Wednesday, July 06, 2011

Of banks and bailing wire

File this under financial wizardry, of the sovereign kind, with a European flair.

Is the European Union bailing out Greece?

Euro zone approves 12bn euros bailout for Greece
Euro zone finance ministers have approved a 12 billion euro installment of Greece’s bailout, but signaled that the nation must expect significant losses of sovereignty and jobs.

Ministers in the Euro-group gave the go-ahead for the fifth tranche of Greece’s 110-billion-euro financial rescue agreed last year, and said details of a second aid package for Athens would be finalized by mid-September.

But within hours of Saturday’s decision, Eurogroup chairman, Jean-Claude Juncker, warned Greeks that help from the EU and Inter-national Monetary Fund (IMF) would have unpleasant consequences.

Sounds a bit like it, but it depends, to some significant extent, on how you define "bail-out". And definition is everything in A Europe of judges.

EU: No-bailout rule III
In the Treaty establishing a Constitution for Europe the provisions on economic policy were located in Part III ‘The policies and functioning of the Union’, Title III ‘Internal policies and action’, Chapter II ‘Economic and monetary policy’, Section 1 ‘Economic policy’.

The ‘no-bailout’ clause is found in Article III-183, OJ 16.12.2004 C 310/78:

Article III-183 Constitution

1. The Union shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of any Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project.
'No Bailout' Clause? The EU's Greek Rescue Problems
European Policy Centre CEO Hans Martens is referring to the 'No Bailout' clause in the European treaty. Article 103 says that: the Union shall not be liable for or assume the commitments of central governments.

This article was specially written to leave ensure no EU country would be saved by the EU if it doesn't respect the Union's economic rules. And that's precisely the case in Greece.

On the other hand, if the European leaders are really willing to aid Greece, they can simply ignore the first clause and go with article 122, which states: when a member-state 'is in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control, the Council [of national governments], on a proposal from the Commission, may grant, under certain conditions, Union financial assistance to the member-state concerned.

ECB's Stark rejects EU guarantees for Greek debt
A senior European Central Bank policymaker rejected the idea of a Greek debt solution involving EU guarantees on Wednesday, and said Greece would face economic collapse if it restructured its debt.

Asked about a scenario under which banks exchanged their Greek bonds for new paper backed by guarantees from EU states - an approach that would be similar to that used in Latin America in the 1980s - Juergen Stark said: "This instrument is disqualified."

"It would break the ban on support - the no bail-out clause in article 125 of the EU Treaty," Stark, a member of the ECB's Executive Board, told German newspaper Die Zeit in an interview.

The U.S.A. and Europe Are Reaching the End of the Line
Because of the sins of the € Commission, the European Central Bank (ECB), and the governments, which have repeatedly violated the no-bailout clause of the European Union's Maastricht Treaty with their so-called rescue packages, plus the ECB's acquisition of toxic government bonds, a situation has now arisen in which the ECB could become technically bankrupt overnight.

UPDATE 1-Finland demands bailout guarantees, bank participation
Finland's new finance minister said on Tuesday that the Nordic country will demand guarantees if it participates in any new euro area bailouts and that it wants private investors to bear more of the burden.

"We want to limit Finland's responsibilities. The new government has taken a tougher stance than the previous government regarding crisis countries' aid packages," Jutta Urpilainen said in a television interview with public broadcaster YLE.

She said the guarantees could be in the form of shares in a company managing the debt-laden state's property.

UPDATE 1-S&P warning adds default threat to Greece's bailout woes
Greece would likely be in default if it follows a debt rollover plan pushed by French banks, S&P warned on Monday, deepening the pain of a bailout that one European official said will cost Athens sovereignty and jobs.

Derivatives industry body ISDA said before the French proposal was released in late June that a voluntary agreement to roll over Greek debt would "typically" not trigger payments on credit default swaps.

European politicians and bankers had expressed confidence last week that the French proposal would not trigger a default, but ratings agency Standard & Poor's said it would involve losses to debt holders, most likely earning Greece a "selective default" rating. S&P cut Greece's sovereign rating to "CCC" last month, from "B", on a view that any restructuring of the country's massive debt load would count as an effective default.

Greece crisis: German lenders 'join rollover plan'
German lenders and insurers have agreed to participate in a plan to continue lending to Greece, according to German finance minister Wolfgang Schaeuble.

He was speaking after a private meeting of the country's main banks.

Mr Schaeuble said German institutions would contribute 3.2bn euros ($4.6bn, £2.9bn) to the plan, details of which have yet to be finalised.

It comes after French banks agreed to relend about half of Greek debts they own coming due by 2014.

Deutsche, Germany's biggest lender, was expected to contribute less than 1bn euros to the plan, according to reports in Germany.

Commerzbank , Germany's second-biggest lender, is likely to contribute far less than 1bn euros, the reports said.

The French plan is designed to make Greece's debtload more manageable in a way that would not be deemed a formal default.

If the deal is classified as a default by ratings agencies or credit derivatives traders, it could force European banks to recognise billions of euros in losses in Greek debts that they currently hold, putting their own solvency at risk.

A couple of years ago, ECB warns Germany against EU bail-out
The European Central Bank gave a thinly veiled warning to the German government on Friday not to violate the European Union’s “no bail-out” clause, which prevents members of the eurozone from supporting other members that are facing rising public debt.

Jürgen Stark, ECB executive board member, told Spiegel magazine in an interview released on Friday that the clause was an “important basis for the functioning of the monetary union”.

The warning follows reports that Germany was considering ways to help members of the eurozone that are facing fast-rising refinancing costs as investor fears rise about deteriorating public finances.

The “no bail-out” clause of the EU treaties prohibits countries from becoming “liable for” or assuming “the commitments” of other governments and is regarded by the ECB as an important weapon for ensuring fiscal discipline.

Asked about the issue on Friday, Frank-Walter Steinmeier, foreign minister, said; “A process is now starting to consider to what extent support via the eurozone and the economically strong countries of the eurozone can happen.”

Fast forward back to the present, German court considers challenge to EU bail-outs
Germany's Constitutional Court is hearing a challenge to the country's participation in bail-outs of Greece, the Republic of Ireland and Portugal.

A Berlin professor argues that the process violates constitutional provisions and should be blocked.

Germany's finance minister rejected the claim, saying all rescue packages had been made on solid legal ground. Experts say the court is unlikely to block Germany's participation in the eurozone bail-outs altogether.

German court hears case against bail-outs
The signs are still that the case is unlikely to cause serious problems for Berlin – the court last year declined to issue an injunction to prevent financial transfers to Greece. Judges signalled they were sceptical that an infringement of EU law would fall under their competence. However, as one government official remarked: “The court is always good for surprises.”

A decision is expected in September or October.

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