Bloomberg News

Schaeuble Dismisses Quick Bank Union, Limits Euro Aid Tools

July 09, 2012

Germany dismissed a rapid move toward direct bank recapitalization by the European rescue fund, limiting the tools for shoring up Spain’s banks as the euro-area debt crisis simmers.

Finance Minister Wolfgang Schaeuble dismissed “false expectations” raised by euro leaders last month that the economically troubled euro zone would act quickly to unify the oversight of its banking system.

“It will take time, it’s complicated, it isn’t easy to do,” Schaeuble told reporters before a meeting of euro finance ministers in Brussels today. “Everyone knows that the setup of European bank supervision isn’t a trivial matter, but a huge job.”

Germany’s go-slow approach reflected mounting public opposition to bailouts in northern Europe just as southern countries such as Spain and Italy clamor for official assistance to tame an increase in borrowing costs.

A four-day slump in Spanish and Italian bonds puts euro- area governments under pressure to act, especially after the European Central Bank showed no signs of restarting its bond- buying program.

The ECB last week lowered its benchmark interest rate by 25 basis points to 0.75 percent, a record, to help bolster the region’s economy and encourage lending.

‘Big Bazooka’

“One should not underestimate the effect of the reduction of the interest rate,” ECB council member Ewald Nowotny told reporters in Brussels. “I know that the markets were a bit disappointed. They always like the big bazooka, but I have to say the bazooka is a very dangerous instrument.”

Finance ministers aim to agree on the outlines of as much as 100 billion euros ($123 billion) in loans to aid Spanish lenders and will have a first debate over the possible easing of Greece’s bailout terms.

Plans to recapitalize Spain’s banks, first announced on June 9, have failed to calm markets because the European loans would be channelled through a Spanish government agency and add to the recession-hit country’s debt load.

While euro leaders on June 29 pledged to enable the permanent bailout fund to make capital injections directly to distressed lenders, that power won’t come about until Europe creates a single bank-supervision system.

Rescue Blueprint

The European Commission, which proposes European laws, expects to “have this in place by year-end,” Financial Services Commissioner Michel Barnier told a European Parliament committee today. Other officials have said the second half of 2013 is more likely.

An accord tonight on Spain’s bank-rescue blueprint would make a final agreement possible on July 20, Spanish Economy Minister Luis de Guindos said. He also expected debate over a “new path of fiscal adjustment” that would give Spain an extra year, until 2014, to drive its budget deficit below the euro limit of 3 percent of gross domestic product.

Today’s increase in Spanish and Italian borrowing costs relative to German levels nullified gains made in the wake of last month’s summit-level commitment to intervene in bond markets “in a flexible and efficient manner.”

Italian Prime Minister Mario Monti, who doubles as finance minister, came back to Brussels to press his case for steps to reduce Italy’s bond yields, whether using the euro bailout fund or the ECB.

‘All Ideas’

The ECB went a 17th week without settling any government bond purchases, the bank said today, keeping on hold a market- calming step used from May 2010 until February 2012 amid growing opposition from the Germans on its council.

The central bank is probing “all ideas” and “constantly studying and searching for actions that could attenuate the current crisis,” ECB President Mario Draghi told today’s EU parliament committee hearing.

The central bank won’t act until Europe is “in suicide mode -- at that moment they will do it, but they will wait so long that a lot of damage has been done,” Paul De Grauwe, a professor at the London School of Economics, told Tom Keene on Bloomberg Television’s “Bloomberg Surveillance.”

Tonight’s meeting is the first opportunity for Greece’s new government to test creditor countries’ appetite to ease its bailout conditions when Finance Minister Yannis Stournaras lays out his economic strategy.

Greek Aid

A four-month policy-making hiatus caused by two elections has cost time and Greece can’t count on the next installment of 240 billion euros in aid until it proves that its economic overhaul is back on track, a European official told reporters in Brussels on July 6.

Decisions on the next Greek disbursement aren’t likely until August, the official said. The same timeline is likely for Cyprus, which filed for aid after the Greek debt restructuring hammered its banking system, the official added.

“We have to look at how realistic what we want from Greece is,” Luxembourg Finance Minister Luc Frieden said today. “I think we can accommodate Greece, but Greece has to realize this isn’t a one-way street.”

Finance ministers ended five months of haggling by appointing Yves Mersch of Luxembourg to a vacancy on the central bank’s six-person Executive Board. They also extended the tenure of another Luxembourger, Prime Minister Jean-Claude Juncker, as chairman of euro meetings, an EU official said.

To contact the reporters on this story: James G. Neuger in Brussels at jneuger@bloomberg.net; Rainer Buergin in Brussels at rbuergin1@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net


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