EU proposes cross-border bank rescues: draft
(Reuters) – European Union countries could be obliged to bail out one another’s struggling banks, according to a draft EU law that marks a big step towards greater EU financial integration likely to upset some members, particularly Germany.
Spain’s banking troubles and the risk that a bank run in a country such as Greece could spread have given new impetus to delayed EU proposals for a law to deal with failing banks.
The European Commission, the EU’s executive, will propose the rules on June 6, to grant local regulators what one official described as “aggressive intervention powers” to take control of stricken banks, break them up and impose losses on their bondholders.
If accepted by EU member countries, it would be a first step towards a pan-EU system of supervising and paying for the winding up of banks in difficulty, a vital element of the “banking union” the European Central Bank has called for.
The law, which could come into effect as early as 2014, would introduce what some officials describe as an insolvency regime for banks in the EU.
It would also instruct countries to prepare for the collapse of a bank, by collecting the equivalent of 1 percent of bank deposits from an annual levy on banks.
That money would be held in reserve and used in an emergency to prop up a troubled bank with loans or guarantees.
The draft has been finalized shortly after European leaders, meeting in Brussels last week, agreed to examine ways to deepen integration in the European Union and euro zone, which could include closer cooperation on banking.
The draft does not suggest the immediate introduction of a single European Union fund to wind up or rehabilitate troubled banks, an approach favored by the European Central Bank.
But the plan does propose closer ties between national funds, a move towards the creation of a common EU scheme. That could oblige a scheme in Britain, for example, to lend to a fund in France, if a bank with operations in both countries were to face collapse.
Strict rules to pool national funds would likely encounter stiff opposition from countries such as Britain, which has argued that London – not Brussels – should have sole authority in deciding when to provide money to support banks.
The push towards a single resolution fund will also make Germany uncomfortable. It has opposed any attempt to use its financial muscle to prop up lenders in weak countries such as Spain.
Once the law has been approved, the Commission will in 2014 look at the next step and assess how a “more integrated framework” for winding down banks might be best achieved, the document said.
In the document, Commission officials wrote: “An effective resolution regime should avoid that the costs … of a failing institution are borne by …(the) taxpayer … (and) should also ensure that large and systemic institutions can be resolved without jeopardizing financial stability.
“Member states shall ensure that financing arrangements under their jurisdiction are obliged to lend to other financing arrangements within the union.”
One EU official familiar with the text said: “It leaves some wiggle room, but there must be an arrangement to cooperate between countries.”
Such proposals, which require the blessing of the EU’s 27 states as well as the European Parliament, would stand little chance of success without the backing of Germany and Britain.
Speaking in Paris recently, Michel Barnier, the European Commissioner in charge of regulation, said the proposals included several steps.
“When supervisors identify a risk, there would be an early warning that could trigger a number of decisions including a ban on some banking activities, a ban on dividends being paid out and a change of management,” he said.
“If the crisis becomes very serious and there is a need for an orderly bankruptcy, there would be a mechanism that could manage that. The bank would be able to manage it, with a resolution fund, creditors and shareholders.”
EU proposes cross-border bank rescues: draft
TOKYO — Japan and China are expected to start direct trading of their currencies as early as June as part of efforts to boost bilateral trade and investment, according to reports.
With the planned step, exchange rates between the yen and the yuan will be determined by their transactions, departing from the current “cross rate” system that involves the dollar in setting yen-yuan rates, Kyodo News said on Saturday.
The two governments are eyeing setting up markets in Tokyo and Shanghai, the Yomiuri Shimbun said.
The yen-yuan exchange system would help businesses in the world’s second- and third-largest economies reduce risks associated with exchange rate fluctuations in the dollar and cut transaction costs, Kyodo said.
It will be the first time that China has allowed a major currency except the dollar to directly trade with the yuan, Kyodo said.
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TOKYO — In an unusually stark warning, Japan’s prime minister during last year’s nuclear crisis told a parliamentary inquiry on Monday that the country should discard nuclear power as too dangerous, saying the Fukushima accident had pushed Japan to the brink of “national collapse.”
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China Has No Plan for Large-Scale Stimulus, Xinhua Says
“The Chinese government’s intention is very clear: It will not roll out another massive stimulus plan to seek high economic growth,” Xinhua said today in the seventh paragraph of a Chinese-language article on economic policy, without attributing the information. “The current efforts for stabilizing growth will not repeat the old way of three years ago.”
Premier Wen Jiabao last week called for a greater focus on growth in the world’s second-largest economy, spurring speculation the nation would step up measures to boost expansion that’s set to slow for a sixth straight quarter. The benchmark Shanghai Composite Index has gained 1.7 percent since the comments were published May 20.
The tilt toward supporting expansion followed data showing trade below forecasts in April and industrial production rising the least since 2009. Europe’s debt crisis and austerity measures are threatening exports.
Pumping in government money to achieve growth targets is “not sustainable” and China will instead focus on encouraging private investments in railways, infrastructure, energy, telecommunications, health care and education, the story said.
Agencies including the finance ministry, agriculture ministry and the securities regulator will introduce their own measures to stabilize growth, Xinhua said.
Economists at Credit Suisse Group AG and Standard Chartered Plc said yesterday that stimulus is likely to be smaller than the 4 trillion yuan ($630 billion at today’s exchange rate) package announced in 2008.
Credit Suisse said spending on investment will probably range from 1 trillion yuan to 2 trillion yuan. Standard Chartered said China is starting a “mini-me” version of the prior stimulus.
China’s economy is forecast to expand 8.2 percent this year, based on the median estimate of analysts surveyed this month by Bloomberg News. That would be the least since 1999.
“Unlike in 2008 when the Chinese government rushed to spend, the new stimulus package will be small and modest,” said Zhang Xinfa, an economist with China Galaxy Securities Co. in Beijing. Bank lending will play a smaller role in the new round of investment, he said.
The nation has sped up the approval process for major projects, Xinhua said yesterday. The country will also encourage greater private investment in banks, according to guidelines released by the China Banking Regulatory Commission in a statement posted on its website May 26.
The People’s Bank of China on May 12 lowered banks’ reserve ratios by 50 basis points, the third cut in six months.
The Xinhua article made no mention of central bank tools including interest rates and the reserve-requirement ratio, previously used to bolster growth. It carried the byline of two reporters and wasn’t labeled as opinion or commentary.
European Stocks Advance as U.S. House Prices Stabilize
CGGVeritas, the world’s largest seismic surveyor of oilfields, increased 3.9 percent as UBS AG recommended the shares. ArcelorMittal (MT) gained 1.7 percent after HSBC Holdings Plc upgraded the steelmaker. Bankia SA led a decline in Spanish stocks, sliding 15 percent. Repsol YPF SA, the nation’s biggest oil company, sank to a three-year low after cutting its dividend payout ratio.
The Stoxx Europe 600 Index (SXXP) rose 0.4 percent to 243.47 at 2:07 p.m. in London, having swung between gains and losses at least six times. The gauge has retreated 11 percent from this year’s high on March 16 amid growing concern that Greece will fail to implement agreed austerity measures and leave the euro.
“Following on from Friday’s improvement in the University of Michigan, traders are hoping that it could be the start of an extended run of improving data in a heavy week for economic data, culminating in the big jobs figure on Friday,” Jonathan Sudaria, a trader at Capital Spreads in London, wrote in e- mailed comments.
National benchmark indexes rose in 13 of 18 western European markets today. The U.K.’s FTSE 100 increased 0.3 percent and Germany’s DAX gained 0.8 percent. France’s CAC 40 advanced 0.7 percent.
A report on May 25 showed U.S. consumer confidence rose in May to the highest level since 2007 as gasoline prices became less of a drag on household budgets. Labor Department figures on June 1 may show payrolls climbed by 150,000 workers in May after a 115,000 gain the previous month, according to the median forecast of 70 economists surveyed by Bloomberg.
Home values in 20 U.S. cities fell in the 12 months ended March at the slowest pace in more than a year. The S&P/Case- Shiller index of property values fell 2.6 percent from a year earlier after a 3.5 percent drop in February. The decline matched the median forecast of economists surveyed by Bloomberg. The index rose from the prior month on a seasonally adjusted basis.
China has no intention of starting a large-scale economic stimulus program like it did during the global financial crisis, the official Xinhua News Agency said today.
“The Chinese government’s intention is very clear: it will not roll out another massive stimulus plan to seek high economic growth,” Xinhua said in the seventh paragraph of a Chinese- language article on economic policy. “The current efforts for stabilizing growth will not repeat the old way of three years ago.”
CGGVeritas added 3.9 percent to 19.30 euros as UBS upgraded the shares to buy from neutral.
ArcelorMittal gained 1.7 percent to 11.62 euros. The stock was upgraded to overweight, which means investors should buy the shares, from neutral at HSBC.
Valeo SA (FR) led auto-related shares higher, climbing 3.2 percent to 35.33 euros. UBS said the French company is one of the few suppliers left offering both upgrades and growth potential.
Preferred shares of Volkswagen AG, Europe’s largest automaker, added 2.7 percent to 132.45 euros, gaining for a third day. Bayerische Motoren Werke AG (BMW), the biggest maker of luxury vehicles, rose 1.9 percent to 63.49 euros. Daimler AG (DAI) advanced 1.9 percent to 38.58 euros and Renault SA (RNO) climbed 2.5 percent to 34.61 euros.
Greggs Plc (GRG), a U.K. baker, jumped 7.6 percent to 502 pence as Chancellor of the Exchequer George Osborne reversed a plan to make hot takeaway snacks such as Cornish pasties subject to value-added tax.
Spanish lender Bankia (BKIA) sank 15 percent to 1.16 euros after dropping 13 percent yesterday. Spain’s IBEX 35 dropped 2.7 percent, on course for the lowest close in nine years.
Spain’s government bonds declined after a spokesman for the economy ministry said the nation’s preferred option for raising funds to recapitalize Bankia is via debt markets. The yield on the five-year securities climbed 13 basis points to 5.87 percent.
Italian lender Banca Popolare di Milano Scarl (PMI) slid 5.6 percent to 31.5 euro cents. Former Chairman Massimo Ponzellini was placed under house arrest as part of a probe into transactions of Italy’s oldest cooperative bank.
Repsol sank 7.2 percent to 12.83 euros, the lowest since April 2009. The oil company said it will cut its dividend payout ratio to increase production outside Argentina after its YPF SA unit was seized.
Wolseley Plc (WOS) retreated 3.5 percent to 2,219 pence as the world’s largest supplier of heating and plumbing products reported a decline in third-quarter revenue.
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European firms plan for Greek unrest and euro exit
(Reuters) – British electrical retailer Dixons has spent the last few weeks stockpiling security shutters to protect its nearly 100 stores across Greece in case of riot.
The planning, says Dixons chief Sebastian James, may look alarmist but it’s good to be prepared.
Company bosses around Europe agree. As the financial crisis in Greece worsens, companies are getting ready for everything from social unrest to a complete meltdown of the financial system.
Those preparations include sweeping cash out of Greece every night, cutting debts, weeding out badly paying customers and readying for a switch to a new Greek drachma if the country is forced to abandon the euro.
“Most companies are getting ready and preparing for a Greek exit and have looked at cash, treasury and currency issues,” said Roger Bayly, a partner at advisory and accountancy firm KPMG.
Europe’s No 2 electrical retailer Dixons owns Greece’s market leading but loss-making Kotsovolos chain, which has a 25-percent market share selling iPads and laptops as well as washing machines, televisions and air conditioning units.
Chief Executive James says the company has contingency plans to shutter up its 69 wholly owned and 29 franchised Greek stores and close them in the short term to protect against any threat of civil unrest and prepare for a switch to a new drachma.
Greece accounts for just over 3 percent of Dixon’s annual sales of around 8.2 billion pounds. The company competes with Europe’s No 1 electrical chain Metro and with a number of local players which James says may struggled to survive in a crisis.
“We know it would put paid to quite a lot of our competitors and give us an opportunity to get more of a market share. So we are ready and we would be very interested to see how it would turn out,” said James…
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Spanish debt costs spiral as crisis deepens
(Reuters) – Spanish 10-year borrowing costs neared the 7 percent danger level and Bankia shares hit record lows on Monday after the government, struggling to sort out its finances, proposed putting sovereign debt into the struggling lender.
Prime Minister Mariano Rajoy pinned the blame for the rising borrowing costs on concern about the future of the euro. He again ruled out seeking outside aid to revive a banking sector laid low by a property boom that has long since bust.
The risk premium demanded by investors to hold Spanish 10-year debt rather than the German benchmark reached its highest since the launch of the euro and closed the day for the first time above 500 basis points, at 511.
“There are major doubts over the euro zone and that makes the risk premium for some countries very high. That’s why it would be a very good idea to deliver a clear message there’s no going back for the euro,” Rajoy told a news conference.
“There will not be any (European) rescue for the Spanish banking system.”
Speaking before Bankia’s parent revealed a 2011 loss of 3.3 billion euros – compared to a modest profit previously declared – Rajoy gave no details of recapitalization plans. But he backed calls for the euro zone bailout fund, which will be in place from July, to be able to lend to banks directly.
Government sources told Reuters Spain may shore up Bankia with sovereign bonds in return for shares in the bank and could use this method to prop up other troubled lenders – moves which would push the country’s debts above the 79.8 percent of economic output which had been expected this year.
“This method has been used by Germany and by Ireland in the past, it is perfectly valid,” a government source told Reuters.
The source said the ECB had not been specifically informed of the plans to inject state bonds into Bankia, although the government was in close touch with the Frankfurt-based institution. A final decision had not yet been made on which option to take.
Bankia’s parent company BFA has asked for 19 billion euros ($23.8 billion) in government help, in addition to 4.5 billion the state has already pumped in to cover possible losses on repossessed property, loans and investments.
Investors increasingly believe weak banks, undermined by the collapse four years ago of a decade-long property boom, coupled with heavily indebted regions, could force Spain to seek an international bailout which the euro zone can barely afford..