EU ministers agree on financial supervision deal intended to shield against future crises

By Pan Pylas, AP
Tuesday, September 7, 2010

EU OKs new financial supervision deal

BRUSSELS — European Union nations agreed to create new financial oversight institutions Tuesday, hoping to prevent a repeat of the government debt crisis that nearly left Greece bankrupt and brought the European banking system to its knees.

The union’s 27 finance ministers also agreed to give Greece the next chunk of its bailout funds but failed to find common ground on the introduction of a levy on banks or on a new tax on financial trading.

The ministers — called Ecofin — decided to establish a new supervisory board over the financial industry and demand a more transparent sharing of government budgetary information — a move prompted by the dubious accounting practices in Greece over the last few years.

The systemic risk board, the principal new body backed Tuesday, will be chaired by European Central Bank president Jean-Claude Trichet out of Frankfurt. It still needs the formal backing of the European Parliament, but that is expected later this month.

This shows the willingness of European countries to “put behind national interests for the sake of Europe,” said Wolfgang Schaeuble, Germany’s finance minister.

Belgium’s finance minister Didier Reynders, who chaired the meeting, said stricter supervision was one of the most important lessons from the government debt crisis and insisted the deal was necessary now to make sure the new risk board begins work at the start of 2011.

The EU reforms echo recent changes enacted in the United States, where a new council of regulators, led by the Treasury Secretary, has been established to monitor threats to the financial system. The U.S. has also created a new powerful independent consumer financial protection bureau within the Federal Reserve to write and enforce new regulations covering lending and credit.

As well as creating a new financial architecture, the ministers also approved a second installment of emergency loans — worth euro9 billion ($11.5 billion) — for Greece after the European Commission and the International Monetary Fund praised the country for the efforts it has made since the massive euro110 billion ($140 billion) bailout plan was agreed in May.

Yet common ground could not be found on the introduction of new banking taxes.

Although many countries in the EU have decided to impose a levy on bank profits, there is no Europe-wide agreement about what to do with the proceeds. Germany wants the revenues to be put in a rescue fund to pay for future banking bailouts while Britain wants to use the money for its own budgetary needs.

“I made it clear … that we did not support proposals for a European resolution fund,” said British Finance Minister George Osborne.

Even though a consensus has not emerged in the EU over the bank levy, Europe has in many ways gone further down the line than the U.S. after Congress failed to back a plan to impose a $19 billion tax on large banks and hedge funds.

The transactions tax, which has been backed by non-governmental organizations, trade unions and politicians, does not look like it’s going to get the broad backing within Europe’s capitals, even though French President Nicolas Sarkozy said it’s going to be a priority when France takes the chair of the Group of 20 countries next year.

Osborne said the problem with the trading tax is the same as it has been since Nobel Laureate James Tobin first proposed it in 1970s — if it’s not introduced everywhere, then firms will just move their dealmaking elsewhere to avoid paying the tax.

“I suspect that transaction taxes will be discussed for many decades to come,” said Osborne.

It certainly looks like it will continue to be a topic of conversation when the finance ministers meet again in an informal meeting at the end of the month — Germany’s Schaeuble said the transaction tax issue remained on the table and that the obstacles were not “insurmountable.”

Proponents of the measures had claimed they would curb excessive risk-taking and place the financial burden of any rescue package on financial institutions themselves instead of the taxpayer. During the financial crisis, governments across the EU provided financial institutions public support worth an astonishing 16.5 percent of the union’s total worth.

Tuesday’s Ecofin meeting took place in a less feverish atmosphere than most recent gatherings, when the ministers faced the real prospect of Greece’s potential bankruptcy. Only May’s bailout of the country by its 15 partners in the eurozone and the IMF and a near $1 trillion rescue package to support other embattled eurozone economies helped ease concerns.

Worries about the European economy and its ability to deal with large amounts of government debt have eased further by a recent run of better-than-expected data, progress by Greece in strengthening its bailed-out finances and the results of stress tests on 91 of the EU’s banks.

Though the most apocalyptic scenarios discussed a few months ago, such as the collapse of the euro currency, have been put on the back burner, market jitters remain. A report in the Wall Street Journal that the summer’s stress tests into 91 EU banks understated some lenders’ holdings of potentially risky government debt spooked markets Tuesday — the euro was trading over a cent lower on the day at $1.2750.

Investors know that the government debt crisis could flare up again, particularly as the 16 eurozone governments are set to issue more debt this month than they did in August.

Eurozone governments have bond repayments of euro80 billion ($103 billion) in September, with around euro30 billion ($38 billion) due from Italy alone — and the results of the debt sales will reveal what bond investors think of government finances.

“There are growing concerns about a potential ’round 2′ in the eurozone debt crisis as banks and some eurozone governments face a heavy funding schedule,” warned Neil MacKinnon, global macro strategist at VTB Capital.


Associated Press Writers Raf Casert in Brussels and Jim Kuhnhenn in Washington contributed to this story.

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