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Irish stress tests reveal a further €24bn black hole;
Portuguese borrowing costs hit new highs on worse than expected budget deficit
Stress tests on Ireland’s banks, published yesterday, have revealed that they require €24bn in additional capital. This would push the total cost of the government’s bank rescues to about €70bn if it provided the funding. Some of the new cost will ultimately be covered by the existing EU/IMF bail-out, but some funds may also come from either private investors or capital-raising actions by the banks. However, the Telegraph notes that investors remain concerned that Ireland has not yet agreed a new funding deal with the ECB to provide more secure financing to its banks on a longer-term basis. The Irish Independent quotes Central Bank Governor Patrick Honohan saying there is nothing “imminent” on the cards.
While previous stress tests have been criticised, the results published yesterday have generally been considered an accurate picture of potential losses. However, FT Alphaville is more cautious, warning that the results did not include losses from the specified asset sales, but also that there will still be some lifetime losses on loans past the three year horizon of the stress tests. FT Alphaville also notes that some Irish banks were trying to reduce their loss figures by stressing the role of forbearance in the Irish mortgage market, despite it only being a temporary tool for delaying the realisation of losses.
The BBC’s Robert Peston writes that those “who fear that Spain’s banks haven’t yet been forced to disclose the full extent of the losses they face on their exposure to the burst residential and commercial property bubble will not be reassured by events in Ireland today.”
Meanwhile, Portuguese elections have been scheduled for 5 June – only 10 days before the country is due to repay €4.9bn in outstanding loans. It is unlikely a new government would be formed in such a short time. The Telegraph reports that, despite growing calls for the country to seek a bailout, Fernando Teixeira dos Santos, the country's interim Finance Minister said, “The government is not in condition to and does not have the powers to request any type of external aid.”
The WSJ notes that Portugal's official statistics agency said yesterday that the country’s budget deficit stood at 8.6% of GDP in 2010, as opposed to its target of 7.3%. Portugal’s cost of borrowing hit fresh euro-era highs, with 10-year maturities shooting up to 8.4%. The Guardian reports that Brazil is considering offering to help Portugal with a financial lifeline.
There is continued speculation about an ECB interest rate rise with inflation expected to have hit 2.6% in March. The Guardian quotes Andreu Mas-Colell, the Catalonian regional government's Economy Minister warning that a eurozone rate rise would spell “disaster” for Spain.
BBC BBC: Peston Independent Le Figaro Straneuropa EUobserver IHT Times Guardian Guardian 2 Mail FT FT Money Supply FT Alphaville WSJ European Voice Le Monde Times FT 2 WSJ 2 Telegraph 2 Telegraph 3 El Pais BBC Times: King FT 3 El Pais 2 Reuters Bloomberg Guardian 3 Guardian 4 City AM WSJ 4 Telegraph 4 Express Irish Independent Irish Times Irish Independent 2 Irish Times 2 Irish Independent 3
Syed Kamall: EU rules on short-selling could reduce market liquidity;
FSA: EU regulations should not extend to the sovereign debt market
Open Europe yesterday hosted a debate in London discussing the implications of the EU’s new short-selling rules for the UK financial services sector and investors around Europe.
British MEP Syed Kamall argued that, in their current form, EU regulations on short selling could have serious unintended consequences. Short positions, he said, are often used to hedge or offset the risk of long positions, especially in equity and sovereign debt markets, and this is particularly true for those who invest in peripheral eurozone countries. By intervening in this, EU regulations could reduce market liquidity.
The FSA’s Micheal Treip argued in support of the disclosure of short positions to both regulators and the market. However, Treip noted that the FSA did not see why these regulations should extend to the sovereign debt market, particularly considering the eurozone crisis. Andrew Baker, Chief Executive of the Alternative Investment Management Authority, warned that evidence suggests that these regulations could increase the “cost of capital [and] prevent efficient risk management”. Sam Jones, Hedge Fund Correspondent at the FT, pointed out that in many cases short positions are an important part of diversifying risk within portfolios.
The event featured on the website Global Finance Strategy. A full write up of the event is available on the Open Europe events page.
GFS Open Europe events Open Europe research
Economist: Eurozone periphery is “bust, admit it”
A leader in the Economist argues that, “Greece, Ireland and Portugal should restructure their debts now”. It continues, “These economies are on an unsustainable course, but not for lack of effort by their governments. Greece and Ireland have made heroic budget cuts. Greece is trying hard to free up its rigid economy. Portugal has lagged in scrapping stifling rules, but its fiscal tightening is bold. In all three places the outlook is darkening in large part because of mistakes made in Brussels, Frankfurt and Berlin.”
Meanwhile, on Conservative Home, Martin Callanan, leader of the Conservative MEPs, argues that, “Apart from contributing to the IMF portion of a Portuguese bailout, Britain should refuse to take part… Any steps to force the UK to join in by handing over money through the EFSM should be challenged politically, and if necessary legally as well.”
The Economist’s Charlemagne notes that EU decision-making has been debilitated by domestic political concerns. However, the article adds, “The answer is not to bemoan national politics, but to enhance democracy. In Europe the Brussels institutions could be made more relevant to voters, for instance by strengthening the influence of national parliaments over EU decisions.”
Following the Irish bank stress tests, City AM’s Alistair Heath argues that Ireland should learn the lessons of Denmark, which forced losses on bondholders. “The Danish authorities have emerged as key proponents of this more rational approach and have even written to the European authorities, urging them to be harsher on senior bondholders.” The Irish Times argues, “The cash for the latest bailout will come from State resources and from the €67.5 billion financing facility agreed with the EU and the IMF. But the wider issue of whether the EU-IMF agreement leaves the Irish economy on a sustainable path remains open to question. This will form part of complex negotiations on the future of the euro zone over coming months.”
Open Europe research Open Europe press release Economist: Leader WSJ: Mattich FT: Stephens FT Alphaville Conservative Home: Callanan Economist: Charlemagne Telegraph: Warner City AM: Heath Irish Independent: Keenan Irish Independent: Sheahan Irish Times: Carswell Irish Times: Editorial
Reuters reports that credit rating agencies have warned that they may stop rating risky eurozone countries if the European Commission pushes ahead with plans to make them legally liable for ‘flawed’ downgrades. Meanwhile, Handelsblatt reports that, starting from June, the EU may decide not to recognise credit ratings on financial securities issued in the US and other third countries if they do not comply with the EU’s quality standards, which are being drafted by the European Commission and the new European Securities and Markets Authority (ESMA).
Handelsblatt Bloomberg Reuters Open Europe research
European Parliament President allows OLAF investigation into MEPs accused of corruption
In response to a letter from EU anti-fraud agency OLAF, European Parliament President Jerzy Buzek announced yesterday that he will allow OLAF to conduct an administrative investigation into MEPs accused by the Sunday Times in the cash-for-amendments scandal. However, Buzek continues to deny OLAF access to MEPs’ offices. “I can not allow OLAF to enter into the MEPs offices and I urged the Agency to fully respect the immunity of Members”, reads the press release.
EUobserver European Parliament press release
EUobserver reports that the European Commission is considering creating a new counter-terrorism office which would pull together the EU’s existing security agencies, including Eurojust and Frontex.
EUobserver
EU ministers to discuss ‘redistribution’ of North African refugees
A spokesman for EU Home Affairs Commissioner Cecilia Malmström said yesterday that EU interior ministers will meet on 11 and 12 April to discuss the possibility of “redistributing” among EU member states some of the North African refugees who have reached Italian shores over the last days. Meanwhile, La Repubblica reports that Italian Foreign Minister Franco Frattini has complained about the lack of solidarity from France and other EU partners. He warned that forced repatriation of part of Tunisian migrants on the Italian island of Lampedusa “is an extreme measure, but cannot be ruled out.”
A comment piece in Le Monde carries the headline “European defence, dead and buried in Libya” and notes that, in its management of the Libyan crisis, “the EU has miserably failed. ‘Instituted’ Europe has not passed the test. In this story, it doesn’t exist…History will retain that this adventure has been led by two European countries [the UK and France], not by a united Europe. This is not quite the same.”
Repubblica Reuters Italia Le Monde: Franchon Economist: Charlemagne El PaísEl País: Torreblanca
The Telegraph reports that the UK has failed to persuade other EU governments to scale back the EU’s Galileo satellite system project, the public cost of which is likely to rise to £4.7bn due to a lack of enthusiasm among private investors.
Telegraph Open Europe research
A report sponsored by the European Commission, which NGOs have fought to be made public, has found that the EU’s fisheries partnership agreement with Morocco only created 170 jobs in Morocco and failed to stimulate the development of the country's fishing sector.
EUobserver
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The Government’s new initiative to promote growth in Europe: Downing Street goes for much needed shock therapy
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