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P 241620Z FEB 09
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INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUCNMEU/EU INTEREST COLLECTIVE

UNCLAS SECTION 01 OF 03 BRUSSELS 000264 
 
SENSITIVE 
SIPDIS 
 
NOT FOR INTERNET DISTRIBUTION 
 
E.O. 12958:  N/A 
TAGS: EFIN ECON ETRD EIND EINV EUN
SUBJECT: EUROPE FINANCIAL AND ECONOMIC REPORT:              FEBRUARY 
20TH, 2009 
Financial Services Upcoming Issues / Events 
Publication of the de Larosiere report: 
--------------------------------------- 
1.(SBU)On February 25, the High Level Group of Experts tasked by 
 
European Commission President Barroso to review the future of 
financial supervision in the EU will present its recommendations. 
The de Larosiere report will be followed by Commission's proposals 
to implement the Group's recommendations, to be unveiled prior to 
the March 10 ECOFIN. 
Guidelines for impaired assets: 
------------------------------- 
2.(SBU) On February 25, the Commission is expected to adopt a set of 
guidelines to help Member States design programs to buy or insure 
impaired assets on bank balance sheets. 
EC High-Level conference on Private Equity and Hedge Funds 
(Brussels): 
--------------------------------------------- ------- 
¶3. (SBU) On February 26 and 27, the Commission will hold a 
conference to discuss possible future regulation of private equity 
and hedge funds.  At the conference, the Commission will release the 
results of its recent public consultation on the issue, held in 
response to reports from the European Parliament calling for 
increased regulation.  Several Member States, such as Germany and 
France, have recently increased their public calls for regulation. 
 
Financial Services - Recent Events 
Credit derivatives dealers commit to clearing via EU-regulated CCPs 
 
--------------------------------------------- ------- 
4.(SBU)February 18, the International Swaps and Derivatives 
Association (ISDA) informed Commissioner McCreevy that nine ISDA 
member firms (Barclays Capital, Citigroup, Credit Suisse, Deutsche 
Bank, Goldman Sachs, HSBC, J.P. Morgan, Morgan Stanley and UBS) 
agreed to commit to use EU-based central clearing for Credit Default 
Swaps (CDS) on EU-reference entities by end-July 2009.  The 
agreement follows a request made by McCreevy in October 2008. 
McCreevy welcomed the "commitment from the Industry to agree to the 
central clearing in Europe for certain CDS which are systemically 
relevant", adding that he was looking whether other measures might 
be necessary to ensure that derivatives "are adequately supervised 
and do not pose unnecessary risks to financial markets". 
EP continues discussion on Capital Requirement Directives (CRD) 
 
--------------------------------------------- ----- 
¶5. (SBU) On February 11, the European Parliament's ECON Committee 
discussed proposed amendments to the CRD. The remaining key issues 
are: retention of securitized products, clearing of credit 
derivatives, and supervision of financial services.  Regarding 
securitization, a proposal to have different retention requirements 
for "good" and "bad" securitizations has been met with skepticism by 
many MEPs, who believe that the distinction will prove 
unenforceable.  Most MEPs appear more comfortable with the blanket 
5% retention requirement proposed by the Commission.  Regarding 
clearing of credit derivatives, the Conservatives (EPP-ED) advocate 
inserting a recital (non binding amendment) mentioning the need for 
a CCP, while the Socialists (PES) are pushing for an article 
imposing higher capital requirements for non-EU-cleared credit 
derivatives.  The Liberals have not yet articulated a position.  On 
supervision, there is agreement that Colleges of Supervisors, though 
not a satisfactory end-solution, are an appropriate interim step 
towards more integrated European supervision.  The ECON Committee is 
scheduled to vote on this issue on March 9. 
CRAs: EP proposes streamlined supervision and a compromise on 
extraterritoriality: 
--------------------------------------------- ---- 
6.(SBU)MEP Jean-Paul Gauzes (French Conservative) report on the 
Commission's proposal to regulate Credit Rating Agencies (CRAs) 
advocates: (1) giving primary responsibility for CRA registration 
and supervision to the Committee of European Securities Regulators 
(CESR), rather than to national regulators as currently envisaged by 
the Commission; (2) allowing EU-registered CRAs - including EU 
subsidiaries of non-EU headquartered CRAs - to endorse ratings 
prepared by non-EU-registered CRAs for a transitional period of two 
to three years, during which EU and third country regulators can 
work out criteria to determine regulatory equivalence.  The CRA 
regulation will be discussed by the ECON Committee on March 9, while 
the Committee vote is scheduled for March 23. 
Solvency II negotiations between EP, EC and Council yield progress: 
 --------------------------------------------- ----- 
¶7. (SBU) According to the EP lead negotiator, MEP Peter Skinner (UK 
Socialist), progress has been made on resolving difference between 
the EC, EP, and Member States on Solvency II.  The EP and the 
Commission strongly back the group support provisions of the 
original proposal, which they say would allow more efficient 
allocation of capital.  While in December the Council had opposed 
group support, now some Member States appear willing to work out a 
compromise on group support.  The Czech Presidency believes that 
agreement on a scheme that would allow some aspects of group support 
 
BRUSSELS 00000264  002 OF 003 
 
SUBJECT: EUROPE FINANCIAL AND ECONOMIC REPORT:              FEBRUARY 
20TH, 2009 
Financial Services Upcoming Issues / Events 
Publication of the de Larosiere report: 
--------------------------------------- 
1.(SBU)On February 25, the High Level Group of Experts tasked by 
European Commission President Barroso to review the future of 
financial supervision in the EU will present its recommendations. 
The de Larosiere report will be followed by Commission's proposals 
to implement the Group's recommendations, to be unveiled prior to 
the March 10 ECOFIN. 
Guidelines for impaired assets: 
------------------------------- 
2.(SBU) On February 25, the Commission is expected to adopt a set of 
guidelines to help Member States design programs to buy or insure 
impaired assets on bank balance sheets. 
EC High-Level conference on Private Equity and Hedge Funds 
(Brussels): 
--------------------------------------------- ------- 
¶3. (SBU) On February 26 and 27, the Commission will hold a 
conference to discuss possible future regulation of private equity 
and hedge funds.  At the conference, the Commission will release the 
results of its recent public consultation on the issue, held in 
response to reports from the European Parliament calling for 
increased regulation.  Several Member States, such as Germany and 
France, have recently increased their public calls for regulation. 
 
is possible.  Parliament is scheduled to vote March 23-26. 
Commission opens review of Investor Compensation Schemes Directive: 
 
--------------------------------------------- ----- 
¶8. (SBU) On February 9, the European Commission launched a call for 
evidence on the application of the Investor Compensation Schemes 
Directive in Member States.  Following recent legal disputes over 
liability for losses sustained in the Madoff scandal, the Commission 
is asking stakeholders to provide relevant information to assess how 
the Directive is being implemented in Member States.  This 
Directive's aim is to protect investors against losses if a firm is 
unable to repay money, or return assets, held on behalf of their 
clients.  The Commission seeks stakeholders' input by April 8 in 
order to evaluate: (i) the scope of the Directive in terms of 
services covered; (ii) the amount of compensation; and (iii) the 
funding of compensation schemes.  The Commission may, following the 
exercise, submit a revision of the Directive. 
Economics - Upcoming Issues / Events 
Assessment of national Stability and Convergence Programs: 
 
--------------------------------------------- --- 
¶9. (SBU) On February 25, the Commission will publish its analysis of 
the second tranche of national Stability programs (Euro area 
members) and Convergence programs (other EU members).  These 
documents are macroeconomic and budgetary projections covering the 
preceding and current years and at least three years ahead.  They 
contain: a medium-term objective (MTO) representing a budgetary 
position in line with the 3% of GDP threshold or an adjustment path 
towards the MTO, the underlying economic assumptions, and, for non 
Eurozone Members, medium-term monetary policy objectives. 
Berlin Mini-G-20 (EU G-20 members): 
----------------------------------- 
10.(SBU)On February 22, the Leaders of the European G-20 members 
(Germany, the U.K., France and Italy), EC President Barroso and the 
current EU President, Czech Prime Minister Topolanek will meet in 
Berlin to prepare for the April 2 G-20 summit.  Leaders aim to lay 
the foundations for a common European position for the 
G-20. 
Extraordinary meeting of EU Leaders: 
------------------------------------ 
¶11. (SBU) On March 1, EU Leaders will meet in Brussels for a working 
lunch to coordinate national initiatives taken in response to the 
crisis and address protectionist tendencies.  Leaders will discuss 
the on-going work on how to deal with impaired assets in EU banks, 
on the basis of guidelines that the Commission will publish on 
February 25.  The extraordinary meeting has been called by the Czech 
presidency after having been suggested in a joint Sarkozy-Merkel 
letter to Topolanek and Barroso. 
ECB expected to cut and BoE to hold: 
----------------------------------- 
12.(SBU)On March 5, the Governing Council of the European Central 
Bank is expected by market analysts to cut the ECB's main 
refinancing rate by 50 basis points, to 1.5%.  Analysts also believe 
that the ECB may begin to consider other measures - namely 
quantitative easing (QE) - to revive the economy without cutting the 
interest rate to zero.  On the same day, the Bank of England 
Monetary Policy Committee is expected to leave its main interest 
rate unchanged at 1%, but may start implementing unconventional 
measures to increase money supply. 
Economics - Recent Events 
EC initiates "excessive deficit procedures" for six countries. 
 
--------------------------------------------- ------ 
 
BRUSSELS 00000264  003 OF 003 
 
SUBJECT: EUROPE FINANCIAL AND ECONOMIC REPORT:              FEBRUARY 
20TH, 2009 
Financial Services Upcoming Issues / Events 
Publication of the de Larosiere report: 
--------------------------------------- 
1.(SBU)On February 25, the High Level Group of Experts tasked by 
European Commission President Barroso to review the future of 
financial supervision in the EU will present its recommendations. 
The de Larosiere report will be followed by Commission's proposals 
to implement the Group's recommendations, to be unveiled prior to 
the March 10 ECOFIN. 
Guidelines for impaired assets: 
------------------------------- 
2.(SBU) On February 25, the Commission is expected to adopt a set of 
guidelines to help Member States design programs to buy or insure 
impaired assets on bank balance sheets. 
EC High-Level conference on Private Equity and Hedge Funds 
(Brussels): 
--------------------------------------------- ------- 
¶3. (SBU) On February 26 and 27, the Commission will hold a 
conference to discuss possible future regulation of private equity 
and hedge funds.  At the conference, the Commission will release the 
results of its recent public consultation on the issue, held in 
response to reports from the European Parliament calling for 
increased regulation.  Several Member States, such as Germany and 
France, have recently increased their public calls for regulation. 
 
¶13. (SBU) The European Commission will open Excessive Deficit 
Procedures (EDP) for six Member States (MS) that posted deficits 
over the 3% of GDP threshold in 2008: Ireland, Spain, France, 
Greece, Latvia and Malta.  The EC presented its first tranche of 
assessments of Stability programs (Ireland, Greece, Spain, France, 
Germany, the Netherlands, Malta and Finland) and Convergence 
programs (Hungary, Latvia, Bulgaria, the Czech Republic, Denmark, 
Estonia, Poland, Sweden and the United Kingdom).  While announcing 
the EDP measures, Commissioner Almunia noted that, "the [Stability 
and Growth] Pact is not about sanctions" in times of crisis, and 
that the Commission will take advantage of the flexibility written 
into the pact when considering its next steps.  Almunia recalled 
that the December European Council affirmed that the SGP remained 
"the cornerstone of the EU fiscal framework," and noted that "under 
the present circumstances, preserving the Pact's credibility is key" 
to maintaining the public and market confidence.  The March ECOFIN 
is expected to endorse the EDP designations, after which the 
Commission and the Economic and Financial Committee (EFC) will 
propose policy actions to bring each Member State's deficit below 
3%. 
Commission reviews French aid to carmakers for breaches of internal 
market 
--------------------------------------------- ------ 
¶14. (SBU) The EC Competition authority is assessing the most recent 
French assistance to its car industry, which has sparked allegations 
of protectionism from the Czech Republic and threats of retaliation 
by Slovakia.  The Commission has requested information to assess 
whether the aid contains anti-competitive conditions after President 
Sarkozy's statement that Peugeot should close a plant in the Czech 
Republic and bring production home to France. 
Grim economic indicators worsen outlook for Europe, as Q4 GDP falls 
1.5% 
--------------------------------------------- ------ 
¶15. (SBU) Q4 GDP declined by 1.5% in both the euro area and the EU 
(versus -0.2% in Q3).  Compared with the same quarter of the 
previous year, GDP decreased by 1.2% in the euro area and by 1.1% in 
the EU, after +0.6% and +0.8% respectively in Q3 2007.  For 2008, 
GDP grew by 0.7% in the euro area and by 0.9% in the EU. 
¶16. (SBU) In December 2008, the volume of retail trade remained 
stable month-on-month in both the euro area and the EU. 
Year-on-year, the retail sales index fell by 1.6% in the euro area 
and by 0.8% in the EU.  In December, the industrial producer price 
index fell by 1.3% in the euro area and by 1.4% in the EU 
month-on-month.  Industrial production was also down in December by 
2.6% in euro area and by 2.3% in the EU, continuing the trend set in 
November when the index decreased by 2.2% in both zones.  Compared 
to the same month the previous year, the average industrial 
production index for 2008 fell by 1.7% in the euro area and by 1.6% 
in the EU27. 
MURRAY