31st Mar 2020

EU institutions hit back at markets, ratings agencies

  • Trichet (l) hands over the ECB reins to Italian banker Mario Draghi (r) in two weeks time (Photo: commission.europa.eu)

EU institutions are seeking to curb the powers of ratings agencies and some forms of speculative trading in a backlash against markets by Europe's political elite.

The Financial Times Deutschland on Thursday (20 October) disclosed plans by EU single market commissioner Michel Barnier to allow Esma, a new Paris-based EU financial supervisor set up in 2011, to impose "temporary" bans on agencies such as Fitch or Moody's from publishing sovereign debt ratings at critical moments.

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The draft EU law says the agencies should be gagged during "innopportune moments", such as negotiations on a new EU bail-out, because their statements could have "negative consequences for the financial stability of the state [undergoing bail-out talks] and potentially destabilisng effects on the world economy."

The bill is to be submitted to EU countries and the European Parliament in November and could come into force as early as autumn 2012.

Meanwhile, member states and MEPs earlier on Tuesday reached agreement to permanently ban trading in "naked credit default swaps" across the union from November 2012 onward. The deal includes an opt-out clause allowing individual member states to lift the ban for up to a year at a time if market conditions allow.

Naked credit default swaps are a complex financial instrument in which an investor bets on a drop in the price of an asset without taking on financial exposure if he gets the bet wrong - a form of trading widely blamed for aggravating the eurozone debt crisis.

EU dignitaries coming together in Frankfurt on Wednesday evening for a farewell ceremony for outgoing European Central Bank (ECB) chief Jean-Claude Trichet gave voice to a siege mentality against market pressures.

Former French leader Valery Giscard d'Estaing in the opening speech at the Old Opera House in the ECB home town blamed speculative trading for the wide-reaching impact of Greek insolvency and called for profound reforms in the EU banking sector.

"Greece is a great culture but a small country in our financial sphere and there is no basis for it rocking the euro at this point, had it not been constantly prodded by speculators and by banks from outside the euro area," he said. He added that the banking sector should be split in two, separating the activities of conventional banks which affect the real economy from speculative trading so that if speculators go bust they do not need to be bailed out by governments.

"If the clock tells the wrong time, we do not change the needle, we need to fix the mechanism," d'Estaing noted.

For his part, former German chancellor Helmut Schmidt, who described himself as a "grandfather of Europe", hit out at what he called the "psychopathic" atmosphere of crisis generated by markets, the Anglo-Saxon media and populist leaders.

"This talk of a crisis of the euro is merely hot air emanated by journalists and politicians," he said.

Contemporary EU leaders at the Frankfurt event - German Chancellor Angela Merkel, Trichet himself, EU Council President Herman Van Rompuy and EU commission chief Jose Manuel Barroso - spoke out in favour of joint EU economic governance and the creation of a new quasi-finance-ministry for the eurozone.

"If the euro fails, Europe fails, but we shall not allow this to happen," Merkel said. "If we are ready to bring about more Europe, we have to seize this opportunity and use non-conventional methods. [EU] Treaty changes for me are certainly not ruled out, they are certainly not taboo."

Van Rompuy noted: "We need both fiscal discipline and economic and fiscal integration. Not only to punish the sinners but also to link our policies together ... We need to acknowledge that this means a loss of sovereignty for all."

The Frankfurt event fell just three days before an EU summit in Brussels on Sunday in which EU leaders are to unveil new measures to save the single currency.

Merkel again warned the summit will not be a "magic wand" so much as a further step in a long-term reform process.

French leader Nicolas Sarkozy temporarily left the bedside of his wife Carla, who gave birth earlier the same day, to hold talks with Merkel in the margins of the Trichet ceremony.

Sarkozy is reportedly keen to turn the EU's Luxembourg-based bail-out fund, the EFSF, into a type of bank able to draw on the resources of the ECB. But Germany prefers to see EU members strengthen the EFSF kitty to give it extra power to rescue at-risk countries such as Italy or Spain.

Rating's agency Moody's earlier this month warned that France's triple-A status is at risk if it increases its share of EFSF liability - a development that would damage Sarkozy's bid to win re-election against Socialist candidate Francois Hollande next year.

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