Commission passes the ball on sovereign debt rules

European Commission vice-president Valdis Dombrovskis during the presentation of the 'winter package' on Wednesday. [European Commission]

European Commission Vice-President Valdis Dombrovskis said on Wednesday (7 March) that he does not intend to amend the regulatory treatment of sovereign debt held by banks following inconclusive discussions at international level.

Dombrovskis told a group of reporters that he would not put forward proposals to amend the risk-free weight of public bonds in European banks, as some officials in the ECB have demanded.

Those in favour of the revision argued that the euro crisis proved that debt issued by some countries weighs on banks’ stability. Capital buffers should therefore be higher in order to absorb potential shocks, they say.

But changing the requirements would be very costly for lenders and could trigger fresh turbulence in the markets and European economies.

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Eight northern European countries said today (6 March) that euro zone reforms should focus on completing the banking union, improving compliance with budget rules and setting up a European Monetary Fund, with more ambitious plans left for later.

The Commission was waiting for the results of the ongoing discussion that started in 2015 in the Basel Committee on Banking Supervision.

A task force set up by the committee analyzed the regulatory treatment of sovereign debt in the Basel framework.

But following on the high-level group’s conclusions, the committee did not reach a consensus on whether to make any changes to the zero risk weighting applied to debt issued by countries.

“Now the ball is back to Europe’s court,” said Dombrovskis. “Do we accept the recommendations of Basel?”

The Latvian commissioner, who is in charge of financial services, added that this issue should be treated with “caution”, given that it could alter financial stability in member states.

Debt coming down

Dombrovskis was speaking following the presentation of the executive’s assessment of the EU’s national economies, part of the so-called winter package of the European Semester, which seeks to coordinate the member states’ economic and fiscal policies.

In its assessment, the Commission noted the progressive reduction of public and private debts, although “at uneven pace”.

“Reductions in debt-to-GDP ratios, including government debt ratios, are increasingly benefiting from higher nominal growth, while borrowing by households and non-financial corporations is edging up”, the Commission’s analysis said.

But a change of the treatment of the public debt could shake a banking sector that “continues to face challenges”, the executive warned.

Europe to improve disclosure of ‘bad loans’ for all banks

European authorities will prepare by the end of next year enhanced disclosure requirements on bad loans to all banks as part of an action plan to tackle the risk of non-performing loans (NPL).

The main issues continued to be “high” levels of non-performing loans and low profitability that the banking system suffers due to the low-interest-rate regime and the digital disruption posed by fintech companies.

However, the executive welcomed that “most member states have lately witnessed notable improvements in capital ratios and stocks of non-performing loans have also been falling significantly.”

Italy’s excessive imbalances

The Commission also took stock of the imbalances detected last November in a dozen countries.

The institution concluded that Croatia, Cyprus and Italy are experiencing ‘excessive economic imbalances’, while Bulgaria, France, Germany, Ireland, the Netherlands, Portugal, Spain and Sweden show ‘economic imbalances’. Slovenia, meanwhile, is no longer experiencing economic imbalances.

The Bulgarian, French and Portuguese governments all registered a small improvement in their economies over the past twelve months. However, the Commission will still send a letter to Lisbon in the coming days requesting further measures to correct its ‘economic imbalances’.

Anti-establishment and far-right triumph in Italy election as count continues

The anti-establishment 5-Star movement and the far-right Northern League could have enough support for a majority after Sunday’s (4 March) general election, although some analysts believe such a coalition is unlikely.

The situation of the Italian economy, still under the spotlight, has become a cause for concern as the two winners of the elections held last weekend would like to unravel economic reforms.

Commissioner Pierre Moscovici refused to speculate on what the negotiations to form a government after the inconclusive poll could deliver.

But he said that “we shouldn’t be fearful of elections”. “The strength of Europe is the strength of its democracies,” he claimed.

Controlling fair taxation

Moscovici, who is in charge of tax issues, also announced that, for the first time, the Commission will monitor the member states’ compliance with fair taxation.

He accused Belgium, Cyprus, Hungary, Ireland, Luxemburg, Malta and The Netherlands of “aggressive tax planning”.

More needs to be done because “we must ensure that fair taxation becomes the rule, a rule without exceptions,” said Moscovici.

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