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P 280842Z MAY 09
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UNCLAS SECTION 01 OF 03 BRUSSELS 000738 
 
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SIPDIS 
 
NOT FOR INTERNET DISTRIBUTION 
 
E.O. 12958:  N/A 
TAGS: EFIN ECON ETRD EIND EINV EUN
SUBJECT: EUROPE FINANCIAL AND ECONOMIC REPORT:  May 19th, 2009 
FINANCIAL SERVICES: UPCOMING ISSUES /EVENTS 
------------------------------------------- 
Commission to publish its blueprint for implementing the de 
Larosiere proposals: 
--------------------------------------------- -------- 
 
¶1. (SBU) On May 27, the European Commission will publish a 
Communication setting out its vision for a new European supervisory 
framework, based on two new pillars: 
--The European Systemic Risk Council (ESRC), which will monitor and 
assess the risks to financial stability, provide early warning of 
systemic risks and recommend actions to address these risks; and, 
--The European System of Financial Supervisors (ESFS), a network of 
national supervisors working with the new European supervisory 
authorities (enhanced Level 3 Committees).  The aim is to enhance 
cooperation between national supervisors, ensure that host 
supervisors have an appropriate say in the supervision of their own 
financial systems, and that cross-border risks are addressed more 
effectively.  With this Communication the Commission takes the next 
step in the implementation of the de Larosiere proposal, and it is 
expected to be discussed by the June 9 ECOFIN. The Commission seeks 
an endorsement of its views by the Spring European Council (June 
18-19), to open the way for the legislative proposals expected for 
this fall. 
 
 
FINANCIAL SERVICES: RECENT EVENTS: 
---------------------------------- 
 
European Parliament approves the revised Capital Requirement 
Directives (CRD): 
 
¶2. (SBU) On May 6, the European Parliament (EP) adopted by a 454-106 
vote the revised Capital Requirement Directives that: set new rules 
limiting banks' exposure to a client or a group of clients, 
establish colleges of supervisors to oversee banking groups 
operating in multiple EU countries, and set EU-wide criteria for 
assessing when "hybrid" capital may be recognized as "original own 
funds."  The Directives also require originators of securitized 
products to retain some risk exposure to these securities (no less 
than 5% of the total originated); and purchasers of securitized 
products to conduct comprehensive diligence.  The Council must now 
approve the proposals.  Member States will have until 31 January 
2010 to put the necessary laws into place, and the provisions will 
be applicable from 31 March 2010. 
 
McCreevy calls for improvement in IASB governance: 
--------------------------------------------- ----- 
 
¶3. (SBU) On May 7, Commissioner McCreevy called for a greater link 
between the International Accounting Standards Board (IASB) members 
and the countries actually using IFRS, and welcomed the recent 
decision of the European Parliament and of the Council to provide 
funding to the International Accounting Standards Committee 
Foundation (IASCF).  The funding will be conditioned on further 
improvements in IASCF governance.  McCreevy noted the growing 
concern among Finance Ministers at the perceived slowness of the 
IASB in responding to the crisis, and characterized the IASB's 
approach to standard-setting as being 'over-academic'. 
Link: McCreevy's speech 
 
EU to stress-test banks. No results will be disclosed: 
--------------------------------------------- -------- 
 
¶4. (SBU) On May 12, the Committee of European Banking Supervisors 
(CEBS) announced that a stress test exercise is currently being 
undertaken by national authorities on EU banks using common 
scenarios and guidelines developed by CEBS.  The aim is to assess at 
an aggregate level the EU banking system's resilience to shocks, not 
to identify individual banks' need for recapitalization.  The 
exercise will end in September and the results will be kept 
confidential. 
Link: CEBS's statement on the stress test 
 
DG ECFIN Director General calls for greater disclosure of EU banks' 
true health: 
--------------------------------------------- ---------- 
 
¶5. (SBU) On May 13, the European Commission Director General for 
Economic and Monetary Affairs, Marco Buti, highlighting the need for 
European banks to disclose their state of health, particularly after 
the recent publication of the results of the stress test performed 
on the 19 top U.S. banks.  Buti's comment echoes the conclusions of 
the last IMF Regional economic outlook report for Europe, released 
on May 12, which calls for better co-ordination of the EU economic 
stimulus and bank rescue schemes, and advocates the use of stress 
tests on individual banks (along the example set by the U.S). Link: 
IMF Regional economic outlook report for Europe 
 
 
BRUSSELS 00000738  002 OF 003 
 
Commission to publish its blueprint for implementing the de 
Larosiere proposals: 
--------------------------------------------- -------- 
 
Germany resists disclosing stress test results, plays down 
significance of US stress tests: 
--------------------------------------------- -------- 
 
¶6. (SBU) According to the FT Deutschland, EU Finance Ministers 
agreed last month to carry out stress tests on a voluntary basis, 
and bowed to German pressures that the results of the tests not be 
disclosed.  Moreover, German Finance Minister Peer Steinbruck told 
the Bundestag, on May 13, that the US stress tests were pointless 
because the US Treasury and the Federal Reserve had manipulated the 
figures beforehand, the FT reports. 
 
German government adopts "bad bank", criticized by experts: 
--------------------------------------------- -------- 
¶7. (SBU) On May 14, the German government approved a "bad bank" 
program.  Banks can voluntarily set up an off-balance sheet vehicle 
and transfer assets to it.  The off-balance sheet vehicle then pays 
for the assets at 90% of their book value with government guaranteed 
securities.  Each year the banks will pay the government the 
difference between the assets' discounted book value and 
"fundamental" values as determined by auditors.  Under the proposal, 
banks are responsible for all losses on the transferred assets, but 
they can stretch them into the future.  Experts have noted that this 
scheme could make it difficult for banks to raise new capital, as 
there would be considerable uncertainties over future losses, and 
the banks will not be able to pay dividends for long periods.  The 
government rejected proposals from parliamentarians to make the 
scheme obligatory.  The German Banking Association has criticized 
the scheme as too onerous.  A vote in the German parliament is 
scheduled for before the July 3 summer recess. 
Belgian government provides state guarantees to KBC: 
--------------------------------------------- ------- 
 
¶8. (SBU) On May 13, KBC Group, Belgium's third-largest bank by 
assets, accepted state guarantees to cover 90% of losses exceeding 
3.2bn largely due to write-downs on assets insured by MBIA Inc. 
The bank will pay the Belgian government 1.2bn plus a quarterly fee 
of 30 million for the guarantee, which covers 5.5bn of 
collateralized debt obligations and 14.4bn of MBIA insurance 
coverage.  The bank will also sell 1.5bn of non-voting securities 
to the Flemish regional government.  KBC is receiving government 
funds for the third time since October following credit-related 
losses. 
 
 
ECONOMICS / FINANCE: UPCOMING ISSUES / EVENTS 
--------------------------------------------- 
 
May ECOFIN discuss current economic and financial situation, 
sustainability and quality of public finances, and tax-related 
issues: 
--------------------------------------------- -------- 
 
¶9. (SBU) The May 5 ECOFIN Council discussed the Commission's newly 
revised economic forecast, which predicts a 4% contraction this 
year.  Ministers emphasized Member States should strengthen public 
finances through rapid reduction of debt, support for employment and 
productivity, and reform of pension, health care and long-term care 
systems.  Concerns about growing divergences in U.S. and EU 
accounting standards were discussed; the June ECOFIN will return to 
this after additional staff work.  Commissioner Almunia indicated 
that Poland, Romania, Lithuania, Latvia and Malta will be the next 
five countries to receive warnings from the European Commission 
under the excessive deficit procedure.  Ministers also formally 
adopted the Solvency II Directive and the Credit Rating Agencies 
Regulation, and agreed to raise the balance of payments facility 
ceiling from 25bn to 50bn.  Outgoing Czech Finance Minister 
Kalousek used the press conference to note that the G-20 should not 
have published the list of uncooperative tax jurisdictions, and 
apologized to Belgium, Luxembourg and Austria as he believes they 
should not have been on the list. 
Link: Council conclusions 
Link: Conclusions on the sustainability of public finances 
Link: Ageing report 2009 
 
 
ECB trims rates and adopts slight QE; BoE expands asset purchase 
program: 
--------------------------------------------- -------- 
 
¶10. (SBU) On May 7, the ECB Governing Council agreed to a 60bn 
program to buy euro-denominated covered bank bonds issued in the 
Euro area.  While small, this is a first step towards quantitative 
 
BRUSSELS 00000738  003 OF 003 
 
Commission to publish its blueprint for implementing the de 
Larosiere proposals: 
--------------------------------------------- -------- 
 
easing.  The ECB also reduced its main refinancing interest rate by 
25 basis points, to a historically low 1%.  The interest rate of the 
marginal lending facility was also cut by 50 bps, to 1.75%.  The 
rate on the deposit facilty was left unchanged at 0.25%.  The ECB 
also ecided to double the maximum length of its refinancing 
operations to 12 months.  On the same day, the Bank of England 
decided to leave the interest rate unchanged at 0.5%, but increased 
the size of the asset purchase program by GBP 50bn. 
 
March industrial production down by 2.0% in euro area, by 1.9% in 
EU27: 
--------------------------------------------- --------- 
 
¶11. (SBU) In March 2009, industrial production fell by 2.0% in the 
euro area, and by 1.9% in the EU27 compared with February 2009, when 
output was down by 2.5% and 2.2% respectively. Compared with March 
2008, industrial production declined by 20.2% in the euro area and 
by 18.8% in the EU27. 
 
Germany expects 2009 tax revenue to decline more than previously 
estimated: 
--------------------------------------------- --------- 
 
¶12. (SBU) Germany's 2009 tax revenue is now estimated to decline by 
over 300bn, compared to previous estimates, as a direct result of 
the global economic crisis (which, according to FT Deutschland, 
would account for two thirds of the decline). 
 
 
European GDP figures for Q1 show continued decline: 
--------------------------------------------- ----- 
 
¶13. (SBU) In Q1 2009, GDP declined by 2.5% q-o-q in both the euro 
area and the EU27.  GDP decreased by 4.6% y-o-y in the euro area, 
and by 4.4% y-o-y in the EU27.  National figures for Q1 show that: 
--Germany's GDP contracted by 3.8% (q-o-q) and by 6.9% on an 
annualized basis; 
--French GDP declined by 1.5% (q-o-q), leading the French 
statistical office to revise its growth forecast for 2009 down to 
-3%; 
--UK's GDP registered a -1.9% q-o-q (4.1% annualized); 
--Italy has recorded a negative growth of 2.4% q-o-q (-5.9% 
annualized), and revised 2009 growth forecasts to -4.6%, 0.2% less 
than previously anticipated; 
--Spain's GDP fell by 1.8% (q-o-q). 
 
 
MURRAY