Following last Friday’s “successful” EU summit in Brussels, global markets were euphoric amid talks of “breakthrough” in the ongoing deadlocked negotiations.
However, as they say, the ‘devil lies in the detail.’ For example, the EU leaders have agreed that the proposed new EU-wide banking regulator will not be set up before the end of 2012. Since issues of national control and sovereignty are involved, chances of the proposed euro-wide central bank supervisory council getting delayed or not taking off at all is very real.
Also, agreement over routing funds from the region’s bailout funds, the EFSF and the ESM, directly to the region’s banks rather than through the national governments in order to keep sovereign debt levels low, goes against the tenets of the European Council, because EU rules allow lending to governments only due to lack of control over foreign banks.
One possible condition to channel funds directly to the banks, as legitimately demanded by the Germans, can be underwriting of loans by national governments, thus compensating for probable losses suffered by the EFSF and the ESM.
However, Benoit Coeure, Executive Board Member of the European Central Bank, doesn’t think non-standard policy measures such as further Long Term Repurchase Operations or quantitative easing, are required immediately.
The latest move by the ECB to cut deposit rates to zero was necessitated to motivate banks to lend each other since the current liquidity crisis is not related to tight monetary policy, but a general reluctance on the part of banks to lend each other due to lack of trust. Also, banks are unwilling to buy sovereign bonds due to trust deficit, which probably will ease after the latest deposit rate cuts.
Asked if the ECB will consider negative deposit rates in future, Coeure said it’s not required under current circumstances even though the central bank of Denmark has done so recently.
Markets’ reaction on ECB’s latest policy moves has been muted and the true impact of the measures will be felt in near future, he said. However, the major worry remains implementing the decisions arrived at last week’s Brussels summit.
The proposed banking union across the EU region remains a significant instrument in the crisis-fighting toolbox of the ECB. Since it’s a priority, the sooner the banking union is formed, the better. However, the number of member-nations set to join the proposed banking union remains uncertain at this point in time.
The European leaders and the European Council will decide if only the 17 members of the single-currency union or all the 27 members of Europe would join the future banking union. You can watch the video here.
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