Though you probably can’t read this, it is quite an important document. That is how deals are made: First there are the obligatory tantrums to the press, public and electorate. Then they dig into substance – or not. Each side in the negotiations have their demands or rather”wishes” (you don’t present the other side with ultimatums – which will impede negotiations by having to work around blustering) and then sit down for a predetermined period to create the proper atmosphere of impending collapse and doom. Each side then checks and you reconvene to work out the compromise.

This compromise is a letter of intent as to what the national legislation will say once it gets through the bureaucracy that will give chapter and verse, cross the t’s and dot the i’s. So you might ask: Is that all it is? Yes, as a competent staff will know how to translate it truthfully into law text. That is indeed the problem of some of the smaller nations in the EU: They don’t have a competent force of little gray men to work out the details.

So the basis they have to work on is this “letter of intent”:

1)      The Basel III recommendations are:

  • Significantly high demands to capital and the quality of equity.
  • The need to identify the Systemic Important Financial Institutions (SIFI) and permanently require stronger capital base for SIFI’s.
  • Continued option for national authorities to require stricter demands on particular institutions or groups of institutions.

2)      The option to require stricter requirement to institutes that impose macro-prudential or systemic risks to the financial stability of Denmark.

  • From 2015 the requirement to sustain a period of 30 days with stressed liquidity and definition of liquid assets on an objective basis.
  • A satisfactory solution to the Danish mortgage bank real estate bonds to enter this pool of liquid assets. The final decision to what bonds may enter this liquidity class will have to be made on object criteria based on actual performance.
  • Bonds with a maturity exceeding one year will have to be financed with stable long term funding.
  • With regard to Danish real estate mortgage the long term funding will await a new political decision in 2017.

3)      Supervisory control of leverage (loan to asset ratio) and publication of targets from 2015 in 2017 at political decision of a “ceiling” to leverage.

4)      Stricter demands on “good management”.

  • Board members qualifications and limitations to how many boards a member may sit on.
  • Equal representation of women on the board.
  • Harmonised and raised sanctions by transgressions.
  • A “whistle-blower” device for anonymous employee reporting to authorities.
  •  Limitations on bonus in relation to salary of 1:1 with a ratio of 2:1 demanding a general assembly decision. Member countries can tighten this ratio.

5)      More extensive reporting to authorities.

6)      A country by country reporting for SIFI and only to the EU Commission that in 2015 will decide whether to publicise or not.

Now this agreement follows the general template with exception of number 2) where the issue is clearly the Danish real estate mortgage bond where the ECB demands positive proof as to the liquidity of the Danish real estate mortgage bond. Furthermore the annual refinancing of the flexible interest loans must stop and longer term financing must back these loans up. The real issue is the constants quarterly refinancing by repo-transactions is notoriously destabilising.

The positive note in the agreement is not solely trying to disguise a clumsily executed withdrawal as a glorious victory. Because it WAS a defeat in as much as Parkinson said that the most deadly refusal is a deferral.

There really is a dearth of quality securities in Europe and anything will help. The 100 bio. USD worth of fixed interest annuities that are all right will probably be accepted, but they are locked in with investors and almost impossible to make them part with. Getting a further 100 bio. USD of variable interest annuities into play would help. That is one of the reasons I think we will see a raising interest rate in Denmark as larger rental owner are being squeezed into converting.

The issue is really that Denmark wants its real estate bonds upgraded to sovereign status; but that upgrade needs positive proof to be consented to. A proof difficult to deliver as the quality bonds are not being sold and the junk isn’t being bought! That puts some serious strain on the claim to liquidity!

Germany has a somewhat similar issue with their local government bonds which are as many as federal sovereign bonds, but pays a 2% premium, which local governments clearly think is unreasonable.

There is a immense benefit to be harvested in both cases: The borrowers will have ridiculously cheap financing and the investor will have some assurance of seeing some of their money again. There is no such thing as a free lunch.

Other countries may have other issues – f.i. it is my hunch that item 6 is the one that made Sweden withdraw from the banking union. I would think Greece will have a list of adaptations to item 4 as long as my arm. The general footprint is German. Germany has only Deutsche Bank and to maybe Commerzbank that can be really classified as SIFI. Here Germany is very well aware that they need all the help they can get. Particularly item 5 is a must for Germany! We are really talking the end of bank secrecy here. Anybody helping to open the banks books will be helped in so many ways on other accounts.

This is a textbook example of how the EU works. Everybody has issues; but let’s deal with them and concentrate on that and not waste time where there is no problem conforming. All the talk about the EU and the EUR breaking up reveals a basic lack of understanding how the machine works. The USA has a federal government, but it is more akin to the US senate where the junior senator to Ohio has a problem with how poultry standards will affect hog farmers. The EU countries each have their own administration – mainly of civil servants much longer in office than any government. These civil servants – if they are worth their salt – detect problems in “federal” proposals ahead of time so the government can get a majority behind a stand on which modifications, exceptions and alterations are required and formulated into political issues.

Without a pro- or anti-EU stand, I’m astounded how well the system actually works in practice. The much maligned EU bureaucracy is more a coordinating function than a central administration. In many ways the policies are put in place better coordinated and less centralised than in the USA.