Berlin to pay at the end for Eurozone banks’ consolidation

José Manuel Barroso, President of the European Commission (in the middle), participated in a High-Level Seminar on Innovation together with Brendan Howlin, Irish Minister for Public Expenditure and Reform (on the right). The event was organised by the Bureau of European Policy Advisers (BEPA) and its Director General, Jean-Claude Thébaut (on the left). (EC photographic library, 8/7/2013).

José Manuel Barroso, President of the European Commission (in the middle), participated in a High-Level Seminar on Innovation together with Brendan Howlin, Irish Minister for Public Expenditure and Reform (on the right). The event was organised by the Bureau of European Policy Advisers (BEPA) and its Director General, Jean-Claude Thébaut (on the left). (EC photographic library, 8/7/2013).

The most valuable asset of Eurozone households, their homes, continue losing large parts of their value in this unending economic crisis, which has brought to knees more than half of euro area countries. It’s a tragic combination. People after losing their jobs watch their homes to lose value every day, and if they have a mortgage, then everything becomes surreal. According to Eurostat, the EU statistical service, in the first quarter of 2013 euro area house prices fell by another 2.2% compared with first quarter 2012.

Falling house prices

Invariably the worst hit countries are Spain, Portugal, Greece, Ireland, Slovenia and Italy, where house prices fell by anything between 3% and 12.8%. This negative tendency however is not confined to the ‘usual victims’ of the four years old crisis. House prices fell also in the Netherlands  by 7.2% and in France by 1.4%. Actually the first of the last two countries is in a very bad financial shape because households are very deep in debt, mainly with house mortgages. Only last month The Hague government was forced to spend €4.5 billion to bailout a bank, exactly because it is increasingly difficult for households to continue pay mortgages on properties of lower value than the loan.

Unemployment

In the other six countries mentioned above on top of the problem of the diminishing value of properties, many households even if they want to continue paying their mortgages find it impossible, when one or more of their members lose their job. No need to repeat here the unemployment rates in all those countries. Every monthly quote is always a new ‘historic’ record.

In this way the falling property prices and the always increasing unemployment have already undermined the banking system in many countries. In Spain this was the core problem. In Greece it was the other way around. The collapse of the Greek government bonds wiped out the capital of the country’s major banks, which are now recapitalised by the European Financial Stability Facility with €48.5bn. The problem though is that if the current tendency, of more Greek mortgages and other loans going increasingly ‘red’, continues this new capital injection will be seriously eroded soon.

This is not a problem only for the Greek banks. It’s the same all over the south of Eurozone and now it surfaces even in the north. That is why the creation of the European Banking Union has become a very urgent business. In this new institution the core tool will be the bank resolution mechanism and not without good reason. If the present catastrophic tendencies of falling house prices and skyrocketing unemployment persists for another year, ‘red’ loans in the south and elsewhere in the Eurozone will become the problem not only for particular banks or countries but for Brussels and Berlin too.

The Commission

In view of this the European Commission, having understood the problem, proposed yesterday the creation of a strong and centrally managed bank resolution authority. The relevant announcement went like that: “The European Commission has today (10/07/2013) proposed a Single Resolution Mechanism (SRM) for the Banking Union. The mechanism would complement the Single Supervisory Mechanism (SSM) which, once operational in late 2014, will see the European Central Bank (ECB) directly supervise banks in the euro area and in other Member States which decide to join the Banking Union. The Single Resolution Mechanism would ensure that – not withstanding stronger supervision – if a bank subject to the SSM faced serious difficulties, its resolution could be managed efficiently with minimal costs to taxpayers and the real economy”.

Germany disagrees in every respect with that, because Berlin wants to avoid paying the price of safeguarding the entire Eurozone’s banking system. On July 10, 2013 the European Sting writer Suzan A. Kane stressed that “Germany insists on the need for a decentralised and consequently loose resolution authorities based in the 17 Eurozone capitals, while the Commission, the ECB and the IMF propose a strong and central resolution authority based in Brussels. Germany hypocritically argues that the enactment of a strong, central resolution authority demands a change in the Treaties of the European Union, a procedure that may take years to accomplish”. Actually yesterday the German minister of Finance Wolfgang Schauble commented that the Commission proposal for a central banks resolution authority “has feet of clay”.

Unfortunately for Germany, if the Eurozone is not to disintegrate disorderly and create a new and worst global credit chaos, Berlin will be obliged to use its reserves to support Eurozone’s banking system. For one thing most German banks themselves need a lot more capital than they can find from the market. As for liquidity support for Eurozone’s 6000 banks this is already promised by the ECB. Printers are warming up in Frankfurt.

Turn and twist it as it may Germany, the definite solution for Eurozone’s banks is not going to be bloodless. Of course the needed resources will be provided by those who have reserves, not the PIGS.

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