 1.7 percent after the Federal Reserve indicated that it may start paring its bond-buying program if the economy strengthens. Stocks rallied around the world yesterday after a report showing slower-than-estimated U.S. economic growth fueled speculation that the central bank will maintain stimulus.
In the Europe Union, finance ministers struck an agreement on how to handle failing banks to help bolster investor confidence and help overcome the euro area’s financial crisis.
In seven hours of emergency negotiations in Brussels that concluded at about 1:30 a.m. today, ministers settled on guidelines for assigning losses to private creditors and regulating public assistance. They also spelled out when governments can step in and established a role for the European Stability Mechanism, the euro area’s 500 billion-euro ($651 billion) firewall fund.
By Jim Brunsden, Rebecca Christie & Fred Pals - Jun 27, 2013 5:32 AM GMT+0400
European Union finance chiefs struck an agreement on how to handle failing banks, a step they said would bolster investor confidence and help overcome the euro-area financial crisis.
In seven hours of emergency negotiations in Brussels that wrapped up at about 1:30 a.m. today, ministers settled on guidelines for assigning losses to private creditors and regulating public assistance. They also spelled out when governments can step in and established a role for the European Stability Mechanism, the euro area’s 500 billion-euro ($651 billion) firewall fund.
Spanish Finance Minister Luis De Guindos Jurado, from left, Finnish Finance Minister Jutta Urpilainen and Austrian Federal Finance Minister Maria Fekter talk prior to an Economic and Financial Affairs Council at the EU Headquarters in Brussels on June 26, 2013. Photographer: Georges Gobet/AFP/Getty Images
A European Union flag flies outside the European Central Bank (ECB) headquarters in Frankfurt, Germany. The European Central Bank is due to oversee financial supervision in the euro zone next year, the first stage in a strategy combining new EU resolution procedures along with national backstops. Photographer: Ralph Orlowski/Bloomberg
“It took a long time and it was arduous and it was intense,” German Finance Minister Wolfgang Schaeuble told reporters after the meeting. He said the deal is an “important step” toward making clear “that shareholders and creditors are liable first and foremost.”
The deal came hours before EU government leaders meet to take stock of the progress toward their 2012 pledge to break the cycle of contagion between banks and sovereign borrowers. The European Central Bank is due to oversee financial supervision in the euro zone next year, the first stage in a strategy combining new EU resolution procedures along with national backstops.
Now that EU nations have agreed among themselves, they can start talks with the European Parliament on a final version of the bill. EU financial-services legislation must be agreed between nations and the assembly. The legislature’s text grants nations a clear right to nationalize failing banks, if the step is seen as essential to preserve financial stability.
While nations endorsed the banking-union project in principle last year, Germany has indicated that it disagrees with the European Commission’s blueprint, warning that a strong central resolution authority, backed by a common bank fund, goes beyond what is possible under current treaties.
Today’s deal shows that none of the EU’s 27 members has abandoned the framework. The meeting of finance ministers was called after 19 hours of talks in Luxembourg dissolved at 3:30 a.m. on June 22, amid recriminations over which creditors face writedowns and when nations would be allowed to step in.
French Finance Minister Pierre Moscovici said France got “what we wanted” by ensuring a role for the the ESM. “It would not have been coherent on the one hand to put in place a direct mechanism for recapitalization by the ESM and on the other to exclude the ESM from the game of flexibility,” he told reporters today.
To reach a deal, ministers had to decide when countries could declare that a financial-system threat is grave enough to trigger exceptions to the loss formula. The aim was to find a middle ground between nations such as France, the U.K. and Sweden, which stressed the need for regulators to be able to adapt their approach to events on the ground, and countries such as Germany, the Netherlands, and Finland, which wanted predictable rules.
Swedish Finance Minister Anders Borg said the accord leaves open the path for nations to take stakes in their most important banks. Sweden also won other concessions that he said lay a foundation for talks with the European Parliament.
“We have achieved a cornerstone from our starting point,” Borg said today. “There is a reasonable degree of flexibility when it comes to inject capital into banks.”
Nations that had fought to limit flexibility, under concern that it would raise funding costs for banks whose nations can’t or won’t use bailouts, also endorsed today’s deal.
“It’s a balanced compromise,” Danish Economy Minister Margrethe Vestager said. “The way that you earn flexibility, that road also goes through bail-in” which “sends a very sound and healthy signal that bail-in is the main rule.”
The ministers’ agreement requires regulators to write down creditors, in order of seniority, until 8 percent of the distressed bank’s liabilities are wiped out, before they could grant exemptions and turn to national backstops instead. The deal offers some wiggle room for regulators, after notifying the European Commission, to exempt some creditors and shift the burden to others.
When government backstops are tapped, the first in line would be national resolution funds that countries finance by levies on their banks. The deal says those funds should reach the size of 1.3 percent of a nation’s insured bank deposits and says the Brussels-based commission must approve any use. Today’s agreement says these funds won’t be allowed to contribute an amount more than 5 percent of a failing bank’s liabilities unless unsecured senior bondholders are wiped out.
Michel Barnier, the EU’s financial services chief, urged nations and the parliament to reach agreement on the deal by year-end. Today’s accord also paves the way for further plans from the European Commission to centralize handling of crisis-hit banks. Barnier will soon present proposals to create a single resolution system for euro-area banks, building on the rules discussed by ministers today.