Paris says timing, Berlin says taming. The core of the euro zone is divided, but not broken, over the establishment of a European Union-wide Banking Union.
The cabinet of France‘s Francois Hollande hopes for an introduction process that could begin as early as this year, whereas German Chancellor Angela Merkel has rejected the small print although not the entire move towards further integration, which is an unavoidable step for the euro zone’s survival. Tactics is the word.
The schedule first drawn by the European Commission for such definitive change looks increasingly implausible. No one believes today that the Banking Union could be up and running in January 2013, with Sweden and the United Kingdom submitting their entities to a watchdog under the control of the European Central Bank that would overpass the European Banking Authority.
JP Morgan in Spain said Tuesday to investors that it expects the debate about the Banking Union to become “one of the main sources of tension during the coming months.”
But while proposals fly to Brussels in an attempt to amend the relations the ECB, the EBA and the state banks should maintain, the periphery hurts again. And they do so in a way the governments of the southern euro area know too well. Portugal and Spain have seen the cost of external credit at 10 years rise.
In Portugal’s case, the reason is that some reforms affecting national insurance contributions (up for employees, down for employers) are still to be approved by the parliament. Analysts at Afi in Madrid explained today that “the growing social dissent casts a doubt on the current coalition’s ability to agree on the budget and the financial stability of the country.”
For Spain, the question is a tougher one, in the view of the investing houses from Wall Street to London, Madrid and Frankfurt: will president Mariano Rajoy finally ask for a bailout? A delayed Banking Union means that it will be impossible for Spain to write the €60-€100 billion capital aid package off its sovereign debt per GDP.
“Without Banking Union, the correlation between sovereign and banking risks cannot be unmade,” experts at Santander Credit Research commented.
A deterioration of Spain’s options to repay its debt is a direct call for Rajoy to accept defeat: his government will not manage to escape from a national rescue instead of getting a mere banking refinancing injection.
JLM Campuzano, head at Citigroup’s global equity section, pointed out to The Corner that there may be even more complications: “It is possible that in Germany, the new state bond-purchasing programme of the ECB is challenged. A member of the German High Court [Paul Kirchhof] has mentioned that Treaty modifications would be in the agenda.”
In addition, the ECB reported Monday the number of its buying sovereign bonds last week. It was zero. And it has been the 27th consecutive week at zero public bond acquisition.
So does Rajoy feel the heat, already? The premium risk between the 10-year Spanish bond and the 10-year German bund has gone up to the region of the 430 basis points. That is quite hot, and yet it is contained enough for France and Germany to allow themselves more rounds of discussion.