Euro leaders look to the future
After the agreement of a debt crisis deal in Brussels, there come demands for a credit crunch contingency plan and guarantees for banks
Nikhil Kumar is The Independent's New York correspondent. He was formerly assistant editor on the foreign desk and has also done a variety of jobs on the city desk, where he wrote about markets, commodities and other business and economics topics.
Friday 28 October 2011
European leaders have given the green light for a sweeping public guarantee of bank funding in an attempt to head off the threat of another debilitating credit crunch. The measures are designed to ensure that banks continue lending to the real economy as officials attempt to solve the debt crisis.
Politicians at the emergency summit in Brussels said the banking sector would need access to ways of borrowing money for the long term to supplement the short-term funding currently on offer at the European Central Bank (ECB) and national central banks.
To do so, they said guarantees on bank liabilities "would be required to provide more direct support" to some lenders seeking to borrow money for longer durations.
And unlike three years ago, when various countries and national central banks implemented extraordinary liquidity measures to support the financial system, European leaders said "a simple repetition of the 2008 experience with full national discretion in setting up liquidity schemes may not provide a satisfactory solution under current market conditions".
"Therefore a truly co-ordinated approach at EU-level is needed regarding entry criteria, pricing and conditions," they said, calling on the European Commission and financial bodies such as the ECB and the European Banking Authority (EBA) to "urgently explore" ways of achieving this goal.
Analysts said co-ordinated action was needed owing to the lack of financial firepower available to troubled eurozone states such as Spain and Italy.
Although funding needs for 2011 have been "mostly addressed", the EBA said the market for longer-term funds was currently closed "due to increasing concerns over the sovereign situation and banks may find it difficult to address their funding needs in 2012".
"Confidence in the market needs to be restored," it explained. "This can only be done through a three-pronged approach: addressing the sovereign situation, through banks recapitalisation and term funding guarantees."
But analysts said that in contrast to the recapitalisation plans agreed at the summit, which require banks to hold a capital buffer of nine per cent after accounting for their sovereign debt exposures, details of how the continent-wide liquidity mechanism would work and who would provide the guarantee were thin on the ground.
For its part, the EBA said banks will have to pay "a fee commensurate to the amount guaranteed and to the risk profile of the beneficiaries". "The scheme will support banks in accessing term funding at reasonable conditions. Therefore banks will have the possibility to continue their lending activities," it said, pointing out that most national guarantee schemes put in place in 2008 had turned a profit for the Governments in question.
Ian Gordon, a banking analyst at Evolution Securities, said the bottom line was that "necessary support to enable banks to overcome market paralysis will be forthcoming".
"I would speculate that they are toying with a guarantee from some central entity," he explained, adding that while there was little clarity on the nature of this entity, "it could be a special vehicle" with recourse to funds from the European Financial Stability Fund (EFSF), the eurozone's bailout fund.
RBS analysts also raised the prospect of a link to the fund. "Term debt guarantees have historically proven to be a good way to re-open private-sector markets. However, in order to break the inter-connection between banks and their sovereign we believe that the guarantor would need to be eurozone-wide, ie the EFSF," they said.
Among the options could be a Credit Guarantee Scheme along the lines of the one introduced by the UK Government as part of its package to protect the financial system in late 2008. Mr Gordon said the statements from Europe suggested that a similar mechanism might be in the works in Brussels.
- 1 The truth about 'girl things': Three cheers for Heather Watson's honesty
- 2 Man who held up 'hire me' sign at Waterloo station returns a year later with 'I'm hiring' sign
- 3 UK weather: Snow to fall in the coming week with sub-zero temperatures to last until early February
- 4 Saudi preacher who 'raped and tortured' his five -year-old daughter to death is released after paying 'blood money'
- 5 Men behaving badly: Urinating while standing, 'manspreading' and the gendering of selfishness
Man who held up 'hire me' sign at Waterloo station returns a year later with 'I'm hiring' sign
UK weather: Snow to fall in the coming week with sub-zero temperatures to last until early February
Saudi preacher who 'raped and tortured' his five -year-old daughter to death is released after paying 'blood money'
Iraq invasion 2003: The bloody warnings six wise men gave to Tony Blair as he prepared to launch poorly planned campaign
Ellen DeGeneres leads Johnny Depp, Gwyneth Paltrow and Paul Bettany in revealing game of Never Have I Ever
Nigel Farage: NHS might have to be replaced by private health insurance
'We would evict Queen from Buckingham Palace and allocate her council house,' say Greens
French court convicts three over homophobic tweets, in case hailed as a 'significant victory' by LGBT rights campaigners
British Muslim school children suffering a backlash of abuse following Paris attacks
George Galloway condemns 'racist, Islamophobic, hypocritical rag' Charlie Hebdo at freedom of speech rally
Islamic history is full of free thinkers - but recent attempts to suppress critical thought are verging on the absurd
iJobs Money & Business
Negotiable: Recruitment Genius: A Tax Assistant is required to join a leading ...
£16000 - £25000 per annum: Recruitment Genius: This is an exciting opportunity...
£45000 - £47000 per annum + bonus + benefits: Ashdown Group: Java Developer / ...
£35000 - £38000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...