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P 051038Z MAY 09
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INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUCNMEU/EU INTEREST COLLECTIVE

UNCLAS SECTION 01 OF 04 BRUSSELS 000635 
 
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TAGS: EFIN ECON ETRD EIND EINV EUN
SUBJECT: EUROPE FINANCIAL AND ECONOMIC REPORT:              May 4th, 
2009 
FINANCIAL SERVICES: UPCOMING ISSUES /EVENTS 
------------------------------------------- 
ECOFIN to discuss EC's Spring economic forecasts, give final 
approval to CRA and Solvency II legislation: 
 
--------------------------------------------- -------- 
 
¶1. (SBU) On May 5, the ECOFIN Council will meet to discuss the 
Commission's Spring economic forecast and to formally adopt the 
Regulation on Credit Rating Agencies and the Solvency II Directive, 
both recently approved by the European Parliament.  Ministers will 
exchange views on how to cross-border information sharing on tax, 
and will begin examining the draft budget for 2010.  The meeting 
will be preceded by a EUROGROUP meeting on May 
 
FINANCIAL SERVICES: RECENT EVENTS: 
---------------------------------- 
 
Vote on Capital Requirement Directives (CRD) on May 6: 
--------------------------------------------- ------- 
 
¶2. (SBU) Following a delay due to an attempt by several MEPs to 
increase the 5% retention requirement on securitized products, on 
April 29 the Member States adopted a proposal that leaves the 
threshold unchanged, but requires the Commission to assess the 
effectiveness of the measure and report back to the European 
Parliament (EP) by the end of 2009.  The EP is expected to adopt the 
Directive on May 6, since a negative vote would force the 
negotiations to restart and make the adoption of the measure 
unlikely before the end of 2009. 
 
European Parliament requires credit rating agencies to be registered 
and supervised in the EU: 
--------------------------------------------- -------- 
 
¶3. (SBU) On April 23, the European Parliament adopted a Regulation 
that will require all credit rating agencies (CRAs) whose ratings 
are used for regulatory purposes in the EU to be registered and 
supervised by competent national authorities.  The vote seals an 
agreement previously reached by Member State representatives.  The 
Regulation sets rules for overseeing rating companies, mandates that 
analysts rotate positions, and introduces internal governance 
arrangements to limit conflicts of interest.  The regulation also 
allows European subsidiaries of credit rating agencies located 
outside of the EU to endorse the ratings produced by their parent 
companies, if a number of criteria are met.  Ratings from smaller, 
non-systemically important CRAs from jurisdictions deemed equivalent 
by the EU can be used without being endorsed.  The Regulation will 
enter into force as soon as it is published in the Official Journal, 
with a 12-month delay for the endorsement provision. 
 
European Parliament approves Solvency II: 
--------------------------------------------- -------- 
 
¶4. (SBU) On April 22, the European Parliament adopted the Solvency 
II Directive, which replaces the current rule-based approach to 
determine solvency and capital requirements for EU insurance and 
reinsurance companies with a more sophisticated, risk-based regime. 
The new legislation will introduce colleges of supervisors to 
oversee cross-border insurance companies and will harmonize 
reporting requirements.  The Commission will set up a mechanism to 
determine third-country equivalence and EC officials have indicated 
that the U.S. will likely not be found equivalent.  Insurers from 
non-equivalent jurisdictions will likely have to establish a holding 
company in Europe and choose a home MS as supervisor. 
 
ECONOMICS / FINANCE: UPCOMING ISSUES / EVENTS 
--------------------------------------------- 
 
Commission proposes to register and regulate fund managers: 
--------------------------------------------- -- 
 
¶5. (SBU) On April 29, the European Commission presented its proposal 
to regulate Alternative Investment Fund Managers (AIFMs).  The 
proposed Directive will require all AIFMs managing portfolios of 
more than 100 million to be authorized and be subject to harmonized 
regulatory standards on an ongoing basis. Criteria for 
authorization: 
- Be established in the EU; 
- Manage non-UCITS assets in excess of 100 million (or     500 
million if unleveraged); 
- Hold and retain a minimum level of capital. 
 
AIFMs managing leveraged funds will be subject to more stringent 
requirements, which the Commission will determine separately from 
this Directive.  Any registered AIFM will be authorized to market 
funds to professional investors throughout the EU and to manage 
funds domiciled in other Member States without being subject to 
additional requirements.  Funds domiciled in third countries will 
 
BRUSSELS 00000635  002 OF 004 
 
ECOFIN to discuss EC's Spring economic forecasts, give final 
approval to CRA and Solvency II legislation: 
--------------------------------------------- -------- 
 
have to be authorized separately in each MS in which they seek 
investors.  Funds domiciled in third countries may also be managed 
by a registered AIFM after a three-year transitional period if the 
third country jurisdiction's regulatory and supervisory standards, 
including exchange of information on tax matters, is deemed to be 
equivalent to the EU's. 
 
Commission to seek authority to end banking secrecy in the EU: 
--------------------------------------------- ------- 
 
¶6. (SBU) On April 28, the Commission outlined its intention to 
increase transparency and exchange of tax information in the banking 
sector, both within the EU and with third countries.  EU Taxation 
Commissioner Lazlo Kovacs is seeking authority to negotiate with 
Switzerland, Liechtenstein, San Marino, Monaco and Andorra a 
provision to exchange information on request.  If these five 
countries agree to share information with the EU, then the temporary 
opt-out which has allowed Luxembourg, Austria and Belgium to apply a 
special withholding tax on the savings accounts of non-residents 
instead of sharing data will cease.  At the May 5 ECOFIN, Member 
State Finance Ministers are expected to hold an exchange of views on 
the issue. 
 
 
 
Germany to develop a "bad bank" approach to impaired assets: 
--------------------------------------------- ------ 
 
¶7. (SBU) The German government is working on a "bad bank" approach 
to impaired assets, in which the government would create special 
purpose vehicles (SPVs) to purchase impaired assets from banks at 
book value in exchange for a government-guaranteed bond of the same 
amount.  A third party will then assess the fair value of the asset 
and the bank will be required to take a provision equal to the 
difference between the book value at which the asset was sold and 
the fair value  The scheme will likely be voluntary.  Deutsche Bank 
has already announced it will not take part and the main 
participants will likely be: HypoRE, Commerzbank/Dresden, and the 
Landesbanken.  Some questions remain open. 
- What is the time period over which the bank bise required to take 
the provision for the difference between book and fair value? 
- If the fair value of the asset declines after the initial sale, 
what will be the burden sharing between the government and the 
bank? 
The government is expected to announce a program by the end of the 
week 
Commission asks Member States to tighten rules on remuneration in 
the financial sector: 
--------------------------------------------- --------- 
 
¶8. (SBU) On April 29, the European Commission published measures to 
ensure that financial institutions put in place remuneration 
policies designed to prevent excessive risk-taking.  Supervisors in 
all Member States are invited to ensure that these principles, which 
target directors and risk-taking staff, are applied to the largest 
possible extent, although their application is voluntary.  However, 
Commissioner McCreevy has announced that he will propose an 
amendment to the Capital Requirements Directive making the bulk of 
these proposals a binding requirement. 
 
Commission outlines its vision on investor protection for packaged 
retail investment products: 
--------------------------------------------- ---------- 
 
¶9. (SBU) On April 29, the European Commission published a set of 
principles that will guide its work in developing - by the end of 
2009- a comprehensive legislative approach to product disclosures 
and selling practices for retail investment products such as 
investment funds, insurance-based investments and other types of 
structured products.  The Commission aims to restore investor 
confidence in these products by improving product information 
requirements.  Rules on product sales will also be made more 
coherent. 
 
Commission looks at whether short selling should be regulated: 
--------------------------------------------- --------- 
 
¶10. (SBU) The European Commission launched a public consultation on 
the review of the Market Abuse Directive (2003/6/EC) on insider 
trading and market manipulation.  The consultation seeks stakeholder 
input into whether EU legislation should be simplified and whether 
the EU should introduce rules requiring short sellers to register 
 
BRUSSELS 00000635  003 OF 004 
 
ECOFIN to discuss EC's Spring economic forecasts, give final 
approval to CRA and Solvency II legislation: 
--------------------------------------------- -------- 
 
their holdings with the authorities.  The Commission fears that 
differing rules on short-selling (recently temporarily banned in 
some countries) may lead to extra costs and be detrimental to 
financial market integration.  On insider trading, the Commission 
may simplify administrative procedures and raise the current 5,000 
threshold above which suspect deals must be reported.  The results 
of the review are expected in the fall. 
 
Commission wants harmonized rules for "intermediated" securities: 
--------------------------------------------- --------- 
 
¶11. (SBU) The European Commission opened a public consultation on 
how securities are held and exchanged, and how to improve legal 
certainty.  The Commission seeks to harmonize the rules on holding 
securities and transferring them across EU member states.  There are 
currently no EU-level rules on book-entry securities, no guidelines 
on how they should be transferred from the seller to the buyer, 
especially for cross-border transactions, and a lack of certainty 
regarding registration of ownership of securities.  This 
consultation is a step towards the release of legislative proposals 
on "intermediated" securities - those held in bank accounts, by 
brokers or in central securities depositories - which is expected 
before the end of 2009. 
 
 
 
 
Fortis shareholders approve sale to BNP Paribas: 
--------------------------------------------- ------ 
 
¶12. (SBU) On April 30, Fortis shareholders approved the sale of 75% 
of the group's banking business (currently owned by the Belgian 
government) and of 25% of the group's insurance business to BNP 
Paribas, making it the Eurozone's largest deposit holder.  A lawyer 
for the shareholders who opposed the deal promised more legal 
actions. 
 
 
ECONOMICS / FINANCE: RECENT EVENTS: 
----------------------------------- 
 
ECB expected to lower rates and may announce QE measures, BoE likely 
on hold: 
--------------------------------------------- ---------- 
 
¶13. (SBU) On May 7, the ECB Governing council is expected to cut its 
main interest rate by 25 basis points.  There have been diverging 
comments from ECB Governing Council members on whether or not the 
ECB will adopt quantitative easing tools.  The Bank of England will 
also announce rate decisions next Thursday, and economists believe 
that the rate and the GBP 75bn asset purchase program will remain 
unchanged. 
 
--------------------------------------------- --------- 
ECONOMICS / FINANCE: UPCOMING ISSUES / EVENTS 
--------------------------------------------- 
 
EC's Spring economic forecasts predict "tough" 2009: 
--------------------------------------------- -------- 
 
¶14. (SBU) May 4, the European Commission released its latest 
economic forecasts for the EU and the Euro area.  GDP in both areas 
is projected to fall by 4% this year and to broadly stabilize in 
¶2010.  The main factors behind the decline are the worsening of the 
global financial crisis, a sharp contraction in world trade and the 
ongoing housing market correction in some economies.  However, the 
Commission believes that the fiscal and monetary stimulus measures 
will have an effect and growth will regain momentum in the course of 
¶2010.  An increase of unemployment is also forecasted, with the 
jobless rate to reach 11% in 2010. 
 
 
 
 
EU government deficits for 2008 rose significantly compared to 
2007: 
--------------------------------------------- ------ 
 
¶15. (SBU) Government deficits and debt in both the euro area and the 
EU27 increased from 2007 to 2008.  In the euro area, combined 
government deficits increased from 0.6% of GDP in 2007 to 1.9% in 
2008, and in the EU27 from 0.8% to 2.3%.  Government debt also 
 
BRUSSELS 00000635  004 OF 004 
 
ECOFIN to discuss EC's Spring economic forecasts, give final 
approval to CRA and Solvency II legislation: 
--------------------------------------------- -------- 
 
increased, but less dramatically, from 66.0% of GDP at the end of 
2007 to 69.3% at the end of 2008 in the euro area, and from 58.7% to 
61.5% in the EU27.  In 2008, the largest government deficits were 
recorded by Ireland (-7.1%), the United Kingdom (-5.5%), Romania 
(-5.4%) and Greece (-5.0%), while Italy (105.8%), Greece (97.6%), 
and Belgium (89.6%) posted the highest debt ratios. 
 
EU jobless rate rises as inflation stabilizes, business and economic 
confidence pick up: 
--------------------------------------------- -------- 
 
¶16. (SBU) Europe's unemployment rate rose to 8.9% in March, the 
highest since November 2005, while Euro area inflation for April is 
estimated stable at 0.6%.   The Business Climate Indicator (BCI) for 
the euro area increased in April for the first time since May 2008. 
Despite remaining at very low levels (-3.33), it showed improvement 
over March (- 3.49).  The Economic Sentiment Indicator (ESI) for the 
EU and the euro area also increased in April - for the first time 
since May 2007 - by 3.5 points in the EU, and by 2.5 points in the 
euro area, to 63.9 and 67.2 respectively. 
MURRAY