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Europe

Moody’s downgrades Italy;

European finance ministers agree to recapitalise European banks

Moody’s last night cut Italy’s credit rating by three notches and placed it on a negative outlook, citing increased funding pressures and “economic and political uncertainties” facing the country. Moody’s did accept that the chances of outright default in Italy are “remote”.

The FT reported last night that European finance ministers have agreed that a series of bank recapitalisations is needed and are examining ways to implement such a scheme. EU Economic and Monetary Affairs Commissioner Olli Rehn said, “There is a sense of urgency among ministers and we need to move on...Capital positions of European banks must be reinforced to provide additional safety margins and thus reduce uncertainty.” Chancellor George Osborne supported the move, saying, “It’s clear now that the European banking system needs to be strengthened and needs more capital.” After a volatile few days, financial markets rebounded strongly on the news, despite Rehn cautioning that there was “no formal decision” yet. One option being discussed for recapitalisation is increasing the capital requirement for banks which went through the recent stress tests. Meanwhile, Belgian Finance Minister Didier Reynders yesterday confirmed and endorsed the plan to establish a ‘bad bank’ for Dexia, worth up to €200bn, which will be guaranteed by the French and Belgian governments.

Spiegel reports that European finance ministers have been “intensively” discussing the prospect of a Greek default at their meeting in Luxembourg over the last few days, which was unofficially confirmed by German Finance Minister Wolfgang Schaeuble. Bild reports that the CDU/CSU government is creating a €10bn ‘cushion’ in the German budget to help absorb the costs of a Greek default to the German economy, outside of the financial sector.

In one of his final appearances as ECB President, Jean-Claude Trichet stressed that the ECB would not be the lender of last resort for the eurozone, saying, “It is their [European governments] responsibility, individually and collectively, to ensure financial stability...if it is not done by governments it will not be credible.” Trichet also rejected the proposal that the EFSF, the eurozone’s bailout fund, could become a bank and gain access to ECB liquidity provision.

The Greek government announced yesterday that it has enough money to last until November, allowing Eurozone finance ministers more time to agree on the next tranche of Greek bailout funds, as well as to finalise the expanded role of the EFSF and create a plan to recapitalise banks. The Telegraph reports that European finance ministers will reopen talks on the second Greek bailout on 13 October and may revise the plan to force private bondholders to take bigger write downs.

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David Lidington: Brussels can supplement but never replace Britain’s foreign policy

Open Europe yesterday jointly hosted a panel debate at the Conservative Party Conference, entitled, “Will Brussels run Britain’s foreign policy?”. Speaking at the event, Europe Minister David Lidington said that foreign policy conducted at the European level could supplement Britain’s own foreign policy by providing extra leverage, but it could never replace it. He argued that although he had opposed the establishment of the European External Action Service as he deemed it to be unnecessary, now that it existed, the UK ought to adopt a pragmatic attitude and strive to make it work. Former Foreign Secretary Lord Hurd argued that while progress towards a common European foreign policy had been “painfully slow”, in many areas it was essential to establish a common position, in particular in terms of Europe’s relations with Russia.

Czech Defence Minister Alexander Vondra argued that the biggest issue of concern was the cuts to defence spending around Europe, especially in comparison to the US, which threatened to diminish NATO’s capabilities. He also argued that France and Germany would veto Turkish entry to the EU because they feared that the London-Ankara axis might become more powerful within the EU than the Paris-Berlin one. Sweden’s Minister for International Development Gunilla Carlsson stressed the importance of the UK government “playing a positive role in the EU."

Open Europe events

Boris Johnson: Referendum on UK-EU relations “not a bad idea”;

Hague: Opportunity to repatriate powers from Brussels “isn’t there at the moment”

During a fringe event at the Conservative Party Conference, the London Mayor Boris Johnson said, “The British people haven’t had a say on Europe since 1975...It seems to me to be that if a reasonable question could be framed and put to the people of this country, I think it is not a bad idea. He added that an in/out referendum could be an option, although he predicted that voters might rather demand a “looser relationship” with the EU.

However, Foreign Secretary William Hague told ITV’s Daybreak programme this morning, “All the uncertainty of having a referendum would probably do further damage to economic confidence. It would not help jobs and businesses in this country.” Hague also told the BBC’s Today programme, “It is hardly any secret that the Conservative Party would like some powers returning to the United Kingdom but that is not currently the position of our whole coalition government and that opportunity isn’t there at the moment because major treaty change isn’t on the table.”

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Osborne claims victory on new EU derivatives rules

The UK has withdrawn its objections to new EU financial regulation on derivatives after winning a series of last-minute concessions. The Telegraph notes that EU diplomats reported that France was “livid” that Britain had defeated plans to give the Paris-based EU financial supervisor, ESMA, the power to decide who was allowed to be a clearing house for OTC derivative trades. The FTquotes George Osborne saying that the changes in effect “remove a eurozone veto” against London. Osborne dropped Britain’s most controversial demand – to extend the scope of the regulation package to exchange-traded derivatives.

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Reuters reports that EU finance ministers yesterday reached political agreement on the so-called six-pack of economic-governance rules.

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The FT reports that the FSA has acknowledged for the first time that the EU’s Solvency II capital rules for the insurance sector are now likely to enter into force in January 2014, a year later than expected.

FT

The Telegraph reports that Attorney General Dominic Grieve has said that MPs may have to vote again to oppose the Strasbourg-based European Court of Human Rights’ moves to allow prisoners the vote. Separately, the Times notes that, in his keynote speech at the Conservative Party Conference today, David Cameron will call for the Human Rights Act to be replaced.

Times

In an interview with FT Deutschland, German Interior Minister Hans-Peter Friedrich suggests that Europe might need to proceed more united in areas like foreign policy, defence or energy supply but “there are also areas where the Commission, over the years, has acquired competency, although many of these issues could be decided on a national, regional or local level.”

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The Guardian reports that fuel from oil sands projects may face an effective ban under a proposed EU directive on fuel quality. UK Transport Minister Norman Baker stated in a letter dated 26 September that the Government would oppose the inclusion of tar sands in the directive.

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