One more summit: The crisis rolls on | vox - 0 views
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Reading the official documents from the June 28 summit requires linguistic and divination skills.
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The summit attendees seem to have successfully drawn the conclusion that this was necessary from the disastrous impact of their mid-June decision on new lending to Spanish authorities to shore up their banks. Within hours, the main conclusion drawn by the markets was that the Spanish public debt had grown by €100 billion, bringing Spain closer to the fate of Ireland (bad bank debt dragging down a government with an otherwise healthy fiscal position).
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The new agreement suggests that in the future, banks will be bailed out by the collective effort of Eurozone countries.
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First, this arrangement is to be finalised by the end of the year. This means that, in the end, the Spanish debt will rise by €100 billion (the market participants who enthusiastically celebrated the decision by raising the price of Spanish bonds will eventually understand that). Ditto in the not unlikely case that some Italian or French banks wobble before December.
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Second, conditions will be attached to such a rescue. These recommendations could be clever if they require “Swedish-style” bank restructuring whereby shareholders and other major stakeholders are made to absorb first the losses, and if a new clearly untainted management replaces the previous one. Such interventions limit the costs to taxpayers; they can even turn a profit. Of course, the conditions could also be silly, raising the costs to taxpayers to huge levels.
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Third, the arrangement is linked to the establishment of a “single supervisory mechanism involving the ECB”. This could be a single Eurozone supervisor built inside the ECB, which would go a long way to plugging one the worst mistakes in the Maastricht Treaty (lack of a joint regulation and resolution regime for banks).
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But this is not what the official text says, which makes one suspect that policymakers have not agreed to something simple and clean. Most likely, they will keep negotiating and come with the usual 17-headed monster that exhausted diplomats are wont to invent.
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This is important because a contagious banking crisis that hits several large banks would require much more money than is available in the EFSF-EMS facilities.
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Light conditionality, as they requested, is bound to collapse at the foot of the Bundestag, which must approve every single loan.
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There was no knock-out winner in this summit, but on points I’d have to say that the winner is the crisis.
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There was nothing on collapsing Greece, nothing on unsustainable public debts in several countries, and no end in sight to recession in an increasing number of countries.