18th December 2015

Deepening EMU – Round-up of Key Events – December 2015

By Paula Martín Camargo, Editor

This year’s last Brussels for Breakfast/Brunch, with the participation of Graham Bishop, delivered useful material for financial professionals operating in the EU: 116th Brussels for Breakfast, live on BBA TV and the 9th `Brussels for Brunch’ 30 minute discussion on CISI TV with CPD points which is available to Friends.

Political

Commission President Juncker at the European Parliament Plenary session on the Economic and Monetary Union said that the euro was a political project, and thus had to be supervised by the European Parliament. Seeking to tie closer bonds between EU institutions to make the Commission more political, he shared thoughts on a deeper cooperation under Stage 1 of the Five President's Report.  

This meeting was held ahead of the European Council, were David Cameron tried to persuade EU leaders of the need for the reforms he asked for in a letter to Council President Tusk, for him to campaign against Brexit with full commitment. This is indeed crucial, because a Brexit would leave Britain in dangerous 'splendid isolation', according to former Prime Minister John Major’s words. But a formal agreement is unlikely to be reached during the Council, given to the refusal by Tusk of the in-work benefits cut for workers from the EU proposed by Cameron. Graham Bishop studied the figures carefully and warned against this: the UK is already in full employment and cutting the “in-work benefits” would save just £1.5 billion (0.1% of GDP).  [...]

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17th December 2015

Commission Green Paper on Consumer Financial Services: This Time, `Fintech’ may make it happen!

A single market in retail financial services has been a goal of the EU ever since the Single European Act of 1987 made the “Four Freedoms” (free movement for people, goods, services and capital) a fundamental objective of the Union. The 1999 review of the progress of the Single Market produced the Financial Services Action Plan (FSAP) and sought to make retail markets `open and secure’. In the halcyon economic times of 2006, the Commission published “A citizen’s agenda – delivering a Europe of results”.  But the financial crisis that began to explode on Europe in 2007 buried such ideas for many years.

However, the political imperative to answer the question “What has Europe done for me today?” has risen sharply – matching the rise of eurosceptic political parties around the EU. A component of the answer must include a demonstration that the single market delivers cheaper financial services – especially in those states that use the euro. [...]

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16th December 2015

Face-to-face between Spanish PM Mariano Rajoy and PSOE’s Pedro Sánchez: who won the debate?

PP and PSOE’s leaders sized each other up in the last effort to woo undecided voters - almost 41% of the electorate. Sánchez cornered Rajoy over corruption and the Spanish bail-out. C’s Rivera and Podemos’s Iglesias said the debate was the epilogue to the two-party predominance in Spain.

By Paula Martín Camargo, Editor

PP’s Rajoy and main contender PSOE’s Sánchez debated Monday night in a formal, classic Spanish debate. The first half of the discussion showed a very aggressive Sánchez, railing non-stop against Rajoy over corruption and leading the debate, while the Spanish PM was rather dubious and nervous. Sánchez even told Rajoy that “the Spanish PM has to be decent. And you are not a decent person”. PP’s leader got very angry at this accusation and responded “You are young, and you’ll lose this election. This is fine, I’ve been there before and you will recover. But what you won’t recover yourself from is that insult, which belongs to the mean, small-minded and despicable person you are.” After these abuses, the spectators, who had been rather respectful on Twitter and analysed the different proposals, raced to the social network to mock both of them. The contenders had taken the debate down to the mud, and from that point on, it was all a ‘you did it worse’ argument and an open dialectical row. [...]

Latest polls

Monday was the last day allowed by Spanish law to publish the outcome of voter intention polls. A large number of them were released over the weekend by media outlets, TV and radio stations, showing the PP has gained 1-2 points to between 25.3 and 29%, while the PSOE – the leading opposition – fell back to 21% In their worst week during the electoral campaign, Ciudadanos (C’s) slipped - to 18.2% - the lowest since November. Podemos, which had been losing steam since the summer, came back up to almost surpass Albert Rivera’s C’s party (19.1%). [...]

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15th December 2015

116th Brussels for Breakfast

Hosted by the BBA and organised by the CSFI – with Graham Bishop and Wes Himes of Instinctif Partners. Topics covered included Brexit, European Deposit Insurance Scheme, Green Paper on retail financial services, FinTech payments, Prospectus Directive Proposal, and progress of the Securitisation Proposal.

The flow of detailed proposals has dropped off – a bit! So that gave time for some rather more philosophical reflections on the role of the banking system as a supplier of credit and the impact of “fin tech” on such core banking activities as payments. However, the Brexit risk remains the first item in the City – as it will for at least the next six months. Co-presenter - Wes - asked for a show of hands on who actually expects the UK to leave the EU. Out of the 65 people present, not a single hand went up. The City seems to know where its economic future lies – especially after the graphic warnings from Commissioner Hill (see my blog of 27 Nov).

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9th December 2015

Rajoy promises there will no more cuts but EU Commission calls for further reforms

By Paula Martín Camargo, Editor

Spanish PM Rajoy was the big absentee in the first TV electoral debate in Spanish democratic history that included all the leaders whose parties are currently in the race for the presidency. Less than two weeks ahead of the General Election, Pedro Sánchez (PSOE), Albert Rivera (C’s – Ciudadanos) and Pablo Iglesias (Podemos), along with deputy PM Soraya Sáenz de Santamaría (PP), debated in a UK-US style TV encounter over the economy, corruption, the EU’s outlook for the  Spanish economy, Catalonia and the possibility of a coalition to run the country. [...]

All four parties at odds in economics

There were important differences between all four on the most relevant issues – but economic policy was the one were an agreement seemed impossible to achieve. The most criticised proposal was that of the C’s single harmonised working contract, seen by the Socialists as a “free working contract” and a “hidden job market reform.”  [...]

Brussels asks for more cuts and deepening the labour market reform

But as Commissioner Moscovici warned in October, Spain’s 2016 Draft Budget submitted to the EU Commission is at risk of non-compliance with the deficit targets set for the next year – new cuts may be needed. The Commission is due to release its assessment of the Spanish economic situation this week in a report already seen by El País newspaper, and its conclusions head in the opposite direction to the message delivered by PM deputy Soraya Sáenz de Santamaría. The EU calls for further spending cuts if the government elected on December 20th is to meet the agreed deficit reduction targets, and asks for deeper job market reform to reduce the duality between temporary workers and fixed contracts. It is also critical of the government measures to stimulate employment. [...]

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7th December 2015

Tusk to Cameron: “in-work benefits” may be a deal-breaker (to save 0.1% of GDP and ensure Cameron is in the history books!)

Council President Tusk responded to the “Dear Donald” letter from Prime Minister Cameron and underlined that the most difficult issue would be “people coming to Britain from the EU must live there and contribute for four years before they qualify for in-work benefits or social housing.”

In my November 11 blog (below), I analysed the data from the Department of Work and Pensions published with the Prime Minister’s letter. This showed that only about 200,000 EU arrivals were claiming these benefits – at a cost of around £1.5 billion. This equates to around 0.1% of GDP. The UK now has full employment and the absence of these people would pose significant economic problems.

Media reports suggest that the Prime Minster is threatening to lead the campaign for Brexit if he does not get his way. The cartoonists will have a field day for the history books if the Prime Minister breaks up the United Kingdom and plunges the economy into recession in order to save 0.1% of GDP. But he will be able to proclaim a policy triumph by stopping the labour market over-heating…

4th December 2015

What would a PP-C’s government look like?

By Paula Martín Camargo, Editor

According to the latest state polls, Spanish PM Rajoy’s party would be re-elected as the largest single party in December’s 20 General Election, but he’s not likely to make it back to government alone. A coalition government between Rajoy’s PP and the most plausible king-maker - the C’s - seems possible. We review the common ground in their policies on economics and towards the EU.

The electoral campaign just kicked off and the only convincing outcome for observers is that Spain will not have a clear government on 21st December. According to many political experts and Foundation Robert Schuman, the two weeks left before voting day will be more decisive than usual: this might be due to the high volatility of the electorate (around 40% have not  decided their vote yet) and to the political drift of Catalonia.

Latest polls

Governing PP would win the largest share of the vote with 28.6% but will not achieve an absolute majority. Therefore they would need to form a coalition to be able to rule for the next four years, according to the latest opinion poll released this week by the state-funded Centre for Sociological Research (CIS). The outcome of the survey confirms emerging C’s as the key to the re-election (with 19% of the votes). Its leader Albert Rivera would be  the most popular politicianin Spain (with a rather poor 4.98 points out of 10 in the popularity polls – none of the leading politicians would pass them and Rajoy is last in the list, with 55% of the population declaring they wouldn’t vote for the PP in any case). The socialist PSOE would be second (20.8%) and the leftist Podemos, although recovering from its collapse in the autumn would remain in fourth position (9.1%). 

Source: CIS (Graphic by El País newspaper) 

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30th November 2015

Deepening EMU – Round-up of Key Events – November 2015

By Paula Martín Camargo, Editor

Political

Graham Bishop gave evidence on the subject of the Five Presidents Report and the Communication on Completing EMU at the House of Lords EU Committee. He said he “fears there is a clear risk either of actual Brexit soon, or de facto Brexit by ‘2025 at the latest’”. Brexit was also the central matter of concern for Commissioner Hill at the FT’s ‘Future of Europe’ Breakfast: Hill warned about the fact that Brexiteers have a complete, fundamental misunderstanding of the rules and are misleading about the consequences [of a Brexit] for business models. Mr Bishop continues to develop his Plan for a Temporary Eurobill Fund as a Stepping Stone to Stage 2 of the Plan for Completing EMU.

The British PM claimed to be campaigning for EU reform for the UK to stay in: David Cameron explained in detail the long-awaited list of reforms he wants - in a letter sent to the President of the European Council. Open Europe responded to his speech at Chatham House and the reforms set out in his letter to Donald Tusk, and the European Council on Foreign Relations' Director Mark Leonard published an article on ‘David Cameron’s Brexit brinkmanship’. [...]

Financial

Banking

The FSB’s proposal for a global requirement for TLAC for G-SIBs found a broad consensus in the EBF– which urged a proper and careful implementation of TLAC in Europe. The Basel Committee released two reports related to TLAC in support of the FSB’s Principles. The FSB also welcomed the extension of the industry initiative to promote orderlycross-border resolution of G-SIBs. [...]

The European Commission presented new measures towards a stronger Banking Union: Commissioner Hill proposed aeuro-area wide insurance scheme for bank depositsthat was supported by the EBF . However the Banking Federation wanted to ensure that the EDIS will not lead to increases in overall contributions that banks make to deposit guarantee systems. [...]

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27th November 2015

Commissioner Hill at FT breakfast: Brexiteers have a complete, fundamental misunderstanding of the rules and are misleading …

Commissioner Hill spoke at the “FT Future of Europe Breakfast” this morning. He was particularly firm and clear on some Brexit issues that are key for the future of the City of London.

“Some say that if there is Brexit, there is no risk because the UK will get the same access (or even better). This is a complete and fundamental misunderstanding of how the rules work. They are misleading about the consequences for business models. People need to be honest… you cannot have your cake and eat it… I do not believe there is a respectable argument that you can leave and have the same access as now…”

I congratulated him on such a firm and clear statement and he did not try to row back at all….

25th November 2015

Introductory remarks to the House of Lords EU Committee

I am honoured – and also delighted – to be giving evidence on the subject of the Five Presidents Report and the Communication on Completing Economic and Monetary Union. 

Unfortunately, I am reminded very powerfully of the British political class’s reaction to the Maastricht Treaty in 1992: to paraphrase the celebrated comments from Bretherton at Messina – it won’t happen and if it does, it will just be a few states and that won’t matter much.

Following the timetable laid down in the Delors’s Report, a “three stage” process was launched in 1992 but the December 1994 decision in Madrid by the Heads of Government to start the technical preparations was almost completely ignored (or even ridiculed) by the British establishment because the EU was engulfed in an existential crisis – about exchange rate movements, including sterling.

In early 1995, I was honoured to be appointed by the European Commission to a Committee of Independent Experts to advise on the changeover to the euro. To general astonishment in Britain, the exchange rates of the currencies of 300 million people were 'irrevocably locked' in January 1999 and the notes and coins were introduced flawlessly for this vast number of people in 2002.

A decade and a half later, 340 million people use this currency – more than five times the population of the UK – and there is no dispute that the fate of the UK’s economy is 'irrevocably locked' to the fate of the euro.

We have had a series of “Presidents’ Reports” since 2012 laying out a fairly detailed plan for a major deepening – but now of “economic and monetary” union with a two stage process for achieving it – “by 2025 at the latest”. A group of independent experts is to be set up next year to plot out the exact details for Stage 2 that will begin in 2017.

Again, the British establishment – with the important exception of this Committee of the House of Lords, rather than the elected Members of Parliament – is ignoring the process because the EU is engulfed in an existential crisis – this time about migration. If the EU survives this crisis, then it has probably launched itself on a path to a genuine Economic Union, Financial Union, Fiscal Union and finally a Political Union to maintain the necessary democratic legitimacy of the new system.

As I listen to the political debate in the United Kingdom today about this 2-Stage process, I fear there is a clear risk either of actual Brexit soon, or de facto Brexit by “2025 at the latest”.

I look forward to your questions.

17th November 2015

115th Brussels for Breakfast

Hosted by the BBA and organised by the CSFI – with Graham Bishop and Raoul Ruparel of Open Europe. Topics included: Cameron speech on Brexit; Completing EMU and deepening the Single Market; TLAC; DGS; ECOFIN Conclusions on CMU (equivalence and securitisation); and MiFID II. 

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16th November 2015

Reforming the EU and Completing the Economic and Monetary Union

News headlines about the EU are dominated by the migration crisis but it cannot detract from the importance of securing the economic and financial stability of the Eurozone, and thus the EU as a whole. 

If that stability is lost, the consequences will dwarf the undoubted social dislocations flowing from migration.

So it is regrettable that so little attention has been paid to the announcement of proposals for profound “reform”. The Commission published its proposals for “A deeper and fairer Single Market”. This should be seen as a vindication of the UK’s demands for reform in the EU’s single market. Prime Minister Cameron is pushing at a wide-open door! The proposal covers:

• Consumers: when buying goods or services – online or face to face – they should not face “diverging prices, sales conditions, or delivery options,” without genuine reasons.
• SMEs and start-ups are to be assisted in financing by Capital Markets Union. Crucially, the Commission will publish a proposal for business insolvency – a key problem for CMU.
• Professionals: improved opportunities for businesses and professionals to cross borders, especially by recognition of professional qualifications.

[...]

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12th November 2015

By Paula Martín Camargo, Editor

Heading for Spanish general election

Rajoy unveiled the seven pillars of his electoral programme as the latest polls show the PP would achieve a narrow victory on 20th December; still he would probably need C’s to pass legislation. But Catalan secession challenge and downgraded economic forecasts loom large in the electoral campaign. 

Latest polls

Source: Elmundo.es and CIS

The latest voter intention polls show a high volatility and nearly 32% of undecided voters, according to the biggest CIS state poll.  There would be four main players led by the PP, which would obtain a narrow victory if the election was held today (around 29% of the votes). Overall, the PSOE (25%) and C’s (15%) would compete for the second and third position – the PSOE would be second, while Podemos would fall to fourth (10%). Emerging party C’s confirms itself as the most likely kingmaker, according to Metroscopia Statistics Institute. The PP would need C’s votes to pass legislation in the next term.

The Catalan ‘secessionist challenge’

The Catalan separatists are mounting their challenge to Spanish laws and used their majority in the Catalan autonomous parliament earlier this week to pass a motion for the effective secession from Spain. Tensions over the ‘Catalan issue’ have jeopardised the PP’s policy in Home Affairs as well as they have given Rajoy an opportunity to appear as the dedicated ‘crusader’ for the unity of the country – “there will be no ruptures or drama here while I’m still president”. However, Rajoy has shifted from categorical refusal of constitutional reform to accepting discussing a revision of the 1978 Constitution. This change of attitude might be due to the results of the most recent surveys, which suggest that Rajoy would probably need the support of a second party to pass legislation during the next term.

Full article for consulting clients is here

11th November 2015

Cameron explodes his own argument on immigration: the cost saving is only £1.5 billion annually for an economy already running out of labour.

In his “Europe speech” yesterday, Prime Minister Cameron laid down four areas where progress is necessary to avoid him having to `think again’ about our EU membership. The fourth – and most politically explosive – is immigration. The Commission spokesman described the immigration aspects as the “most problematic” part of the negotiations:

“We now know that, at any one time, around 40 percent of all recent European Economic Area migrants are supported by the UK benefits system…

…with each family claiming on average around £6,000 a year of in work benefits alone…

…and over 10,000 recently-arrived families claiming over £10,000 a year.

We need to restore a sense of fairness, and reduce this pull factor subsidised by the taxpayer.”

The proportion of claimants was about twice external estimates so the Department for Work and Pensions has now published its analysis. The DWP underlined the unreliability of its assessment given the sample size of only 5% and the out-of-date data. However, it reported “This represents between 195,000 and 235,000 (numerator) EEA Nationals in recently arrived households claiming benefits or tax credits at March 2013”

Applying the upper estimate to the Prime Minister’s speech:

·        Each (of 235,000) families claiming £6,000 per year: cost £1.4 billion

·        Over 10,000 …claiming over £10,000 per year:           cost £0.1 billion

Ø  The Prime Minister is proposing that the UK risk leaving the European Union to save £1.5 billion of expenditure – about 0.1% of GDP.

The latest unemployment figures were announced by ONS today:

·        “For July to September 2015, 73.7% of people aged from 16 to 64 were in work, the highest employment rate since comparable records began in 1971.

·        The unemployment rate for July to September 2015 was 5.3%, down from 6.0% for a year earlier and the lowest since 2008.”

This is excellent news for Britain BUT if the “235,000” had not been here, then the unemployment rate could well have been under 5% and perhaps exacerbating even further the skills shortages that are now reported as a bottle-neck for the UK’s economy. This would not be surprising as the Office for Budget Responsibility estimated in July 2015 that the medium term “Non-Accelerating Inflation Rate of Unemployment (NAIRU)” is now 5.4%.

Ø  Stopping the entry of these migrants would remove a very significant safety valve for the UK economy – putting at risk our continued economic growth as we run out of labour.

NOTE: This analysis will be developed further in a forthcoming Federal Trust publication.

10th November 2015

European Movement (UK): Graham Bishop 
elected to Executive Committee

Notes for Editors

Graham is a regular speaker and broadcaster on EMU and Brexit topics

Graham is a passionate believer that Britain will best secure our national interests by remaining a fully-committed member of the European Union. With that standing, Britain will be able to play a leading role in pushing forward the reform programme set out by Commission President Juncker in the `Political Guidelines’ for the European Commission 2014-19.

Graham is particularly focused on the proposals for a Deeper and Fairer Economic and Monetary Union. His status in this field is well recognised:

·        The House of Lords EU Economic and Financial Affairs Sub-Committee (Sub-Committee A) has asked him to address the first session (on November 25th) of its `Completing Europe's Economic and Monetary Union’ inquiry.

·        In 2013, Commission President Barroso appointed him in to be a member of the European Commission's Expert Group looking into initiatives for the joint issuance of debt in the form of a redemption fund and eurobills.

·        As the Expert Group found that Graham’s plan for eurobills was technically and legally feasible, he continues to take this forward and has just published a revised “Plan for a Temporary Eurobill Fund as a Stepping Stone to Stage 2.” The plan provides a concrete mechanism to:

o   Bind the euro area into economic policy co-ordination and convergence; deepen the financial integration inherent in CMU; and buttress financial stability.

o   Be initiated in Stage 1 as a modest stepping stone; be scaled up in Stage 2 towards becoming a de facto European Treasury with Communautaire political governance – perhaps even providing a modest `fiscal capacity’.

o   Be easily reversed (even to extinction) within two years.

******

Go to European Movement website

10th November 2015

The “STS” securitisation proposal: will it deliver for CMU?

The concept of securitisation is simplicity itself: pool a collection of small loans into a large `special purpose vehicle’ (SPV) and sell participations to major institutional investors so that citizens’ savings are effectively on-lent fairly directly to SMEs, households etc. There is no need for large lumps of bank capital to act as a risk buffer. However, the term `securitisation’ became `toxic’ in the financial crash after 2007 when US sub-prime mortgages inflicted massive losses on European investors - in sharp contrast to the minor losses on European securitisations. 16% of the worst AAA US securitisations defaulted versus just 0.1% of their EU counterparts.

However, the reputational damage was done and EU securitisation volumes still languish at half their pre-Crash levels. So a key CMU goal is to boost annual volumes by €100-150 billion or more – a powerful complement to the €315 billion investment fund. The February 2015 Consultation on what needs to be done to revive this market attracted 120 responses to define “simple, transparent and standardised” (STS)securitisation– thereby earning more `appropriate’ capital treatment. The “vast majority” of the respondents favoured this approach and a 76 page Regulation has now been proposed.

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4th November 2015

Deepening EMU – Round-up of Key Events – October 2015

By Paula Martín Camargo, Editor

Political

Stage 1 of the June Five President’s report on Completing Europe's Economic and Monetary Union is now underway with a new package of measures - including an advisory European Fiscal Board; a more unified representation of the euro area in the IMF, and specific steps towards completing the Banking Union via a European Deposit Insurance Guarantee Scheme. The Commission also presented the roadmap to deepening the Single Market - President Juncker’s drive for the European economy to thrive in the global field.

The long British EU-referendum campaign began with several polls from the business world favourable to the ‘In’ option, and vague reform measures outlined by PM Cameron’s Government – Commission President Juncker made Cameron commit to unveil his ‘list of demands’ in November. The best statement so far of what the UK wants was Foreign Secretary Philip Hammond’s letter in POLITICO saying that “UK's government wants a renegotiation of market regulation, ‘ever-closer union,’ subsidiarity and welfare. David Cameron seems to have ruled out a second referendum in case of a Brexit vote - “leave means leave”. The newly-elected Labour leader Jeremy Corbyn might influence the campaign: he wrote in the Financial Times supporting EU membership but only if reforms were made to improve worker’s rights. Graham Bishop analyses what Corbyn’s amazing rise might mean for the Labour Party’s policy towards Europe. [...]

Financial

Banking

Payments systems were very topical in October, with a number of proposals and new rules being issued by European payments and financial institutions: the BCBS Chairman Ingves reiterated that the Basel III policy response to the financial crisis is largely complete and the overall architecture of the regulatory framework is now clear. The Basel Committee published a report on RWAs for counterparty credit risk, a part of its wider RCAP which is intended to ensure consistent implementation of the Basel III framework. [...]

Securities

ECB's Mersch reviewed the Eurosystem’s Vision 2020 over the coming years, and said it will complement the Commission’s project to establish a CMU in Europe – a project which the PCS explained the five key issues in the Commission’s securitisation proposal, and proposed solutions to the problems of the current proposals impact on bank capital. While AFME welcomed the Commission’s action plan for securitisation, Reuters reported that the French Banking Federation chief was sceptical about them. [...]

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27th October 2015

The Spanish parliament was dissolved yesterday and Prime Minister Mariano Rajoy announced that the General Election will take place on 20th December. Although the electoral campaign will not kick off until the 4th December, many opinion surveys are being published and show a very fragmented outcome. 

The last plenary of Rajoy’s PP government term in office took place last week with the usual bitter exchange of reproaches between him and the leaders of the opposition – who accused him of lying repeatedly and of corruption within the governing People’s Party. However, recent polls continue to suggest that the two-party system may still dominate Spanish political life, though the new parties (Ciudadanos and Podemos) will be the 'key to the Moncloa' (the official residence of the Prime Minister). 

A pact may be indispensable to form a new government between the old politics - ‘the caste’ (as Podemos’ Iglesias likes to call the biggest Spanish political parties) and the `new politics' (as the new political parties like to call themselves).

But pacts aren’t to the taste of PM Rajoy, who claimed during the plenary – once again - that the list with the most votes should be the one to prevail and said that he “would only govern if the PP wins”. However, this is unlikely to happen: the most recent surveys show a very fragmented distribution of seats and the most supported pact - according to a poll by Invymark for LaSexta in which voters where asked what coalition they would prefer - would be the one formed by PP and Ciudadanos (with the support of 29,4% of the voters). An alliance between PSOE and Podemos government would have 26,2% of popular support; a PSOE & Ciudadanos government would only be approved by 17,2% of the Spanish population. 

Latest opinion polls

1. According to the outcome of Sigma-dos survey for Mediaset on the estimated votes, PM Rajoy’s PP would win again the General Election on 20th December with 27,4% of the votes but  far away from an absolute majority. PSOE, led by Pedro Sánchez, would be second. Since the last poll by Sigmados in July, both these parties have lost 1,4 and 0,5 percentage points, respectively; these votes would go for Ciudadanos and Podemos, which would win 18,1 and 16,3% of the votes respectively.

Source: Sigma-dos for Mediaset

[...]

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23rd October 2015

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20th October 2015

114th Brussels for Breakfast

Hosted by the BBA and organised by the CSFI – with Graham Bishop. The meeting opened with tributes to John-Paul Dryden who died suddenly and prematurely last week. He was to have been my fellow speaker today, and we all remembered fondly his contributions over the years. Main topics included: Brexit, Capital Markets Union and financial supervision architecture.

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5th October 2015

Deepening EMU – Round-up of Key Events – September 2015

Financial

Securities

September was marked by the presentation of the Action Plan for building a Capital Markets Union by Commissioner Jonathan Hill, who also wrote a comment in the FT explaining why a stronger capital markets union for Europe is needed. For those seeking a comprehensive view on the CMU, Graham Bishop shared his vision in several articles published by Financial World (“What is CMU?” and “It’s time for a 29th regime”) and some comments in Open Markets (“Europe’s search for capital”).

ECB's Mersch enumerated the medium to long-term priorities of CMU for the ECB and the Eurosystem at the Eurofi conference , stating that union needs to be pursued through a higher level of ambition to achieve deeper financial integration. Commissioner Hill had previously wooed the banking sector at the EBF annual conference, saying that the CMU didn’t represent a challenge for European banks but “a complement”: the EBF welcomed the presentation of the CMU Action Plan, arguing that it “puts Europe on track towards growth.” Nevertheless, the ACCA was more prudent and warned against “hasty design or poor implementation.” [...]

Banking

ECB President Mario Draghi discussed the latest economic developments in the EU and the proposals presented in the Five Presidents’ Report at the ECON meeting, and revealed that most big euro zone banks have capital way above requirement, as the ECB’s Single Supervisory Mechanism found out after taking over the supervision of large eurozone banks late last year. Draghi dismissed concerns from some national central banks were asking institutions to set aside too much capital to cover potential losses risks so strangling lending and hampering the eurozone's economic recovery. However, research from JPMorgan showed that “harmonisation” efforts could result in a need for €26bn in extra capital by 35 of Europe’s biggest banks. [...]

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15th September 2015

113th Brussels for Breakfast

(Hosted by the BBA and organised by the CSFI – with Graham Bishop and Simona Amati of Kreab)

Topics included: President Juncker’s State of the Union speech; Brexit developments; G30 Report on Banking Culture and Conduct; BBA report on the rise of Fin Tech; EIOPA’s consultation on infrastructure as a new asset class and the EMIR review.

7th September 2015

Deepening EMU – Round-up of Key Events – August 2015

Political

The European Commission signed the third ESM programme for Greece, after which Greek PM Alexis Tsipras resigned and called for a snap election on 20th September. We’ll see what outcome the Hellenic polls will bring, but in the meantime, Chinese stock markets turmoil may be a bigger concern for the global economy: what could be the consequences to a still fragile European economy in the event of a serious slowdown in China?  Raoul Ruparel analyses how exposed the EU is to a Chinese crisis in Forbes.

The ‘ever closer union’ concept established by the Treaty of Rome was brought to the present by French PM François Hollande, who called for a 'eurozone government' to further integrate member states as an answer to the muddled response to the Greek debt crisis. This ‘Jacques Delors' vision of the EU was supported by Italian MP Pier Carlo Padoan, who called for ‘political union’ in the eurozone to save the euro. The Financial Times also engaged with this appeal, and asked Berlin to lead the vanguard. Finally, German Think-tank CEP presented an innovative idea: a sovereign default regime for the euro area which would allow again member states to make their own decisions, and would prevent future sovereign debt crise.

Financial

Banking

The BIS issued a study analysing how has the Countercyclical Capital Buffer affected mortgage pricing after Switzerland became the first country to activate this Basel III macroprudential tool. It also published a FAQ document on the standardised approach for measuring counterparty credit risk exposures under Basel III.

The current weakness of European banks is an important matter of concern for regulators and influencers: the EBA published key information on the systemic importance of the 37 largest banks in the EU, which Bruegel considers to remain vulnerable unless urgent restructuring. The eurozone’s small and medium-sized banks remain under considerable stress too, according to VoxEU. All of them might be subject to EU’s 2016 stress tests, which will include 50-60 euro zone banks as said by ECB’s Nouy.

More for Friends

Article for consulting clients is here

29th July 2015

Deepening EMU – Round-up of Key Events – July 2015

Greece avoided bankrupcy thanks to a last-minute deal on 13th July that came after a still resounding ‘No’ to the latest creditor’s proposals on a referendum held by the Greek government. The roadmap to a complete EMU kicked off on 1st July, and François Hollande called for a 'eurozone government'. 

Political

Greece was again extremely topical, with a breathtaking last-minute deal to avoid bankrupcy on 13th July that came after a still resounding ‘No’ to the latest creditor’s proposals on a referendum held a week before by the Greek government. As Graham Bishop stressed, it was a “problem of social culture, not just finance, economics and politics”, that led 3.6 million Greek voters to claim they should be entitled to debt relief from the rest of the eurozone. Greek Finance Minister Varoufakis resigned the day after the referendum, but his successor didn’t even bother to bring a new ‘Trojan horse’ to Europe, in the form of a new economic proposal.

Budgetary

The Commission agreed a package of measures which will make sure that the EFSI takes off in autumn, such as communication on the role of National Promotional Banks (NPBs) in supporting the Investment Plan for Europe.  As for the European Council, the 2015 'European Semester' was concluded after the Council endorsed itsrecommendations to member states on economic and fiscal policies.

Financial  

Banking

The European Commission launched a consultation on the possible impact of the CRR and CRD IV on bank financing of the economy: Commissioner Hill said it was the “time to ask whether the rules [that had restored resilience, stability and trust in the European banks] have unintended consequences”.

Securities

Capital Markets Union was in every European regulator and banker’s minds: Graham Bishop wrote that ESMA’s mantra on this topic is that "a high level of investor protection is essential for a successful CMU. Only when investors feel sufficiently protected will they be willing to enter financial markets", and that some of the CMU’s building blocks, such as the MiFID II/MIFIR were precisely the focus in the MiFID II/MIFIR was also published.

More for Friends

Article for consulting clients is here

28th July 2015

Euro IRP launches Independent Research Directory

The European Association of Independent Research Providers (Euro IRP) has launched a new searchable directory of independent research providers: Euro IRP Directory.

Built and hosted by worldflow, the Euro IRP Directory is a quick and easy way to help institutional investors find independent research published by the Association's membership, using search criteria based on industry classifications.

Users of independent research can locate firms with a specific research focus, or published research that matches multiple search criteria. 

(GrahamBishop.com is a member of EuroIRP)

View it here: www.euroirp.com/directory

14th July 2015

112th Brussels for Breakfast

Did Guy Verhofstadt shame Tsipras  into the somersault?

Judge for yourself Verhofstadt speech. Hours later, the Greek government came with a set of proposals that mirrored the European requests so closely that is looks dificult for the euro area  to refuse to negotiate. A significant sticking point may be a debt "re-profiling" (as opposed to a haircut), but this principle was conceded in 2012 when the EFSF loans had their interst rate reduced, together with a grace period of 10 years on capital repayments (as set out in my 21 January 2015 article). It should be a no-brainer to follow the same principle now. 

If the Greek economy is unshackled from the deadweight of corruption and clientelism, there is ample scope for a surge in productivity (and thus economic growth during the next decade) that will make the current volume of debt look  as sustainable as that of many other EU states.

8 July 2015

The twists and turns of Tsipras become ever more bizarre. “Brussels” has become used to the Athenians arriving with various “Trojan horse” proposals. But the new Finance Minister arrived in Brussels yesterday without even bothering to pretend to have a gift `horse’ with him – promising instead that it will be delivered today. However, reports suggest that horse will be no more than the proposals rejected last week – with an added demand for 30% debt relief given the emphatic decision by 4m Greek voters in Sunday’s referendum.

·         Before the referendum, Tzipras promised that he would deliver a deal within 48 hours.  That promise has now been breached comprehensively.

·         He promised that money in the banks would be safe and his then-Finance Minister was reported to promise that the banks would be `open on Monday’ i.e. yesterday. Currently, they are expected to remain shut for at last an additional week.

A rational person would only have called a referendum if he believed he had a plan that would be accepted by the creditors if the referendum supported him. As at yesterday, it seems he did not even have a plan at all, let alone a clear path to a reasonable chance of agreement with the country’s creditors. How can the euro area negotiate with someone who appears to live in a parallel world of reality? The end-point of this `game’ is now set for Sunday, but the 7 July letter from Greek President Pavlopoulos to President Tusk engaged virtually all the Greek political establishment in this `game’. There may be no `clean hands’ the people can turn to.

Since Syriza came to power, the euro area in the form of the ECB has agreed to extend an additional €30 billion of assistance to Greek banks – via ELA. On the basis of the plans advanced so far by the Greek side, most right-thinking citizens of the euro area would feel that Tsipras had tricked them. The court of public opinion seems to be moving decisively against Greece – making it very difficult for political leaders to contemplate further funding without absolute proof of performance of the strict conditions attached. The demonstrated incompetence of the Greek political and administrative system makes it rather unlikely that this performance can be proved before legal deadlines pass and defaults make it impossible to support the Greek banking system further. Hades is [probably] ahead.

****

7 July  2015

My series of recent blogs on Greece are below. When Syriza came to power, I thought that they might actually break the mould of Greek politics over the last 40 years. Sadly, that hope has been proven hugely over-optimistic and a desperate situation lies ahead for the unfortunate people of Greece as the natural result of voting for the easy way out 18 times since the restoration of democracy in 1974.

• “State of the Union 2015 - Time for Honesty, Unity and Solidarity” reinforced the `roadmap’ laid out in the June `Five Presidents Report’ towards more convergence. In particular, the President committed to a plan for a common deposit insurance scheme - but based on re-insurance. He also reiterated his call for a European Treasury  that would be accountable at the European level.

• • On Brexit, Juncker stressed his commitment to a fair deal for Britain - but one that had to be fair to the other 27. However, the well-connected Open Europe think-tank published a report on the safeguards that Britain wants for the euro `outs’. Their list included several items that appear to require fundamental change to the `Treaty’ and that may prove very difficult to get agreed in the near future.

  • The G30 issued its report on Banking Conduct and Culture, calling for sustained and comprehensive reform. The 80-page report was disappointing reading for those who thought that the banking system had learnt its lesson about ethical conduct in recent years.

  • Several reports and surveys on the implications of Fin Tech for banks were published - especially from the BBA. The central message was that banks in a `bricks and mortar’ mindset/technology were going to have to scramble to catch up with their customers demands for instant payments on their mobile phones.

Greek voters may not have realised the political price they are demanding from the euro area. It is far too high a price for the euro area to pay. It should not pay.

Greek `No’ voters scored 61% of the vote on a surprisingly low turnout of 62% of the 9.3m eligible voters. The concept is now quite clear: Greek PM Tsipras will claim that the 3.6 million Greeks who voted `No’ should now be entitled to debt relief from the rest of the eurozone.

Eurostat statistics show that the Greek minimum wage in January 2015 was nearly €700 per month – higher than five other euro members, and double that in Lithuania or Latvia. Thus 4 million `rich – relative to some of their creditors’ Greeks have voted for debt relief on the euro area’s exposure of close to €250 billion once the ECB’s Emergency Lending Arrangement (ELA) exposure is included.

However, the euro area already knows the Greek government’s approach to the private sector where “private sector involvement” (PSI) turned out to mean a `haircut’ of around 75% in value. So it is plausible to see that the euro area will have to pay off the full amount of the loans on schedule and only receive 25% from Greece over `a period’ – a loss of about €750 for each euro area voter. Alternatively, this could be described as a present via taxation on the 250m euro area voters of close to €20,000 per Greek voter. US commentators might wish to apply the 200-year-old concept of “no taxation without representation” and argue for a referendum of euro area voters on such a tax.

The political problem for the euro area’s statesmen and women is that a gift of the magnitude that Greek voters want to give themselves amounts to the permanent destruction of any credibility for the euro area’s economic governance system. This request coincides with the first discussion about the “Five Presidents Report” on further, far-reaching financial, economic and political integration. Bowing to Greek blackmail would put an end to the trend that earned the European Union the Noble Peace prize in 2012 for its six decades of work for peace in Europe.

How did this all happen?

Since Greece triggered the euro crisis in 2010, the euro area has had to deal with five bail-outs: Spain; Portugal; Ireland; Cyprus and Greece itself. The first three successfully concluded their economic programmes – designed along the same principle as that of Greece – and are expected to be amongst the fastest growing euro area members this year (Ireland at twice the average!). The Greeks in Cyprus are well on track to resume good growth next year. Six months ago – before Syriza was elected – the Greeks in Greece were expected to be in the fast-growth club. With confidence shattered by Syriza’s tactics, those prospects are a distant memory.

The result of rule by New Democracy or Pasok for 40 years has been utter ruin for the vast majority of Greeks, but great enrichment for a tiny minority of `oligarchs’.  So amajor part of the case for a Syriza vote in early 2015 was their declaration of war on the `oligarchs’: Earlier this year, the Financial Times published a fascinating article describing their shadowy hold on power. Any casual reader of the Troika reports on Greek compliance with EU conditionality is struck by the dogged resistance of certain sectors of society to reforms that the rest of the EU takes for granted. Indeed, the ordinary electors of Greece also seem to want this.

This is the highly-charged political backdrop to a series of intensely technical decisions about the solvency of Greek banks. This drama underlines that Banking Union really was a major extension of Political Union. The supervisor of the four largest Greek banks is the Single Supervisory Mechanism (SSM) of the ECB. The ECB can only lend to `solvent banks’ – as reported by its independent arm, the SSM. If the situation deteriorates, then Europe’s new Single Resolution Authority (SRA) would have to put the relevant banks into resolution.

Without extra support from the ECB, it is difficult to see how Greek banks can meet their obligations to their depositors – the usual definition of insolvency. A formal default by the Government itself will put the whole system into even more extreme difficulty.  How long can the SSM avoid recognising this situation? Can it even go to the end of July unless the euro area agrees a new package with the Tsipras government? Does it give way to Tsipras’ demands or the other way round? A cessation of ECB support for the banks would precipitate a collapse of the economy – taking it back to bartering with the existing (though substantial) stock of euro banknotes within Greece.

Five years of massive deepening of economic integration have paved the way to economic recovery in the euro area. It runs a current account surplus with the outside world that is more than four times that of Japan. Massive firewalls are in place – certainly relative to Greece.  Public debt ratios are now beginning to fall and markets are starting to complain about a shortage of government bonds as the ECB is buying €60 billion of bonds each month under it QE programme. After initial concerns, the financial markets seem stable after the shock referendum result.

6 July 2015

Is the time `ripe’ for Eurobills?

The Four Presidents will report to the 25/26 June European Council on “Preparations for Next Steps on Better Economic Governance in the Euro Area” The Euro Summit of 24 October 2014 invited the President of the European Commission, in close cooperation with the President of the Euro Summit, the President of the Eurogroup and the President of the European Central Bank, “to prepare next steps on better economic governance in the euro area.”

My detailed plan for a Temporary Eurobill Fund (TEF) explicitly provides the requested “concrete mechanism for stronger economic policy coordination, convergence and solidarity”. It would provide a platform to ensure continuing financial integration and stability once the ECB’s non-standard monetary policy measures expire. However, it can be initiated as a small step towards financial integration; be scaled up to become a de facto European Treasury and even provide a modest `fiscal capacity’; but it can be reversed easily – even to extinction within two years. The plan would contribute to answering most of the eleven questions posed in the February Analytical Note (link).

Beyond the direct benefits to financial integration and stability, a properly designed Eurobill system can provide a concrete mechanism state-by-state: (i) to reward good economic `homework’ (ii) penalise lack of effort (iii) operate with the grain of the markets to graduate the carrot and stick incentives for each state and (iv) minimise the eventual costs if a state insists on pursuing economic policies that are likely to end `badly’.  The design ensures that there is no additional liability for euro states beyond their existing ESM commitments. It could be operational in time to take over euro area `solidarity’ as the ECB’s QE programme winds down after September 2016 and interest rates normalise.

More for Graham Bishop’s consultancy clients: link

More for Friends: link

21st May 2015

After the UK election: What chance of Brexit?

Superficially, the UK election results bode ill for the chances of the UK remaining inside the EU. But a deeper examination makes the picture look rather different. However, it is virtually certain that the question of “Brexit” – Britain leaving the EU – will be put to a referendum of all voters before the end of 2017. The consequences could be dramatic for a country that must attract capital inflows of £100 billion each and every year to pay for its imports.

The Scottish referendum showed what happens when electors really believe their vital interests are at stake: The turnout was the highest in any UK election since universal suffrage was introduced in 1918.The task for the pro-Europeans is to engage those 9 million who were non-voters at the General Election – nearly 20% of the electorate – and persuade them that they can aspire to a better life within the EU – and that the obverse is also true: it would be much worse outside.

Voters must have genuine options: a “straight in/out referendum” is a false prospectus. For the UK, a `Cameron re-negotiation’ may well amount to a decade-long road to marginalising itself to the point that is a de facto Out. The referendum must include the option to stay in the EU as it undergoes a major reform along the lines of the Juncker 10-point reform agenda.

More for Friends

Full paper with Graham's comments for clients

5th May 2015

Deepening EMU – Round-up of Key Events – April 2015

Political

After the Eurogroup meeting of 24th April, Jeroen Dijsselbloem made some remarks regarding Spain, the SSM, and growth and jobs in the EU, and celebrated Cyprus was ‘back on track’ with the programme after the foreclosure framework implementation.

As for Greece, Dijsselbloem warned that “time was running out”. 

Financial

At a Conference on Financial Integration and Stability held together with the EU Commission in Brussels, the ECB said that financial integration in Europe is rebounding. The `EFSIR’ was launched at the same conference.

The Financial Times noted that Stagnation, fines and regulation leave European banks struggling. Nonetheless, it seems that south European banks have taken advantage of bailouts, since the EU may consider probes into unfair state aid. Greece is a particular worry for regulators as Athens says deferred tax assets represent some 30 to 40 per cent of the core tier one capital in the country’s main banks.

The meeting of the European Securities Committee produced documents on transparency, SMEs and growth, FX contracts, investor protection (including payment for research), reasonable commercial basis and portfolio compression. As a result, Markets Media commented that the future of CSAs in Europe under MiFID II is in doubt as the UK’s Financial Conduct Authority presses its view that CSAs fail to adequately separate commissions paid for execution from commissions paid for research.

Full article for consultancy clients and Friends

14th April 2015

109th Brussels for Breakfast

(Hosted by the BBA and organised by the CSFI – with Graham Bishop and Huw Jones (Reuters) and Simona Amati (Kreab).

(After this event, Graham Bishop went to CISI for a 30 minute discussion that is CPD-eligible for CISI members – and others. Please click here for full details of our structured/unstructured CPD products)

Topics covered at B4B included: Greece; Brexit; BIS on Achilles Heel of financial system; Commissioner Hill speeches; Eurogroup President succession; Commission management re-shuffle; ESA budgets; bank break-up; CCPs (ECB speech, BoE/ECB agreement); collateral shortage; Solvency II and infrastructure investments;  CSAs; cross-selling to retail; IAS7 on net debt reconciliation.

More for Friends

Full article with Graham's comments for clients

1st April 2015

'Deepening EMU' - Round-up of Key Events - March 2015

Political

All politicians want to reform the EU and make it work better for citizens. But, as Richard Corbett explained in an Op-Ed on Euractiv, there is no clear consensus on what reform is needed.

Besides EU reform, another hot topic in March was Greece. Der Spiegel published an interview with Tsipras covering planned reforms, the polarizing effect his government has had on Europe and the possibility of a "Graccident”.

Economic

Commissioner Jonathan Hill reported to ECON on progress made in implementing his priorities. He discussed financial reforms, banking union, CMU and the single market.

The European Parliament also examined the Commission’s EU Semester 2015 economic policies. The three resolutions were approved.

Securities

At the beginning of March, the ECJ annulled the Eurosystem Oversight Policy Framework published by the ECB. The ECJ decision avoids the main issue but pits the UK directly against the Euro area,wrote Graham Bishop: “It is the worst possible outcome.” By the end of the month the ECB and BoE announced measures to enhance financial stability in relation to centrally cleared markets.

Financial services policy

Capital Markets Union (CMU) also took some space in last month’s news. Reuters informed that regulators will discuss plans to accelerate its implementation. “CMU will not be created through legislation, but with the market’s help to deliver solutions,” Commissioner Jonathan Hill told IPE.

31st March 2015

UK current account deficit 2014: biggest since 1948 - very frightening!

"In 2014, the UK’s current account deficit was £97.9 billion, up from a deficit of £76.7 billion in 2013. The deficit in 2014 equated to 5.5% of GDP at current market prices. This was the largest annual deficit as a percentage of GDP at current market prices since annual records began in 1948."

 Marginal improvement in Q4 2014 but still very frightening: Full ONS release

26th March 2015

108th Brussels for Breakfast 

Hosted by the BBA and organised by the CSFI – with Graham Bishop and Bob Penn (Allen and Overy) and Raoul Ruparel (Open Europe).

After this event, Graham Bishop went to CISI for a 30 minute live interview.

The meeting covered:

• Grexit / Graccident
• UK v ECB on CCPs at the ECJ: raising the risk of Brexit?
• Capital Markets Union
• MiFID
• IFRS – spreading far and wide, updates for insurance and pension funds

Graham’s full article covering what was discussed is available for consultancy clients

A summary is provided for Friends

17th March 2015

A spring in the step at the Lib Dem conference

My personal `red line’ for coalition negotiations about Brexit after May 7th: Voters must be offered three options in an early referendum

The Liberal Democrats (LDs) completed a remarkably successful spring conference in Liverpool last weekend. As electoral `experts’ are predicting that the Party’s MPs will fall from 57 currently perhaps to 14 (Electoral Calculus – probably the lowest amongst forecasters), party activists might have been expected to be in despair. But not a bit of it! Instead, they are aware that support is holding up much more strongly in many seats held by LD Parliamentarians than national opinion polls suggest.

The UK has become a country addicted to capital inflows to balance the massive current account deficit on payments with the rest of the world. This must be resolved sooner or later - quite separately from a reduction in the Government’s deficit.

The tide of warnings from leaders of industry and finance about the risk to inward investment has been rising sharply in recent months. So it was not surprising  that Business Secretary Vince Cable warned in Liverpool that even a narrow referendum vote in favour of the UK remaining part of the EU would "scare off" overseas companies from investing in Britain. That is hardly the climate to continue attracting £100 billion of capital inflows each and every year. The Brexit boil must be lanced.

Article for Friends

Full article for consultancy clients

4th March 2015

Location of Central Counter Parties (CCPs)

ECJ decision avoids the main issue but pits the UK directly against the Euro area – the worst possible outcome

Ultimately, this case is about the independence of the ECB in conducting the monetary policy of the euro area – not about politics, the single market or the convenience of commercial operators. So the risk remains of an end-result that could be the worst possible outcome for political relations between the UK and the euro area: the UK may be out-voted by a bloc vote on a subject that it argues is fundamental to the single market applying to all 28 states. However, is there any need to decide before a Brexit referendum?

3rd March 2015

Graham Bishop speaks about Europe at Global Independent Research Conference in London: The integration trend is your friend!

I asked 150 investors three simple questions:

1. Who believes the design of the euro is flawed? About two-thirds of the hands went up
2. So who believes the euro is doomed? About one-quarter raised their hand
3. Overall, who has made money trading that view? Just one hand was visible!!!

A great new chart from the ECB shows why they have been so wrong: European integration has been rising for more than 60 years and is now accelerating – firstly because of Greece, but now Putin is a potent force to drive further integration. When will investors notice these profound forces at work? Remember the old investor's adage: "The Trend is your Friend" and the trend is clear.

24th February 2015

Greece: the good news appears to continue

 “The Greek authorities will present a first list of reform measures, based on the current arrangement, by the end of Monday February 23. The institutions will provide a first view whether this is sufficiently comprehensive to be a valid starting point for a successful conclusion of the review. This list will be further specified and then agreed with the institutions by the end of April.  

Only approval of the conclusion of the review of the extended arrangement by the institutions in turn will allow for any disbursement of the outstanding tranche of the current EFSF programme and the transfer of the 2014 SMP profits. Both are again subject to approval by the Eurogroup.” 

Will the Greek Fiat 500 insist on crashing head-on into the 50-ton tank – losing the game of chicken?