Brexit, Italy, Migrants... solutions to be found by Europe, for Europe
Brexit, migrations and negotiations
The complexity of having more than one currency in the EU may now come to undermine the single market according to Andre Sapir and Guntram Wolff (Bruegel), as attempts to deepen integration in the banking, labour and capital markets might require governance integration that involves only euro-area countries. They argue that Safeguards are needed to protect the interest of the UK and other euro-outs.
This is the heart of UK prime minister David Cameron’s November 2015 letter to European Council president Donald Tusk asking for “a new settlement for the United Kingdom in a reformed European Union” with four key demands:
(i) complete the single market;
(ii) limits to social benefits to migrants—a point on which there is still no compromise (EuroIntelligence). The FT reports that the chances of a UK-EU deal this month had gone up after talks between David Cameron and Donald Tusk (with still the French opposition to British proposals to safeguard the London interests). UK’s EU reform proposals may include an ‘emergency brake’ applied to migrant benefits (Goldman Sachs). The arrangements would allow the UK to exclude new migrants from qualifying for in-work benefits for four years under certain, ‘exceptional’ circumstances—e.g., exceptional strain for the welfare system owing to immigration.
(iii) defense of the legitimate interests of non-euro members”; and
(iv) ending “Britain’s obligation to work towards an ‘ever closer union.”
The latest polls show that the probability of Brexit is not forecastable (YouGov shows the Leave option at 42%, ahead of Stay at 38%, hat-tip EuroIntelligence).
A Barclays Capital report incorporates the political economy of immigration into an analysis of the UK legislative calendar yields a more accurate view of both the likely timing of the referendum and the important event risks along the way.
An NPL solution for Italy
A deal was agreed between Italy and the EC on a mechanism to securitize and guarantee nonperforming loans (NPLs) (see the press release and press release 2 and 3), solution found to the issue of setting up an asset management company—which was derailed because of EC concerns about state aid. The rationale for the guarantee scheme is threefold: (i) more lending to the economy, (ii) facilitate NPL disposals, and (iii) prompt bank resolution through M&A. Silvia Merler provided some background on the situation of Italian banks (Bruegel).
The GACS (Garanzia Cartolarizzazione Sofferenze) mechanism provides government guarantees for the securitization of bad loans aiming to help banks offload NPLs. These will be moved to special purpose vehicles at market values and securitized with senior, mezzanine, and junior tranches (see EuroIntelligence). Public guarantees will be available for senior tranches, priced based on credit default swaps on Italian issuers with similar risk profiles to the loans in question—hence no state aid.
Markets have been disappointed (Italian bank stock prices fell 2 percent, see EuroIntelligence and FT), notably because of the unclear impact on bank balance sheets. Without state aid, the scheme means that banks will ultimately realize their losses (EuroIntelligence). Andrea Boda writes that GACS bring volume to the market (similar NPL packaging was available before at market rates). For Goldman Sachs, the scheme provides a positive backstop but is no game changer. The capital impact will depend on level of private investor participation—participation will be voluntary, and to get the state guarantee on the transferred assets and deconsolidate the NPLs, banks must get enough private investor participation in the equity/junior tranches in order not to keep the equity/subordinated risk. whereas a bad bank solution would have led to a proper clean-up that restores full confidence and profitability to the Italian banking system, yet the guarantee scheme creates improved conditions for NPL disposals.
A series of European Commission reports got published
The Fiscal Sustainability Report finds low short-term risks for all EU countries, though medium-term risks remain for 11 countries (including Spain, France, Italy, and the UK). For the euro area, debt is expected to come down gradually from 94 percent of GDP in 2015 to 82 percent of GDP in 2026, reflecting primary surpluses from 2016 and negative interest rate –growth differentials through 2025.
The European Court of Auditors released a report on the Commission’s management of 5 financial assistance programs (Hungary, Latvia, Romania, Ireland, and Portugal), with a negative broad assessment (see the FT’s analysis and WSJ RealTime Brussels): unpreparedness (on imbalances, financial flows, and provision of a financial safety net), weak processes, and some unrealistic measures.
An Anti-Tax Avoidance Package (see press release, Q&A, study and working document) aimed at counteracting aggressive tax planning by large companies and facilitating EU countries’ implementation of OECD/G20 standards against Base Erosion and Profit Shifting (BEPS). The package includes legally-binding measures, technical assistance, mandatory automatic exchange between tax authorities, and actions to promote good governance on taxation globally.
