By Yanis Varoufakis, professor of economics at the University of Athens. Cross posted from his blog
The idea was to de-couple the banking from the debt crisis. The reality is that they propose to do nothing of the sort.
In June 2012 Mario Monti had demanded that banks in need of capital injections should source capital directly from the ESM, without the involvement of states and, of course, without these funds counting as part of the member-states’ national debt. Faced with a front comprising Spain, France and Italy, Mrs Merkel relented but added a precondition: Banking Union (BU). Ever since, Germany has been proclaiming the idea of a BU in principle in order to deny its formation in practice. The more BU is debated and pushed into the future the easier it was to undermine the direct ESM recapitalisation of banks. Now, the Eurogroup has handed down its blueprint for direct ESM recapitalisation of banks. The gist is it will not happen. At least, it will not happen in any manner that helps decouple the present banking crisis in the Periphery from the crisis of debt and of the imploding social economies of the Periphery. And this is not just because the agreed upon scheme will not begin before the end of 2014 – see below for the deeper reasons. In short, today is nothing short of a(nother) black day for Europe.
Here is the essence of what they agreed to:
When a bank needs capital injections, the first thing that happens is that the national government provides the capital needed to raise the bank’s minimum capital ratio (T1) to 4.5% of its assets. After that, a sequence of haircuts must follow. First to be haircut are the shareholders and bondholders and then come the uninsured depositors (i.e. the Cyprus model is enacted). Beyond that, the ESM and the national government pout more money in the bank, with the latter participating at a rate of 20%, which can later be reduced to 10%.
What does this mean? And why am I arguing that this is the death of the spirit of what was decided in June 2012? Two points need to be made here, and shouted from the rooftops:
The Eurozone’s fragmentation is to continue: Member-states that are not insolvent will be able to bailout their banks’ unsecured depositors, just as the head of the Eurogroup did with Dutch SNS-Real recently. On the other hand, insolvent member-states will have to follow the above blueprint, with deposits above €100,000 savaged and the member-state going further into debt.
Legacy losses will be used as a disciplinary device: The Eurogroup reached no decision on whether the above can operate retrospectively. They announced that banks already recapitalized by insolvent states will be dealt with on a case-by-case nature. Thus, Greece, Spain and Ireland will now have to tussle, to beg, to plead for debt relief regarding the funds already borrowed from the EFSF-ESM for their banks. As the grand total for all bank recapitalisations, past and future, is to be limited to the puny sum of €60 billion, Europe’s peripheral nations can only at best receive a tiny amount of debt relief; enough to ensure that Ireland, Greece and Spain are competing against one another as to which proud nation will be a better ‘model prisoner’ than the rest.
Lastly, you do not have to take my word, dear reader, that this scheme does nothing to decouple the banking from the debt-deflationary crisis of the Periphery in particular and of the Eurozone in general. Mr Olli Rehn, the EU’s economic overlord, has said it himself, in describing this scheme as an attempt not to decouple the two crises but, rather, to “dilute the link” between them. It is like telling a hanging man that you will not cut the rope choking him but that you will remove a couple of layers of string from it. A truly shameful day for Europe.