The EU Growth and Job packet agreed upon.
The compromise is struck:
1) The growth and job packet of 120 bio. EUR
2) Direct ESM intervention to save banks.
The Growth Pact:
A) EU-member states put up 10 bio. EUR in fresh capital for the European Investment Bank, which means ability for the EIB to lend 60 bio. EUR.
According to the Danish Prime Ministers open presentation to the parliamentary committee: The main target for this credit is the small and medium businesses. That detail is significant:
The first to suffer in a credit squeeze are the small and medium firms as their loans can be recalled by the banks immediately. This means that the banks will not be able to hold small and medium businesses as hostages, when they (the banks) demand rescue.
B) Liberation of 55 bio. EUR of ”old money” from unused funds in the EU’s structural funds. These funds are now to be spent on job creation and not regional development.
There have been considerable problems using these funds for any sane purpose and not building cathedrals in the desert as the Italian saying goes.
C) A pilot project, with associated bonds 4½ bio. EUR, to finance important infrastructure: Transport, energy and broadband communication.
Patient readers might think of the HVDC projects, though none of the investments have been itemized.
Formation of a European Bank Inspection in the Euro-zone and direct purchase of sovereign bonds by the ECB to relieve pressure on interest rates.
Handelsblatt:
A) Bank rescue directly from the ECB (or ESM) bypassing the national governments:
Germany has up to now been against direct funding of banks in distress as there was no means of controlling the economic and financial policy of the banks country. Spain and Italy have argued that additional burdens on the sovereign nation would drive up the interest rate on their debt to an untenable level.
Spain, Italy (and France) has a point, as the major banks have subsidiaries in several countries. I refer here to the story about Danske Banks Irish bank: National Bank of Ireland. A rescue of Danske Bank would involve Denmark guaranteeing an essentially Irish bank – and vice versa.
The other problem is that the quality of the national bank inspections has varied from the lax and pitiful to the downright farcical. Every trick has been used by distressed banks to keep their books closed until a credit squeeze forced them to shut their doors. The new standards introduced for evaluation of the credit quality does permit an earlier action – already on the insolvency stage.
The price Germany has extracted for the direct investment into banks by the ECB is a European Bank Inspection. The intervention and capitalization of banks directly from the EFSF will according to Hermann van Rumpoy (EU-council President) an agreement with the country and “appropriate conditions” – whatever that might be.
B) Eurobonds
The Italian Prime Minister announced that there was opened for Euro-bonds, but he’s interpretation was immediately reputed. On the contrary: Not only Germany but other countries as well referred existing instruments.
Again the problem is: How to control the debtor? What executive power will a European Bank Inspection have? Would they be authorized to rescind the banking license? For non-euro countries?
In this context the credit extension to Danske Bank of 41 bio by the EFSF. DKK gains a new perspective! The amount is guaranteed by the Danish CB. The maneuver seems designed to keep Danske Bank’s German subsidiary from playing the market.
Much of the technical details seem unclear and they are to be agreed upon finally in December.
