EU sovereign debt crisis/G20 FM Meeting: After months of dithering, there are tangible signs that policymakers are starting to grapple with the Eurozone sovereign debt crisis. Judging by comments last week, there seems to be a growing recognition that decisive coordinated action is needed.
EU officials are reportedly working on a plan to recapitalize the balance sheets of those banks most exposed to losses in the Eurozone periphery. Banks that fail a new round of stress tests (the third) that incorporate haircuts on their sovereign debt will be obliged to seek government funds to bolster their tier 1 capital ratios. The threshold for core tier 1 capital has yet to be agreed, although reports suggest it could be set as high as 8%.
The recapitalisation schedule is, it seems, being prepared alongside plans to increase the scale of private sector involvement in Greek restructuring - a move which would carry large risks. Moreover, tentative estimates suggest that the recapitalisation could cost €200bn. If the cost of the UK bank recapitalisation in 2008-9, however, is anything to go by, Eurozone banks could require substantially more than this. The €440bn EU bailout fund, the EFSF, could, in theory, be used to source the funds. Yet there is strong opposition to this by some countries who feel it is the responsibility of individual member states to foot the bill for recapitalizing their domestic banks.
Given these uncertainties, there is still a substantial risk that these nascent plans collapse. The markets will be watching to see whether EU officials and the Troika (comprising the European Commission, the ECB and the IMF) can agree on the way forward, ahead of the key G20 Finance Ministers meeting on Friday and EU Council Summit the following Monday. Chancellor Merkel and President Sarkozy are due to meet on Sunday to discuss these proposals, while the Troika are scheduled to visit Ireland on Tuesday. The progress made at these meetings is likely to dominate market sentiment ahead of next weekend's G20. Beyond plans to recapitalize the EU banking system, some wider coordinated policy response across the G7, could be on the cards.
EU officials are reportedly working on a plan to recapitalize the balance sheets of those banks most exposed to losses in the Eurozone periphery. Banks that fail a new round of stress tests (the third) that incorporate haircuts on their sovereign debt will be obliged to seek government funds to bolster their tier 1 capital ratios. The threshold for core tier 1 capital has yet to be agreed, although reports suggest it could be set as high as 8%.
The recapitalisation schedule is, it seems, being prepared alongside plans to increase the scale of private sector involvement in Greek restructuring - a move which would carry large risks. Moreover, tentative estimates suggest that the recapitalisation could cost €200bn. If the cost of the UK bank recapitalisation in 2008-9, however, is anything to go by, Eurozone banks could require substantially more than this. The €440bn EU bailout fund, the EFSF, could, in theory, be used to source the funds. Yet there is strong opposition to this by some countries who feel it is the responsibility of individual member states to foot the bill for recapitalizing their domestic banks.
Given these uncertainties, there is still a substantial risk that these nascent plans collapse. The markets will be watching to see whether EU officials and the Troika (comprising the European Commission, the ECB and the IMF) can agree on the way forward, ahead of the key G20 Finance Ministers meeting on Friday and EU Council Summit the following Monday. Chancellor Merkel and President Sarkozy are due to meet on Sunday to discuss these proposals, while the Troika are scheduled to visit Ireland on Tuesday. The progress made at these meetings is likely to dominate market sentiment ahead of next weekend's G20. Beyond plans to recapitalize the EU banking system, some wider coordinated policy response across the G7, could be on the cards.
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