Wednesday, October 08, 2008
Not just the euro
Booker in The Daily Mail reckons that this crisis could not only deep-six the euro, but the whole of the EU as well.
Some of the comments are interesting as well – the EU does not have a lot of friends amongst Mail readers.
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He's back
England Expects is back – under license. And he's picked up this.
Why am I not upset?
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Neelie 1 – Ireland 0
Ireland's €400 billion-plus bank guarantee scheme, we are told, can't be finalised without the approval of the European Union, but Irish Prime Minister Brian Cowen plans to have a draft of the proposal ready later in the week.
However, the finished proposal will not be ready to be put before the parliament until 15 or 16 October, when the parliament will also be debating the government's 2009 budget, which will be unveiled on 14 October (the day before the European Council). Cowen told the Irish parliament that "contacts are ongoing" with the financial regulator, the central bank of Ireland, and the EU. "Issues are currently being factored into the draft of the scheme," he said.
I looks like Neelie has had her way.
However, in effect, Ireland no longer has an unlimited guarantee - and never did have. On the other hand, with Darling's partial nationalisation of our banks, these UK institutions have what amounts to an unlimited state guarantee, giving their customers roughly the same status as that enjoyed by Northern Rock investors.
Once this interesting situation is absorbed by the good people who rushed to put their money in Irish (or Post Office) accounts, will we suddenly see reversal in the flow of funds? And if the good people of Europe also wake up to what is happening, can we see a similar rush of money from over the Channel?
And if that does happen, what price banking stability?
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What journalists find amazing
Just returned from a forum organized by theExiled Journalists Network (who appear to have exiled the apostrophe) who appear to be a useful bunch of people, though I am not that impressed by the patrons: Yasmin Alibhai-Brown, who is known to us all, Richard Dowden, Director of the Royal African Society, who has his moments of sanity, Lindsey Hilsum, Channel 4 News International Editor and former NUJ President Tim Lezard (and the less one says about the NUJ in connection with media freedom, the better).
This particular forum was of great interest as it was about the situation in Belarus, a country that has somehow become everybody's favourite tyranny, so the Left feels justified in talking about it. Apparently, President Lukashenka is well aware of this anomalous and, to him, not unuseful situation. At a recent press conference he said to the assembled hacksproponents of journalistic integrity that they should be very happy to talk to him as he was "Europe's last tyrant", a moniker he clearly revels in.
This story was told by Mike Jempson, Director of the co-sponsoring organization, the MediaWise Trust and he was not amused by the idea that this Belarussian dictator should be amusing himself at the journos' expense.
Even less amused was Marc Gruber, who was there from the International Federation of Journalists, a self-important group about which we have written before. He had looked up Belarus on Google News and found that in all languages there were more stories about football than about the rather dubiously run elections. How could this be so? How could journalists be so forgetful of their high calling?
Well now, could this have anything to do with the fact that journalists and editors are interested in selling their particular brand of the media (except for the BBC who have an earmarked income but that's another story) and there are more people out there interested in football than in elections in far-off countries of which they know little, care even less and where the chances of a free and fair vote are remote? Is Mr Gruber not a journalist himself?
Some of us would welcome serious reporting of news from a little nearer home, such as the European Union. It seems that reporting from absolutely everywhere is now left to the blogs. We shall endeavour to provide a substitute for the Big Media.
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God help us!
No wonder we are in such trouble. It is more than a week since David Cameron stood in front of his audience in Birmingham and declared that one of the main problems in the financial crisis was "a new international accounting regulation called 'marking to market' [which] automatically downgrades the value of banks."
Now, finally, after ignoring this issue – not even bothering to report the Great Leader's words - The Daily Telegraph wakes up and storms into action with a cross-page leader offering its recipe to solve this huge crisis.
And there, prominent in the text is this:
… changes to accounting rules can lift confidence and alleviate anxiety in the financial markets. The system known as "mark to market" - which records the value of a security to reflect its current market value rather than its book value - can force troubled institutions into insolvency and erodes investor confidence. These rules do not work when there is no market or when it is in such turmoil. The Financial Services Authority should announce that it is prepared to suspend them.I am not going to use the most appropriate word for these unmitigated fools on this site. But if you go to this post and look at the last word of the second paragraph (don't look if you are easily offended), you will see exactly what I mean.
As we have written on the blog, laboured to the point of desperation, not least here, one week ago, "mark to market" rules are a competence of the European Union.
The particular rules are implemented variously by Directive 2006/49/EC of 14 June 2006 "on the capital adequacy of investment firms and credit institutions", together with Directive 2006/48/EC, augmented by Commission Regulations made under the aegis of Council and European Parliament Regulation (EC) No 1606/2002, implementing IFRS agreed in principle at Basel II, as promulgated by the International Accounting Standards Board.
Therefore, WE CANNOT CHANGE THEM. The Financial Services Authority cannot announce "that it is prepared to suspend them". It has no authority to do so and, furthermore, as we saw yesterday, the EU has decided not to change or suspend them.
If a major and supposedly authoritative newspaper (joke – I know) cannot get its brain round the fact that we have another government calling the shots, and is seemingly completely unaware of the fact that it is advocating something that simply cannot be done, then there is no hope for us.
The man with the placard has it right.
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Joining the dots
Today, after days of "dithering" – a favourite Tory and media label – chancellor Alistair Darling suddenly launches "a drastic rescue of Britain's high street banks in move designed to head off a cataclysmic failure of confidence."
This just happens to be a day after an emergency meeting of the finance ministers of the 27 EU member states. Is this a coincidence?
At the Ecofin meeting yesterday, two things happened. Firstly, the ministers effectively gave the green light to member states to break the EU's state aid rules.
Secondly, they turned their faces away from initiating structural reforms to the regulatory system, which might have freed the logjam in inter-bank lending – preferring instead to make one minor and largely cosmetic change.
Now, today, we see Darling introduce a scheme designed specifically to free up inter-bank lending, including the provision of at least £200 billion to banks under the Special Liquidity Scheme and the injection of £50 billion capital into a select group of British banks - to the general approval of the Europhile Tory hierarchy.
Thus we see an alternative and far more expensive plan aimed at achieving that which the EU members states collectively failed to address. Furthermore, it is one which, in its totality, almost certainly breaches EU state aid rules, as well as being "discriminatory" – two of the EU's mortal sins.
So, Britain is in Europe but not ruled by Europe? Just join the dots …
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What they actually agreed
Our excitement at the EU's announcement on the "mark to market" rules was misplaced. All the Council did was endorse a very minor "clarification" to the existing rules, and call for this formally to be incorporated into EU law.
It is funny, but the only times we really get things seriously wrong on this blog are when we take media reports at face value, without checking the sources first. This we did when we wrote up our report from the The Guardian (online edition).
However, there is something of a difference between how the Council's move was reported, and what was agreed. Actually, it was not even aGuardian report – simply a cut-and-paste of a Reuters release. Just to remind you, the nub of what it said was:
EU finance ministers agreed to change how the mark-to-market rule is applied in the third quarter so that European banks are treated in the same way as their US competitors in the face of the worst financial crisis in 80 years.Now the Council communiqué has been published online, we can see that what it says is very different. Opaque it is, but here are the relevant paragraphs:
We underline the necessity of avoiding any distortion of treatment between US and European banks due to differences in accounting rules. We take note of the flexibility in the application of mark to market valuation under IFRS as outlined in recent guidance from the IASB. Ecofin strongly recommends that supervisors and auditors in the EU apply this new guidance immediately.Thus, the Reuters report – or, at least, the headline - is fundamentally misleading. EU finance ministers have not "agreed to change how the mark-to-market rule is applied."
We also consider that the issue of asset reclassification must be resolved quickly. To this end, we urge the IASB and the FASB to work together on this issue and welcome the readiness of the Commission to bring forward appropriate measures as soon as possible. We expect this issue to be solved by the end of the month, with the objective to implement as of the third quarter, in accordance with the relevant procedures.
All the Council has done is "taken note" of a statement issued by the International Accounting Standards Board (IASB). That turns out to be a reference to another statement, this one issued by the US Securities and Exchange Commission (SEC) on 30 September. That offers additional guidanceon how to measure "fair value" – the basis of mark to market valuations.
The IASB stresses that the "clarification" is not an amendment of the (US) legal code, reiterating that it is simply exactly what the SEC says it is, "additional guidance", and thus endorses it.
According to the Reuters report, European banks in the third quarter are now being "allowed", in rare circumstances, to move an asset from their trading books, where assets are valued on a mark-to-market basis, and to place them in their bank books, where assets are valued at cost. That is what the Council means by "asset reclassification".
But this change was effectively handed down from the IASB - acting as an agent for the EU commission which gives its rulings legal effect. It thus already applies from 3 October, when the statement was issued. The Council has done nothing more than add its own endorsement – an endorsement which is entirely irrelevant.
As to substantive changes, there are none. In the second paragraph which we cite, the Council is saying that this very small part of the problem related to mark to market valuation "must be resolved quickly" - i.e., formally adopted into the EU legal code.
To this end, it says in part, "we urge the IASB and the FASB to work together on this issue." The IASB we have met before – the FASB is the Financial Accounting Standards Board, its US counterpart. It is already set on producing further clarification to the earlier clarification, so the Europeans are still behind the curve.
More importantly though, there is a very significant difference between the IASB and the FASB. The FASB is part of the US government and, together with the SEC, it has complete control over US standards and procedures, with the ability to place measures before Congress for enactment into legislation if need be.
On the other hand, the IASB is an independent non-profit organisation. It has no regulatory power but makes recommendations which are then adopted (with or without changes) by the EU commission before they become law – by way of Commission Regulations.
In that process, by the way, there are two EU bodies involved, the Accounting Regulatory Committee (known as the ARC) and Contact Committee. These actually do the detailed work for the commission.
The crucial thing here is that the IASB, the ARC and the Contact Committee, and then the Commission through its own regulatory process, can only deal with detailed accountancy procedures. These only implement what are known as the "pillar III" aspects of Basel II, not the whole of the agreement.
The rest is implemented via the Capital Adequacy Directive, which is not within the gift of the Commission to change directly (as opposed to a Commission Regulation, which it can). Changes to that must go through the tortuous procedure of getting approval from the Council and EU parliament, which can take years.
The point – which we made in our earlier post - is that the problem for the financial services industry lies not so much in the mark to market rules, per se, or in the "fair value" method of valuing assets. The real issue is the complex rules which require the structuring of debt and the risk assessment model applied. These are found in the Directive.
Thus, while the Council welcomes "the readiness of the Commission to bring forward appropriate measures as soon as possible," this is actually very limited in effect, as is its statement that, "We expect this issue to be solved by the end of the month, with the objective to implement as of the third quarter, in accordance with the relevant procedures."
The "issue" to which the Council is referring is not the Directive. This was clarified at the Council press conference (pictured). There, via Reuters, council president Christine tells us that they are indeed talking about adopting the SEC's "additional guidance" formally into EU law. "We feel this method should also be allowed to apply to establishments in Europe," she says.
This, when all is said and done, is nine tenths of nothing. It amounts to a very minor procedural change in the rules, one with very, very limited application. It certainly does not amount to either a suspension of, or a fundamental change to, the mark to market rules. It does not affect the basis of asset structuring or risk assessment.
Finally, to compound obfuscation with confusion, the Council seems uncertain of the "relevant procedures" to which it refers. We are told that the IASB meets in London on 13-17 October, ostensibly "to consider aligning its mark-to-market rule with changes made in the United States."
We are then told that, if the IASB "did not make the change," the EU commission would make a formal proposal "within days" for EU ministers to adopt. But the commission does not need Council approval for such a minor change.
Under the aegis of Regulation (EC) No 1606/2002, it has the delegated power to issue is own regulations, after consulting the Accounting Regulatory and Contact Committees, both of which are made up from member state officials. The Council is not in the loop.
Putting this all together, we cannot even complain that the Council has misrepresented the situation. We have been misled by an ambiguous headline. But if the EU has ducked the issue, it is probably because the rules are far too difficult and complex to change. That, though, is not without its penalties. It means that the problems inherent in the current regulatory system will remain unaddressed.
Meanwhile, as the Council was yesterday deciding to do next to nothing, the US Securities and Exchange Commission announced further developments on its study of "mark-to-market" accounting, "as authorized by Sec. 133 of the Emergency Economic Stabilization Act of 2008, signed into law by President Bush last Friday."
The study is due for completion by 2 January 2009 and will, undoubtedly, lead to fundamental improvements in the US system. It looks like the Americans will have the last laugh leaving the EU, as always, trailing in their wake.
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