There’s been a recent storm of controversy over the ECB’s decision to accept mortgage backed bonds from Spain. In effect, Spain has had a disastrous subprime mortgage collapse and has been bailed out by the ECB.
This Investment Markets note of last week explains the process well, saying that Spanish banks have been forced to “increase their provisioning of liquidity auctions held weekly by the ECB, using mortgage-backed bonds as collateral". This would be all well and good, except that Spain publishes its figures for their reliance on these funds and, so far, they are taking “around 10% of ECB’s total, which is up from 5% not too long ago, this is a raising of nearly €24bn ($34.8bn) in Spanish lending."
In other words, Spain has been bailed out by the ECB in a rescue of similar size to the rescue and nationalisation of Northern Rock in Britain. The Daily Telegraph reports that “Moody's said the total issuance of securities by Spanish banks last year reached €143bn, up 55% on the 2006. Over €62bn were mortgage securities."
This has raised the question amongst many as to whether the British, German, French and Italian citizens will be happy that their funding has rescued Spain’s mortgage market, when the rest of us are left to suffer the slings and arrows of outrageous misfortune.
The reason I pick on the British, German, French and Italian citizens is that we run Europe apparently, according to Portuguese national paper Correio da Manhã (the Morning Mail). In an opinion piece written by columnist Armando Esteves Pereira, there is major objection to the fact that London hosted a European summit a couple of weeks ago, but forgot to invite 23 countries.
This was a meeting hosted by the UK Prime Minister Gordon Brown on January 29th, where he hosted German Chancellor Angela Merkel, French president Nicholas Sarkozy and the resigned Italian Prime Minister Romano Prodi for a mini-summit about the world's financial crisis in Downing Street.
According to Sr. Pereira, the meeting "sets a dangerous precedent for the EU by imposing the false authority of four giants on the fate of the 27 member states. And Barroso, the Commission's president, is approving this controversial division of power with his presence ... The United Kingdom is not part of the eurozone and the decisions made by the European Central Bank have little impact on the lives of Britons, as opposed to those from countries that do belong to this zone. Thus all European citizens are equal, only, as in George Orwell's Animal Farm, some are more equal than others."
Funnily enough, this is a sentiment I’ve heard many times around Europe. For example, there is a quote I use in presentations regularly which came from the main newspaper of the European Commission in Brussels, New Europe. There is an opinion column on the back page of New Europe called Kassandra’s Notebook.
This Notebook had a killer column a while ago that ended: “It is ridiculous for Europe and its leader to tolerate a situation in which a country, not participating in the Euro, is the one dictating policies in the Eurozone.”
The column was actually a rant about the fact that Charlie McCreevy had replaced Alexander Schaub with David Wright as a Director General of the European Commission in the Internal Markets. The rest of the column went something like:
“Alexander Schaub is leaving his post as he reached the retirement age and Commission President Barroso did not extend his mandate”, which is because “Charlie McCreevy is serving the British view for Europe” and also “explains why President Jose Manuel Barroso, rather susceptible to the wishes of Anglophile Commissioners and of Downing Street, did not have the political courage to offer a two year extension to Alex Schaub.”
The bit I liked the best is the fact that David Wright, who oversaw the introduction of MiFID, had "introduced the Financial Service Action Plan, by coincidence tailor-made to satisfy the needs of the City of London.”
Well, London is the financial centre of the European Universe isn’t it? I mean we have more people working in financial services here than the population of many large cities, including Frankfurt.
However, all this tension does raise the question: what would happen if the EU fell apart or, more importantly, EMU. What would it mean if the euro disappeared?
This was a question raised when the French and Dutch rejected the EU constitution referendum in the summer of 2005. The result of these rejections led to reports that German finance ministers and the Bundesbank were planning scenarios for the collapse of monetary union and returning to the Deutschemark.
Meanwhile, there are regular reports of Italian politicians pleading to break away and return to the lira.
All in all, we live in times where we think that SEPA and MiFID, along with the Market Abuse Directive, Capital Adequacy Directive, Solvency II and all that other stuff is here, now and stable ... but it’s not.
I’m not proposing that the EU will fall apart, but with Spain being propped up by the rest of us, Portugal whinging about being one of 23 countries being controlled by the other four and the euro still only six years old as a currency and nine years old as a trading instrument, should we be betting the farm on PEACHs, TARGETs and STEPs?
Actually, for those in the Finanser community supplying the banks, it doesn't matter as it would be good news if it did all fall apart. I mean think of how much more revenue consultants and vendors could create by breaking up SEPA and MiFID now they've been implemented, and it would secure our IT jobs for another decade too.
Hmmmmm ....
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