TEXT-Fitch: Europe's SSM deal positive, broader EMU reform deferred
Dec 14 - The week's meetings of European Union leaders and finance ministers have seen an important step taken towards banking union via the agreement to set up a Single Supervisory Mechanism (SSM), Fitch Ratings says. However, banking union remains a long-term project, and the broader reform process aimed at furthering economic and monetary union remains at risk of stalling. For Europe's leaders to have met their self-imposed end-2012 deadline for an agreement on the SSM is positive. The European Council's aim of agreeing proposals for a Recovery and Resolution Directive and a Deposit Guarantee Scheme Directive by the end of March next year, giving the Commission and Parliament time to agree on them before June, indicates a commitment to maintain momentum on all three elements of a banking union. Under the SSM agreement, the ECB will have direct oversight of eurozone banks with assets greater than EUR30bn or a fifth of a country's national output. This is likely to cover the vast majority of most countries' banking systems by assets, with Germany's numerous savings banks and cooperative banks a notable exception. Where the ECB does not have direct oversight, banks remain under the supervision of national regulators, which together with the ECB form the SSM. The ECB will have overall responsibility for the functioning of the SSM. This pragmatic "hub and spoke" approach could make implementation easier, although our view remains that a fully effective and operational SSM is unlikely to be in place until late 2014. The agreement itself says that the earliest the ECB will assume its supervisory tasks within the SSM is 1 March 2014. Substantial questions remain unanswered. Legacy assets have yet to be defined, although the European Council conclusions state that a definition "should be agreed as soon as possible in the first semester 2013" so that direct recapitalisation of banks by the European Stability Mechanism would be possible once the SSM is effective. But even when they are defined, it is not clear what the practical implications will be. Transferring bank support costs already incurred during the current crisis to the European level is not factored into our eurozone sovereign ratings. It is also not clear what shape the Resolution and Deposit Guarantee proposals will take. Based on the experience with the SSM agreement, compromises are likely. Fitch expects that the ECB will be provided with the capacity to wind-down failing banks in the next crisis, but the overall banking union initiative's aim to break the sovereign-bank link will be a lengthy process. Beyond the progress on banking union, the European Council summit has postponed decisions on major reforms, instead asking Council President Herman Van Rompuy to outline possible measures and present another "time-bound roadmap" in June 2013. This would cover co-ordination of national reforms, the social dimension of EMU, mutual contracts with EU institutions to boost competitiveness and growth, and "solidarity mechanisms" to enhance these contracts. Some of these initiatives are already well advanced, while ideas mooted in the President's 5 December report "Towards a genuine Economic and Monetary Union", such as developing a fiscal capacity for the EMU, do not appear in today's Council conclusions. Political cycles in Germany and Italy, where elections are due next year, mean they are unlikely to reappear anytime soon. The easing in financial market pressures driven largely by the European Central Bank's announcement of its Outright Monetary Transactions (OMTs) has provided an opportunity for reforms. But as we said after the previous EU Summit in October, delays increase the risk of structural reforms needed for a fully functioning EMU not being implemented. This remains a risk heading into 2013. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.