European Commission Says It Is Willing To Envisage Direct ESM Bank Recapitalizations

Update: sure enough "EU says accommodative ECB has little scope for more stimulus"

In a headline that is far less than meets the eye, we read the following:

  • EU WILLING TO `ENVISAGE' DIRECT ESM BANK RECAPITALIZATIONS
  • EURO ZONE SHOULD MOVE TOWARDS BANKING UNION

As a reminder, this is the EU... not the ECB... and not Germany. The same EU which has for a while now been pushing for Germany to foot the bill. The same EU which without Germany's funding agreement, is a faceless zombie. Recall yesterday's Reuters story that made the rounds: EU proposes cross-border bank rescues. and which as Reuters admitted is "likely to upset some members, particularly Germany." Same here. As expected the record number of EUR shorts send the currency into the sky, but we expect it to come right back down once it is understood that Germany has yet to say anything on this plan.

And here is more on the story, which is nothing but a rerun of yesterday's Reuters report, this time from the WSJ:

The 17 countries that use the euro should consider setting up a "banking union" that allows them to share the burden of bank failures, the European Union's executive arm said Wednesday in a report on the currency union's crisis-fighting efforts.

 

To further stop expensive bank bailouts from pulling down governments' own finances, allowing the euro zone's new rescue fund to directly boost the capital of banks "might be envisaged," the European Commission said.

 

At the moment, any financial aid to prop up struggling banks would have to be requested by the firms' own government, pushing up its debt and deficit burden. The fear is that even if the government gets the required bank aid from the bailout fund, it would damage its efforts to raise money from the bond markets to finance the rest of its operations.

 

The Commission's suggestion for a banking union comes as vulnerable euro countries like Italy and Spain have seen borrowing costs jump in recent weeks while the euro's value has slumped. Spain's troubles, in particular, have been compounded by the weakness of banks suffering the effects of a property-market meltdown.

 

Investors have also shied away from the currency union's weaker members amid concerns that Greece may have to leave the euro and spark further turmoil in the bloc's financial sector.

 

The Commission publishes on Wednesday specific recommendations for all 27 EU countries as well as the euro zone as a whole. Many economists have called on the Commission to give countries more time to cut their budget deficits to avoid pushing them further into recession.

 

In its own staff report, which was released ahead of the recommendations, the Commission paints a dark picture of the euro zone's economy—even in relatively strong countries.

 

"Even member states that had been regarded as financially sound became affected and the crisis became systemwide in the second half of 2011," it said. "This reveals the strength of spillovers in the euro area…and is a call against complacency for those seemingly unaffected."

And much more recycled "news" in the article itself.