Friday, 29 June 2012

Euro area summit statement - recapitalisation of Spain's banking sector

As reported in a summit statement this morning and as reported by ft.com, the European Commission is now proposing to allow the European Stability Mechanism (ESM) to recapitalise banks directly. The first paragraph of the statement reads as follows:

"We affirm that it is imperative to break the vicious circle between banks and sovereigns. The Commission will present Proposals on the basis of Article 127(6) for a single supervisory mechanism shortly. We ask the Council to consider these Proposals as a matter of urgency by the end of 2012. When an effective single supervisory mechanism is established, involving the ECB, for banks in the euro area the ESM could, following a regular decision, have the possibility to recapitalize banks directly. This would rely on appropriate conditionality, including compliance with state aid rules, which should be institutionspecific, sector-specific or economy-wide and would be formalised in a Memorandum of Understanding. The Eurogroup will examine the situation of the Irish financial sector with the view of further improving the sustainability of the well-performing adjustment programme. Similar cases will be treated equally".

The ft.com further reports that "Madrid can sweep the burden of the bailouts off its sovereign books" as a result of this proposal" and that "bailout loans to Spain would no longer be granted seniority status".

So, what's the bottom line? Losses at banks are being socialised across the whole eurozone leading to even more moral hazard and the central planners of the eurozone will be assuming even more power through the "single supervisory mechanism". The tax payers will eventually pick up the tab. This is just more of what got us into this mess to begin with - low interest rates, easy credit and little accountability. We are now one step closer, again, for the individual EU countries to lose their sovereignty. It's all part of the plan.

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