This is not the first time cracks have appeared in the European Union over its response to the financial crisis. In March, the so-called fiscal compact, which would introduce stricter requirements for national budgetary discipline, was signed by 25 EU countries -- but not Britain and the Czech Republic. If the treaty is ratified, it will apply to those countries that ratify it rather than to all EU countries.
MONEY MARKETS-Access still restricted after Spanish bank bailout - Reuters
* Spanish bank aid not seen improving their money market access
* Looser ECB collateral rules also seen having limited impact
* Markets expecting ECB to ease monetary policy more
By Marius Zaharia
LONDON, June 22 (Reuters) - The bailout of Spanish banks and any loosening of collateral rules for borrowing from the European Central Bank will do little to improve confidence in bank-to-bank lending markets, which will remain shut for most peripheral banks.
Two independent consultancies have identified a capital hole of up to 62 billion euros for Spanish banks, which have been hammered by a rising number of bad property loans. Spain is expected to submit a formal request for financial help to bail them out in the next few days.
Another measure aimed at helping funding-squeezed Spanish banks that is being discussed is the possibility that the ECB may loosen its collateral rules by allowing the use of more mortgage-backed securities as collateral.
But traders say confidence levels in money markets are so low that those measures will not have a significant or lasting impact. Broader concerns about the fate of the euro zone project are still going to dominate markets after those steps are taken.
"Nothing has happened in the past few years to improve the standard of periphery (banks). Unless there's something pretty dramatic, nothing's going to change any time soon," one trader said.
Traders said only a select group of banks are active in unsecured interbank markets, mainly those based in the so-called "core" of the euro zone, formed of triple-A rated countries, such as Germany, France or the Netherlands.
In Spain, one trader said that the three largest banks Santander, BBVA and CaixaBank, which do not need any fresh funds according to Bank of Spain, are still having access to lending markets, but at an increasingly higher costs.
Others are increasingly reliant on the ECB's regular liquidity offerings for cash.
"We have seen an increase in the cost of borrowing for all Spanish banks. Some of them still have access to the market," said Giuseppe Maraffino, rate strategist at Barclays Capital.
"The market is still very cautious, they want to see more details about the bailout. I don't think in the very near term it could lead to an improvement in confidence. Even after we see the details ... the market will remain cautious because they want to see how the broader situation will evolve."
RATE BETS
As tensions in financial markets rise, speculation is growing that the ECB may ease monetary conditions further by cutting interest rates.
Traders estimate the market is attaching a 50 percent chance of a cut in the deposit facility rate from 25 basis points to zero in July and the probability rises further out the curve.
The forward euro overnight Eonia rate for July was last 0.22 percent, compared to Thursday's fixing of 0.33 percent. On average, Eonia rates have recently traded 10 basis points above the deposit facility rate. For dates starting from August to December, Eonia forwards trade around 0.18 percent.
ECB member Benoit Coeure said earlier this week the bank is expected to discuss interest rate cuts at its next meeting.
"Based on the recent comments, it is very likely they will cut the deposit facility to zero," Barclays' Maraffino said.
He warned, however, that this could create distortions in lending markets as those who are now willing to provide liquidity will have little interest in lending cash for even lower rates.
HIGHLIGHTS-EU finance ministers' comments - Reuters
LUXEMBOURG, June 22 |
LUXEMBOURG, June 22 (Reuters) - EU finance ministers and officials were meeting on Friday to discuss plans for deeper integration of the bloc's banking sector, including draft rules on how to rescue failing banks and proposals for a tax on financial transactions.
Following are comments from ministers and officials as they arrived for the talks in Luxembourg:
DUTCH FINANCE MINISTER JAN KEES DE JAGER
ON A FINANCIAL TRANSACTION TAX:
"The Netherlands has a very clear position on this. We will definitely not be implementing it.
"We see better alternatives. We already have a bank tax ourselves. Our tax also hits bonuses."
SPANISH ECONOMY MINISTER LUIS DE GUINDOS
ON BANK RECAPITALISATION:
"I think (direct bank recapitalisation) is a possibility. It is one of the fundamental elements to break the link between bank risk and sovereign risk.
"We will discuss this at the European summit, and this possibility (of direct recapitalisation) is absolutely open to Spain if there is progress (on this issue) in the next few months. The process of recapitalisation is not instantaneous."
GERMAN FINANCE MINISTER WOLFGANG SCHAEUBLE
ON FINANCIAL TRANSACTION TAX:
"Like we discussed with parliamentary floor leaders yesterday, we will see today that if we make no progress on the level of the EU 27, whether we don't have a chance to drive the project in the framework of closer cooperation. We will try to push this vigorously today.
"There will be a discussion on that today and I'll tell you the result afterwards... but the government will act like we agreed with parliamentary floor leaders and party chiefs yesterday."
ON IMF REPORT ON EURO ZONE:
"The IMF in its Article IV report made a number of proposals on how the euro zone must be strengthened through institutional reforms in the medium term. That's the agenda for the European summit next week.
"We are all working vigorously on preparing it so that it can come to a good result but we don't intend to announce results ahead of time. It's an important contribution just like the IMF always makes important contributions."
DANISH ECONOMY MINISTER MARGRETHE VESTAGER
ON A POSSIBLE EU FINANCIAL TRANSACTION TAX:
"I think it is a little bit too hasty to make abrupt conclusions. Probably it will be obvious that there's not the unanimity needed to pass the Commission's proposal.
"The next step of course is whether some countries would like to move on from that. Today, possibly more likely is a political (signal) if countries would consider enhanced cooperation or not."
ON REVIEWING DEADLINES FOR GREEK BAILOUT PROGRAMME:
"I think that is a very tight discussion between members and those who give the loans. As far as I know the debate, they're very firm on the fact that if you take a loan you should fulfil your obligations.
ON A PROPOSAL FOR AN EU BANKING RESOLUTION FUND:
"We've been longing very much for this proposal to be tabled because it is urgent to have a debate about who's going to make sure we have a more stable banking and financial system.
"From a Danish point of view, as the presidency, we find that it's a very good signal that it's not taxpayers who are going to bail out banks in the future if the proposal is passed. I think we'll have a very light debate and then the next presidency will take it from there."
EU ECONOMIC AND MONETARY AFFAIRS COMMISSIONER OLLI REHN
ON SUPPORT FOR SPANISH BANKS:
"Yesterday we took important decisions concerning Greece and Spain. We have a very clear roadmap concerning the decisions to support recapitalisation of the Spanish banking system, and I expect that we could agree on a memorandum of understanding in the next regular Eurogroup meeting, which will take place on July 9 in Brussels."
ON STRENGTHENED EU ECONOMIC GOVERNANCE:
"Today is a very important day for the reinforced economic governance in Europe. The Ecofin is expected to adopt country-specific recommendations on economic and fiscal policy and structural reforms for all 27 member states."
SWEDISH FINANCE MINISTER ANDERS BORG
ON PRIORITIES FOR FINANCE MINISTERS:
"I think we should concentrate on first things first - reducing uncertainty, restoring credibility of the Spanish banking system, and then we can go on for a discussion for a year or two on a banking union. But that will not help us if we don't deal with the most urgent issues, and those are the Spanish banking system - get it recapitalised and get some monetary expansion our of the ECB."
ON THE EUROPEAN CENTRAL BANK:
"I think it would be very good if the ECB could provide liquidity, if they could boost growth and if at the same time we could do something about the Spanish banking system. Then we could discuss who is supervising who. But we need to solve the urgent problem first.
ON THE PROPOSAL FOR A FINANCIAL TRANSACTIONS TAX:
"The financial transaction tax will increase borrowing costs and it will have a negative impact on European growth, and what we need to do is restore growth, not to reduce it."
ON PROSPECTS FOR STIMULATING GROWTH:
"We cannot spend ourselves out of the crisis that has to do with our uncompetitiveness. What we need to do is to restore the competitiveness of the southern European countries. Some countries in the north with low interest rates can do a little bit more on the spending side when it comes to real growth."
AUSTRIAN FINANCE MINISTER MARIA FEKTER
ON AN EU FINANCIAL TRANSACTION TAX:
"I will fight for the fact that if we don't get an agreement with all 27, then we drive the project on with enhanced cooperation.
"I assume we will try to push this today. I will not allow it to go the grave. Unanimity is not that important when nine can come together and see a good reason to keep working on it." (Reporting by Annika Breidthardt, Robin Emmott, John O'Donnell, Jan Strupczewski, Charlie Dunmore, Sebastian Moffett and Claire Davenport; editing by Sebastian Moffett and Rex Merrifield)
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