EU cri­sis eases; com­pla­cency called a risk

Austin American-Statesman - - BUSINESS - Bloomberg

cial sta­bil­ity report.

“Key fi­nan­cial sta­bil­ity risks re­main and there is no room for com­pla­cency,” the bank said.

Europe is strug­gling with high lev­els of government debt in some coun­tries, fi­nan­cially weak banks, and slug­gish eco­nomic growth. Greece, Ire­land and Por­tu­gal have needed government res­cue loans, although Spain and Italy are now breath­ing eas­ier af­ter strug­gling to fi­nance them­selves over the sum­mer.

Bond mar­kets have im­proved dra­mat­i­cally since ECB Pres­i­dent Mario Draghi vowed in July to do “what­ever it takes” to save the euro. The ECB then out­lined a plan un­der which it would buy un­lim­ited amounts of a coun­try’s government bonds, re­duc­ing its bor­row­ing rates, on con­di­tion it tapped a Euro­pean aid pro­gram.

But ECB Vice Pres­i­dent Vi­tor Con­stan­cio was cau­tious when asked Fri­day at a news brief­ing about the eu­ro­zone’s progress out of its fi­nan­cial and eco­nomic trou­bles.

“I have learned with an­cient Greece, not to be hubris­tic,” he said, us­ing the Greek word for ex­ces­sive pride and self­con­fi­dence. “There is an im­prove­ment.”

The ECB report said there was a risk that the im­prove­ment in mar­ket con­di­tions might re­duce the pres­sure on gov­ern­ments to cut debt and deficits and im­prove growth.

Banks also re­main a po­ten­tial weak spot as they re­pair their fi­nances, Con­stan­cio said. The bank­ing sys­tem also re­mains frag­mented, with bor­row­ing costs far higher in some coun­tries than in oth­ers.

On the bright side, banks in fi­nan­cially trou­bled coun­tries are able to tap bond mar­kets again. Mean­while bor­row­ing costs have fallen for gov­ern­ments.

On Thurs­day, EU fi­nance min­is­ter struck a deal that would cre­ate a sin­gle cen­tral bank su­per­vi­sor un­der the aegis of the ECB. The idea is to have a watch­dog that will not put off tak­ing ac­tion when banks are get­ting into trou­ble, as overly pro­tec­tive na­tional reg­u­la­tors have done dur­ing the cri­sis. That, in turn, means gov­ern­ments will be less likely to face huge costs from hav­ing to the banks out.

Euro­pean lead­ers and many an­a­lysts say the sin­gle su­per­vi­sor agree­ment is progress. How­ever, the lead­ers have put off to next year — or be­yond — de­ci­sions on other key changes to strengthen the euro.

One of the next steps they will con­sider next year is the cre­ation of a cen­tral author­ity that can re­struc­ture banks and force losses on bond hold­ers. Prospects are un­cer­tain for other, more con­tro­ver­sial pro­pos­als, such as a cen­tral fis­cal author­ity that would try to even out eco­nomic down­turns across eu­ro­zone coun­tries, com­mon bor­row­ing, and EU-wide bank de­posit in­surance.

Mario Draghi, pres­i­dent of the Euro­pean Cen­tral Bank, pauses dur­ing a news con­fer­ence at the bank’s head­quar­ters in Frankfurt, Ger­many, on Thurs­day. Bond mar­kets have im­proved un­der Draghi’s watch.

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