Updates on Europe sovereign debt crisis

by Véronique Queffélec on juin 16, 2012


June 13th , 2012

Key Summary


EU Commission denies plans for capital controls for Greece. EU officials may issue statement on Sunday after Greek election result.


After saying on Monday that Italy might need support, Austrian FM Fekter yesterday stepped back, saying she had no indication Italy planned to apply for aid.


Today the leaders of coalition parties and opposition meet to hammer out a compromise on the planned joint approval of the fiscal compact and the ESM.

Banking union

German officials make clear that a banking union can only come in exchange for a transfer of sovereignty.


Latest Financial Stability Review warns about the potential for an aggravation in the debt crisis.


Calls for urgent solutions for growth to accompany integration.


Open to euro bonds for A rated countries.

Key Analysis

Greece: EU Commission denies plans for capital controls for Greece.

Commission spokesman Olivier Bailly told reporters in Brussels yesterday that the European Commission is not aware of any plans for the introduction of capital controls in Greece. According to him, such controls are legally possible in specific cases of public order and security, but no such plan is under discussion : “We are working on one plan and only one plan to keep Greece in the euro zone”.

It is unclear how comprehensive this denial is. There may be no “plan” as such for capital controls, but there may well be discussions about this possibility, even without a formal “plan”.

Greek Elections: EU officials may issue statement on Sunday after the election result.

A German government official said that European finance ministers will issue a statement on the outcome of Greece’s Sunday election at the G-20 summit in Mexico if necessary. The official, who briefed reporters in Berlin on yesterday, declined to define the circumstances under which the

ministers might issue a statement.

Italy: Austrian FM rows back.

After saying on Monday that Italy might need support, Austrian Finance Minister Maria Fekter yesterday stepped back, saying that she had no indication Italy planned to apply for aid.

Italian PM Mario Monti was quite outspoken on the initial remarks by Fekter, saying that these were “completely inappropriate” for an EU finance minister. Monti added that he “does not believe” that Italy would need a bailout. However, in a meeting with the leaders of the parties that support his technocratic government in parliament, Monti said that he is “worried by the situation of emergency” on financial markets, and had told party chiefs that “cohesion” was needed “to overcome the critical situation and give an image of unity abroad”. According to Monti, the party leaders have pledged their “full support” for government measures currently before parliament. The parliament will decide on legislation to counter corruption, which has been strongly contested by parts of the PDL, the centre right party.

The comments from Monti highlight Italy’s difficult position. In a situation where the sovereign crisis continues or escalates further, Italy will probably need external help.

Talks on Fiscal Compact and ESM in Germany.

Today the leaders of the coalition parties and the opposition come together to hammer out a

compromise on the planned joint approval of the fiscal compact and the ESM. The critical points in the negotiations are still the introduction of a financial transaction tax and the opposition’s demands for more growth supportive elements in the euro area rescue strategy.

In order to strengthen their position, the three potential Chancellor candidates, Gabriel, Steinmeier and Steinbrueck are traveling today to Paris for a short meeting with French President Francois Hollande.

ECB has asked Germany to ratify the Fiscal Compact quickly to give a strong signal to its European partners. It also asked Germany to ratify the ESM quickly in order to prepare the union “for the worst case scenario, which hopefully will not come about”.

Banking union only as quid-pro-quo.

Yesterday, German officials made very clear that a banking union, which would provide centralised funding for the banking sector, could only come in exchange for a transfer of sovereignty. Ms. Lautenschläger said that “Whoever accepts liability also has to have a right to control, especially when it is potentially a question of very large sums as in the case of a banking crisis.”

The German Chancellor criticised the fact that so far the European Banking Authority’s remit had been undermined by national oversight bodies acting “out of misguided national pride”, which had led to inaccurate stress tests. She added that in order to get better oversight for banks, national competences would need to be given up.

The German position on a banking union is very clear and consistent with the policy stance in other areas: on a quid-pro-quo basis, financial support from eurozone-wide facilities comes only under the condition of giving up sovereignty.

ECB financial stability review warns about the potential for an aggravation in the debt crisis

In its financial stability review, the ECB noted a renewed rise in eurozone tensions since April, but that measures of stress in the banking system were below where they had been at the end of last year. The ECB highlighted three key areas of concern:

- dwindling bank profits,

- excessive deleveraging by banks,

- the potential for an aggravation of the debt crisis perceived as the main risk.

Vitor Constancio, vicepresident of the ECB, who presented the report, remarked that the €100bn set aside for the recapitalisation of Spanish banks should be sufficient to fill the holes in their balance sheets and was a reassuring step for markets. The document argued that the bailout decision made an “important contribution to ease existing banking vulnerabilities in the euro area”. The report added that political leaders now had to address markets’ doubts about the future of the monetary union, pointing to the EU summit on the 28th and 29th of June at which leaders aim to agree on a road map to a “fiscal union”.

France calling for urgent solutions for growth to accompany integration

A presidential source suggested that President Francois Hollande will, in the days ahead, outline France’s position in a written submission to the June 28-29 European Council, trying to find “positive talking points and areas of agreement”. France’s European Affairs Minister Bernard

Cazeneuve argued that there would be “no political integration if we do not succeed in overcoming the financial and economic crisis, and we will not manage to overcome the crisis if we do no not have a supplementary process of integration.” He made the point that while focusing on integration measures was necessary to solve the crisis in the medium term, the acuteness of the crisis also called for growth considerations. France continues to push for bolder steps to solve the crisis. Finance Minister Pierre Moscovici stressed on Tuesday that the package of €100 billion for Spanish banks was the first step towards a banking union in the eurozone, that Europe must “define the framework for definitively consolidating the euro in political, budgetary and social terms.” Reaching a compromise on the key topics is likely to be an arduous task, given the significant differences in the various starting positions. Negotiations could broach the delicate topic of giving countries more time to meet their budget deficit reduction targets in the event of a further deterioration of the economic situation.

Finland open to euro bonds for A rated countries.

After meeting German Chancellor Angela Merkel, Finnish PM Jyrki Katainen could see the advantages of Eurobonds “for countries which have at least one A in their credit rating”. But, he added that it was advisable to shield countries from “market pressures” to keep their public finances in good order.