As the trading week's close is drawing near, European leaders came out to address markets' jitters, by announcing a string of measures and proposals aimed to strengthen the region's faltering economy and its financial system.
Leaders of the four largest euro-zone members have met in Rome on Friday in preparation for the crucial EU summit to be held next week. According to Italian Prime Minister, Mario Monti, they have already come to an agreement to introduce economic measures directed to boost the economic growth in the euro bloc.
The four leaders, German Chancellor Angela Merkel, French President Francois Hollande, Spanish Prime Minister Mariano Rajoy and Italian Prime Minister Mario Monti have agreed on the need to introduce economic growth stimulus package worth 1% of euro area GDP, or €130 billion.
At a press conference in Rome today after a meeting of the countries' four leaders, French President Francois Hollande said those measures should be implemented as quickly as possible, while German Chancelor Merkel said she agrees with the package that will be presented for the rest of the member states at the EU Summit on June 28 and 29 next week.
Leaders emphasized the irreversibility of the euro and the need to control deficits. The four leaders also agreed "to put all the mechanisms into motion to achieve financial stability" and to work toward better economic and financial integration. "We need more Europe," Merkel said.
Meanwhile, Germany seems to be lagging alone in its position against the European rescue fund purchasing sovereign bonds. Hollande said Friday he supports Monti proposal to use rescue funds to buy distressed member's debt.
Earlier on the day, Mario Monti said in an interview for The Guardian that if EU officials fail to devise a clear strategy next week "a large part of Europe would find itself having to continue to put up with very high interest rates that would then impact on the states and also indirectly on firms. This is the direct opposite of what is needed for economic growth."
ECB announces measures to boost collateral availability
Also Friday, the European Central Bank announced measures to ease collateral rules and allow banks greater access to liquidity.
The ECB decided on additional measures "to improve the access of the banking sector to Eurosystem operations in order to further support the provision of credit to households and non-financial corporations", says the ECB in a statement.
The ECB has reduced the rating threshold and amended the eligibility requirements for certain asset-backed securities (ABSs) thus increasing the pool of securities it accepts from banks at its liquidity operations.
In addition to the ABSs that are already eligible for use as collateral, the ECB will now accept certain mortgage-backed securities, car loans and loans to small and medium-sized firms.
The newly eligible ABSs will face higher haircuts, or certain discounts, and "must also satisfy additional requirements which will be specified in the legal act to be adopted Thursday 28 June 2012". The measures will take effect as soon as the relevant legal act enters into force.
The Bundesbank, the German central bank, was quick to respond. "The Bundesbank takes a critical stance on the new rules," a spokesman said. The Bundesbank has repeatedly criticized the ECB for the continued easing of its collateral rules.
Spain expected to apply officially for bank aid on Monday
Following the Spanish bank audit results released on Thursday the Eurogroup head Jean-Claude Juncker strongly urged the country to present its official request for bank aid by Monday, despite the fact that initially Spanish Economy Minister Luis de Guindos described it as just a formality. After the misunderstanding was cleared up, it was agreed that the request will be put forward as soon as possible, by Monday at the latest.
The Eurogroup confirmed that the recapitalization money for Spanish banks will come from the EFSF bailout fund and that the exact amount will be determined during negotiations which will be held in the next two-three weeks. Once Spain officially asks for assistance the Troika inspectors will be able to visit the country to supervise the recapitalization process.
Spain needs up to €62 bln to recapitalize banks
Spanish Government announced Thursday independent assessments consider Spain will need between €16 and €62 billion to recapitalize the nation's banks.
According to reports made by Oliver Wyman and Roland Berger, hired by the Bank of Spain at the request of the Government, Spanish banks' fund needs amount to €16-25 billon in central scenario and between €51-62 billon in adverse scenario.
In the central scenario, Oliver Wyman considers €16-25 billon as appropriated, while Roland Berger estimates €25.6 billion.
In the adverse scenario, which contemplates a 5.0% drop in activity, a 26.4% fall in housing prices, and a 6.5% accumulated decline in GDP through 2014, Oliver Wyman estimates funds need between €51 and €62 billion, while the second firm forecasts €51.8 billion.
For the analysis, both firms studied independently 14 banks, which aggregate nearly 90% of banking activity in Spain, in a 3-year timeframe.
Most needs, are concentrated in the nationalized entities or in process of being, Bankia, CatalunyaCaixa, Novacaixagalicia and Banco de Valencia, who will have to resort to European money. Three biggest banks do not need capital.
With the reports available, the Spanish government will proceed to the formal request for financial assistance. The EU announced on June 9 it approved as much as €100 billion in a loan to recapitalize Spanish banks. Hence, in the worst scenario, Spain will need €38 billion less than pre-approved by the EU.
These assessments represent the first step as these studies do not reveal how much would each bank will demand, that's will be revealed by reports requested to four major audit firms operating in Spain, Ernst & Young, Deloitte, KPMG and PwC, which will end their work by July 31.
Spanish FinMin Luis de Guindos said earlier Thursday that he expects that the roadmap for banks' recapitalization should be clear by the end of July.
Moody's downgrades 15 global banks as previously leaked
Moody's, as expected, has downgraded 15 banks with global capital markets operations. The cut breakdown has seen 4 downgraded by 1 notch, 10 by 2 notches, 1 by 3 notches, the latter receiving the severe 3 notches cut was Credit Suisse.
The full list of downgrades can be found below:
- Morgan Stanley 2 notches to Baa1 (there was talk of 3 notches)
- Citigroup lowered to Baa2, outlook negative
- UBS lowered 2 notches, there was talk of 3
- RBS lowered 1 notch to Baa1, outlook negative
- Goldman to 2 notches to A3 from A1
- HSBC 1 notch to AA2
- Barclays 2 notches to A3
- BNP Paribas 2 notches to AA3
- Credit Agricole 2 notches to AA3
- RBC to two notches to Aa3
- Soc Gen 1 notch to A2
- Deutsche Bank 2 notches to A2
- Fortis, Lloyds and Bank of America the others.
"All of the banks affected by today's actions have significant exposure to the volatility and risk of outsized losses inherent to capital markets activities", says Moody's Global Banking Managing Director Greg Bauer. "However, they also engage in other, often market leading business activities that are central to Moody's assessment of their credit profiles. These activities can provide important 'shock absorbers' that mitigate the potential volatility of capital markets operations, but they also present unique risks and challenges."