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Eurozone Bank Supervisor Plan Found To be "Illegal"

Tyler Durden's picture


While we have largely resumed ignoring the non-newsflow out of Europe, as it has reverted back to one made up on the fly lie after another, or just simple rumor and political talking point innuendo in the most recent attempt to get hedge funds starved for yield (and chasing year end performance) to pursue every and any piece of Italian and Spanish debt (at least the until euphoria ends and the selling on fundamentals resumes) the latest development from the FT bears noting as it has major implications for Europe's make it up as you go along "recovery." According to the FT: "A plan to create a single eurozone banking supervisor is illegal, according to a secret legal opinion for EU finance ministers that deals a further blow to a reform deemed vital to solving the bloc’s debt crisis. A paper from the EU Council’s top legal adviser, obtained by the Financial Times, argues the plan goes “beyond the powers” permitted under law to change governance rules at the European Central Bank." The punchline: "The legal service concludes that without altering EU treaties it would be impossible to give a bank supervision board within the ECB any formal decision-making powers as suggested in the blueprint drawn up by the European Commission."

Keep in mind this has been Germany's position all along, which has absolutely no intention of handing over supervision of Deutsche Bank (whose ongoing bailout this is all about), to the ECB. But more importantly, recall that the ESM as a bank recapitalizing CDO mechanism can only work under an active banking supervision regime, which in turn means that the uber Deus Ex Machina, that of recapping insolvent and locked out banks directly and bypassing the ECB's direct debt purchasing using a third party surrogate instead, will not be possible. This is bad news for Spain, but the country is still celebrating its "Schrodinger" status of a country which is both investment grade and needing an imminent bail out any second now.

More from the FT:

Those non-eurozone countries that want to opt into the bank supervision regime would also be legally unable to vote on any ECB decisions – a key demand of countries such as Sweden and Poland.


While it is common for lawyers from different EU institutions to disagree on aspects of proposals, diplomats involved in the talks said the sharp difference in legal opinion would complicate efforts to overcome the deep-set concerns of some member states. Banking union will be a central topic at the EU leaders summit on Thursday.


While EU leaders are still aiming to agree the supervision plan by the end of the year, talks have made little progress to date, in part because of strong German objections. Some participants privately suggest the talks may drag on for a year or more.


Other elements of the commission proposal were also challenged in the legal opinion, notably in asserting the rights of member states to decide how rules on their banks are applied, even when under the supervision of the ECB.


“The major question that follows from this opinion is a practical one,” said Alexandria Carr, a former UK legal adviser now at Mayer Brown International.


“Will the ECB have the capability and capacity to be the ultimate decision maker in respect of all supervisory decisions over complex, global institutions and to apply at least 17 different pieces of domestic legislation?”

Which hits at the heart of the matter. Becase while Europe may have a central bank, one which is controlled by an ex-Goldmanite with a purely reflationary agenda, the real fiscal and monetary powerhouse (because at the end of the day if Weidmann quites the ECB, what happens next is anyone's guess) continues to be Germany. And that's just the way Germany likes it. And whether there will be inflation in Germany (which Deutsche Bank certainly needs but in moderation so as not to spook the German population), will be Germany's decision. At least that is how Germany sees things.

So to summarize:

  • The June Eurosummit, which was hailed as a grand victory for Mario and Mariano, and which sent stocks soaring on the misperception that Germany has finally yielded to the PIIGS demands, has not yet been effected (just out from Bloomberg: "Rajoy Says June Summit Accords Must Be Implemented Soon").
  • The ECB's OMP was disclosed a month ago, but has yet to buy a single bond.
  • The ECB has said the OMP will be pari passu with the private sector, yet the ECB refuses to take any capital hits on its Greek bonds, confirming there is no clear plan how OMP purchases will be potentially impaired (see "Draghi Again Confirms ECB Pari Passu Status Is A Pipe Dream")
  • The ESM will have insufficient funds, when one takes out the paid-in capital components and the funds already pledged, to prefund Spanish 2013 bond issuance, let alone Spain and Italy (as we said months ago, and as IFR confirmed last week)
  • The ESM will certainly not have enough cash to prefund Spanish and Italian funding needs once the current bout of euphoria ends (see "Brussels we have a problem")
  • Now we learn that the ESM will be hobbled, and one of its most critical functions (assuming it can find the funding of course) - recapitalizing insolvent PIIGS banks - will now almost certainly not happen.
  • If AEP is right, Germany will demand an arm and a leg in exchange for providing ongoing assistance to the PIIGS, and wants to become Europe's defact "currency commissioner", which makes the ECB even more irrelevant in the great scramble for monetary authority power.
  • Spain's Rajoy has been delighed to take advantage of the market correctly assuming that it is insolvent and will need to be bailed out, but so far has refused to admit reality, and while issuing debt at bailout-inclusive levels, does not want to pay the piper and face the population once he admits failure. Moody's laugahble report that the pro forma bailed out country is Investment Grade is simply further proof of Europe's current policy-driven idiocy.
  • The Greek economy is imploding now faster than ever, with the country's biggest company, Coca Cola, leaving the country, heading to Switzerland, in the process causing another major spike in the unemployment rate, leading to less tax revenues, and an even greater fiscal mess. In fact, Greece will likely gets its marching orders shortly, but certainly not before the US election. 
  • The cherry on top is that having delayed long enough, Germany is now rapidly entering the recession that its neighbors have been hit by. And making things worse, the ironic outcome where the EUR is stronger on more ECB easing simply means that German exporters will be more and more impaired with every day that the EURUSD rises, such as today. This in turn means more core weakness, and less German ability to hold the eurozone on its shoulders.

In a nutshell, not only has nothing actually happened in Europe, aside from lots of talk of course, but things are even worse than they were several months ago. But at least bonds are tighter, giving everyone a false sense of confidence and allowing peripheral countries the comfort of believing that everything is under control.

It isn't. Instead, what it is, is one big confidence game. Literally.

For those who want to know the media scripted outcome of the European tragicomedy, we again refer you to the article highlighting Lee Buccheit's "Next Steps" for Europe.  Because unlike contradictory flashing red headlines every 10 minutes, it explains cleanly and accurately precisely what happens in Europe in the next few quarters (spoiler alert: there is no happy ending).

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Wed, 10/17/2012 - 13:02 | 2898352 pods
pods's picture

When it comes to government, is anything really illegal?

Loved the "secret legal opinion."  Yep, sounds about right.

When you act in a manner that is just, you do not need to do it in secret.


Wed, 10/17/2012 - 13:26 | 2898421 Winston Churchill
Winston Churchill's picture

Just pay another lawyer enough money and I know you will get the

'correct' opinion.Hoes.

Wed, 10/17/2012 - 13:30 | 2898428 redpill
redpill's picture

'It may be necessary to use methods other than constitutional ones.'

-- Bob Mugabe

Wed, 10/17/2012 - 13:40 | 2898458 Cognitive Dissonance
Cognitive Dissonance's picture

The "Rule of Law" is only there when it is convenient to the uber powerful who regularly use the "Rule of Law" to protect themselves from the rabble and/or the competition.

Wed, 10/17/2012 - 13:59 | 2898516 Kaiser Sousa
Kaiser Sousa's picture

"give me control of a nations credit and money supply and i care not who makes its laws..."

Mayer Amschel Rothschild, Cocksuker International Banker

Wed, 10/17/2012 - 14:03 | 2898532 HobbyFarmer
HobbyFarmer's picture

I become more cynical every day.  Regardless (or perhaps because) Zerohedge is my first site visited every morning.  In a hopeless world, I am grateful for Tyler(s).


Wed, 10/17/2012 - 14:37 | 2898624 nope-1004
nope-1004's picture

Tyler, you mean to tell me the EU had a plan?  Huh.  Who knew?


Wed, 10/17/2012 - 13:37 | 2898446 Dr. Engali
Dr. Engali's picture

If the president does it that means it's not illegal.


~Richard  M. Nixon~

Wed, 10/17/2012 - 13:48 | 2898475 redpill
redpill's picture

'It's a big fuckin' club, and you ain't in it.'

--G. Carlin

Wed, 10/17/2012 - 14:02 | 2898519 Dr. Engali
Dr. Engali's picture

American Citizenship


~ anannoyingnous

Wed, 10/17/2012 - 13:02 | 2898353 Quintus
Quintus's picture

"The legal service concludes that without altering EU treaties it would be impossible to give a bank supervision board within the ECB any formal decision-making powers as suggested in the blueprint drawn up by the European Commission."


Yeah, well.  Without altering EU treaties (Specifically the Lisbon treaty) it is also illegal to bailout member states.  Hasn't proved to be an obstacle though, has it?

Wed, 10/17/2012 - 13:42 | 2898463 Urban Redneck
Urban Redneck's picture

Perhaps someone who is more familiar with the inner workings of the byzantine beast of Brussels can explain why the ECB doesn't just enter into a bi-lateral treaty/loan with a prospective pauper State and insert the necessary terms of Indenture as a loan covenant and demand the borrower's Parliament ratify the loan terms as a bilateral investment treaty between between the "sovereign" lender and formerly "sovereign" borrower?



Wed, 10/17/2012 - 13:03 | 2898355 Jim in MN
Jim in MN's picture

Oh that pesky sovereignty thing again.  Soooooo inconvenient when there are elite banksters to be bailed out.

Wed, 10/17/2012 - 13:06 | 2898364 Vegetius
Vegetius's picture

The European Titanic still sinks and the Elite still argue over the deck chairs.

Good times!

Wed, 10/17/2012 - 13:08 | 2898375 bank guy in Brussels
bank guy in Brussels's picture

In other euro-farce news of the day,

France's President Hollande hilariously claims the EU crisis will be essentially over by Christmas - ha!

While German think tank Bertelsmann Stiftung estimate the cost of the Mediterranean countries leaving the euro as around 17 trilllion ... give or take a few trillion

Both here on the UK Telegraph's excellent daily 'Debt Crisis Live', which cites ZeroHedge favourably every few days:


Wed, 10/17/2012 - 13:43 | 2898468 Winston Churchill
Winston Churchill's picture

Seem to remember that 'over by Christmas' line being used just prior to

both World Wars.

Third times a charm. Duck and cover.

Wed, 10/17/2012 - 13:56 | 2898502 No Euros please...
No Euros please we're British's picture

Yes, and watch out for those German think tanks.

Wed, 10/17/2012 - 13:09 | 2898378 FatAmerican
FatAmerican's picture

Just buy gold you don't need more income
Just get a nice lump of shiny shit that does nothing

Wed, 10/17/2012 - 13:11 | 2898383 max2205
max2205's picture

s e c r e t ........

Wed, 10/17/2012 - 13:12 | 2898384 Cognitive Dissonance
Cognitive Dissonance's picture

Since when did "illegal" stop the (EU) Ponzi?

Too freaking funny!

<It's only illegal when I say it's illegal.>

Wed, 10/17/2012 - 13:14 | 2898391 PUD
PUD's picture

Last week, Spain's Red Cross launched its first ever campaignto raise donations to help the growing number of poverty-stricken Spaniards needing food handouts as the nation's economic crisis deepens.

Now, the Catholic charity Caritas has said it is aiding more Italians than ever as the economu remains mired in recession. AP reports that the charity's annual report revealed that nearly half the people seeking its help in the poorer south are Italians. That compares with 30pc of Italians seeking regular help in the country overall - already up from 23pc three years ago.

The report added that greater numbers of housewives and pensioners are coming forward seeking help.

16.01 Greece and Spain are in "depression, not recession", according to Nobel prize-winning economist Joseph Stiglitz 

Wed, 10/17/2012 - 13:17 | 2898397 Misean
Misean's picture

Laws are for peasants.

Wed, 10/17/2012 - 13:19 | 2898405 q99x2
q99x2's picture

Maybe someone will rise up and restore law and order.

Wed, 10/17/2012 - 13:28 | 2898424 Dr. Engali
Dr. Engali's picture

Haw...if there were such a person TPTB would be quick to kill them off.....Hmmmm sounds familiar.

Wed, 10/17/2012 - 14:32 | 2898604 Schmuck Raker
Schmuck Raker's picture

Howard Beale (?-1976) RIP

The first known instance of a man who was killed because he had lousy ratings.

Wed, 10/17/2012 - 13:21 | 2898409 nmewn
nmewn's picture

"In a nutshell, not only has nothing actually happened in Europe, aside from lots of talk of course, but things are even worse than they were several months ago. But at least bonds are tighter, giving everyone a false sense of confidence and allowing peripheral countries the comfort of believing that everything is under control."

Another strongly worded statement on unicorns and puppy dogs is way overdue.

Wed, 10/17/2012 - 13:30 | 2898419 Dr. Engali
Dr. Engali's picture

Legal? What is this term legal? Laws ,like taxes, are only for the little people.

Wed, 10/17/2012 - 14:25 | 2898593 OneTinSoldier66
OneTinSoldier66's picture

I might be the only one, but I found myself wondering what the following means...


"a secret legal opinion"


But your post reminded me that it doesn't matter.

Wed, 10/17/2012 - 16:47 | 2899243 EscapingProgress
EscapingProgress's picture

"Written laws are like spider's webs; they will catch, it is true, the weak and the poor, but would be torn in pieces by the rich and powerful." - Anacharsis

Wed, 10/17/2012 - 13:35 | 2898442 ziggy59
ziggy59's picture

Sheesh!! What part of Union dont the Germans understand?

Wed, 10/17/2012 - 13:36 | 2898443 Yen Cross
Yen Cross's picture

 If Spain sets up a credit line through the ESM what will they pledge as collateral? Spanish debt? These guys don't even need bank vaults to store paper any more. They can just bury piles of shit in someones back yard, then dig it up later and use it for collateral!

Wed, 10/17/2012 - 14:34 | 2898608 Jugdish
Jugdish's picture

Hey !!! Not so fast. Shit has a tangible use. The Koreans that live next door shit in buckets and use it in their garden. You should see their fucking garden compared to mine. Grandiose, ornate, bountiful. Mine, wilted. Shit has more value than worthless pieces of ass wipe paper. I demand you stop the comparison.

Wed, 10/17/2012 - 13:46 | 2898472 rosethorn
rosethorn's picture

These sorts of issues should have been resolved before the euro currency was introduced.

Wed, 10/17/2012 - 13:51 | 2898489 Dareconomics
Dareconomics's picture

This is another nail in the coffin for the eurozone. How will it end?

My eurzone endgame scenarios are Periphexit, Corexit, Status Quo, Implosion and Grand Bargain:


Wed, 10/17/2012 - 14:20 | 2898505 LongSoupLine
LongSoupLine's picture

Wow, look at futures crash on this news.


whoops, scratch that.  i forgot reality isn't applicable in this piece of fucking fullretard shit called a "market"  

Wed, 10/17/2012 - 14:00 | 2898523 onebir
onebir's picture

Yet another thing they should've thought about before tying the EU knot...

Wed, 10/17/2012 - 14:20 | 2898585 CrabGrassKila
CrabGrassKila's picture

Oh, to be a Fly on the wall over in NATO.......


Wed, 10/17/2012 - 14:43 | 2898639 Ghordius
Ghordius's picture

"...Germany's (...) which has absolutely no intention of handing over supervision of Deutsche Bank (whose ongoing bailout this is all about)".

Any evidence beside the circomstantial?

Wed, 10/17/2012 - 15:48 | 2898909 Haager
Haager's picture

I think your objection is correct.

DB (and others)  had time and chances to sell and remove any bad assets, which will be substantially found at KfW, the Kreditanstalt für Wiederaufbau, and nowadays the ECB.

Wed, 10/17/2012 - 16:27 | 2899137 goldenbuddha454
goldenbuddha454's picture

Surely if Greece hasn't been kicked out of the Euro yet, then noone will.  We will see this whole fiat currency/money-shifting charade continue to playout until Germany issues the final nein to the rest of Europe for it would cost too much to end the game now when so many banking careers can be sustained indefinitely given the Euro's southern state's obstinence to budget reforms of a worthwhile nature.  The status quo until the end will be bailout after bailout.  http://www.spiegel.de/international/europe/study-warns-euro-exit-of-southern-nations-could-cost-17-trillion-euros-a-861775.html 

Wed, 10/17/2012 - 20:24 | 2899671 supafuckinmingster
supafuckinmingster's picture

 "A plan to create a single eurozone banking supervisor is illegal, according to a secret legal opinion for EU finance ministers that deals a further blow to a reform deemed vital to solving the bloc’s debt crisis"

Since when did illegality ever present a problem before in Euro la-la-land?


What's that you say.................never? 


Then why the fuck do you think it will be a problem now, suddenly?

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