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Reply #58: Finance Ministers Agree to EU Debt Guarantees [View All]

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Demeter Donating Member (1000+ posts) Send PM | Profile | Ignore Thu Dec-01-11 10:05 AM
Response to Reply #8
58. Finance Ministers Agree to EU Debt Guarantees

European Union finance ministers settled on a plan Wednesday aimed at thawing Europe's frozen wholesale lending market, agreeing that national goverments would work in concert to offer guarantees backing the bonds issued by each nation's banks. But the officials rejected a more ambitions plan that would have created a single "syndicate" in which the 27-nation bloc would jointly issue guarantees to ease European banks' funding troubles. That rejected proposal had been supported by the European Central Bank and other EU institutions.

Guarantees act as insurance policies that banks can buy to protect holders of their debt against default. Governments are eager to get a guarantee program up and running to help banks raise unsecured, long-term fundinga market that has been effectively closed to them for months as global financial institutions have grown increasingly wary of purchasing bonds issued by troubled euro-zone banks...The creation of a syndicate would face large technical and political obstacles that would delay its coming into force, officials said. Moreover, most creditworthy governments have opposed joint guarantees, fearing the plan could undermine their own credit ratings.

But banking-regulation experts have said the current environment calls for something like the syndicate idea, noting that guarantees provided individually by the EU's financially troubled sovereigns will be of little use to those countries' banks. "The failure of the to agree to a credible mechanism to support weak banks in troubled economies is a very serious oversight," said Sony Kapoor, managing director of Re-Define, a financial think tank. "How useful would bank guarantees from member states be if these member states are themselves shut out of financial markets?"

The European Commission, the EU's executive arm, will coordinate the terms under which banks' debts are guaranteed, with a proposal expected Thursday on how much banks should pay their governments for these guarantees. The guarantees' price will bear a relation to the credit-default swap price of each bank in question, people familiar with the matter said. But these people said that the price would be adjusted to avoid levying unfairly high fees on intrinsically strong banks in troubled countries. The decision was made on the second of two days of meetings by European finance ministers here. Now they embark on intensive talks ahead of a Dec. 8-9 European summit, which German Finance Minister Wolfgang Schuble said would be a "decisive event."
...He admitted there were still differences among euro-zone leaders about how to erect firewalls to stem the crisis. "We are losing the confidence of the markets week by week," he said. "The sooner we solve our problems the sooner we will regain confidence."
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