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DE RUEHBS #0931/01 1881442
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P 071442Z JUL 09
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UNCLAS SECTION 01 OF 05 BRUSSELS 000931 
 
SENSITIVE 
SIPDIS 
 
NOT FOR INTERNET DISTRIBUTION 
 
E.O. 12958:  N/A 
TAGS: EFIN ECON ETRD EIND EINV EUN
SUBJECT: EUROPE FINANCIAL AND ECONOMIC REPORT:              July 
4th, 2009 
SUMMARY: Following is the biweekly financial report from the U.S. 
Mission to the European Union.  The report is divided into three 
sections:  Economic Conditions and Policy, Financial/Monetary 
 
Conditions and Policy and Financial Supervision/Regulation. 
 
ECONOMIC CONDITIONS/POLICY 
-------------------------- 
 
ECOFIN MINISTERS MEET ON JULY 7: 
------------------------------- 
 
¶1. (SBU) At the July ECOFIN Council - the first one under the 
Swedish presidency ministers will exchange views on the preparation 
of the forthcoming G-20 meetings, i.e., the G-20 finance ministers 
meeting preceding the G-20 summit in Pittsburgh in September.  There 
Council will also discuss: 1) pro-cyclicality (and is expected to 
adopt conclusions); 2) the Commission's proposal to open excessive 
deficit procedures concerning Lithuania, Malta, Hungary, Poland and 
Romania under the stability and growth pact; and 3) the Commission's 
assessments of the stability and convergence programs for Belgium, 
Austria, Slovakia and Slovenia.  Ministers are also expected to 
examine member states' medium-term budgetary objectives, as well. 
 
SECOND QUARTERLY REPORT ON EURO AREA SHOWS EARLY SIGNS OF 
IMPROVEMENT: 
--------------------------------------------- ------- 
 
¶2. (SBU) On June 29, the European Commission published the second 
Quarterly Report on the Euro area for 2009.  The analysis done by 
the services of DG ECFIN shows that the euro-area economy is still 
in recession, but the EU's "strong and coordinated" policy response 
is providing support to economy activity. Most financial markets are 
showing signs of stabilization although conditions remain fragile. 
Spreads on money and bond markets have narrowed on the back of 
improved economic sentiment and lower risk aversion.  Financing 
conditions in the euro area have also improved as the cost of bank 
loans, equity capital and market debt have all declined.  However, 
the report shows that money and credit growth have slowed further in 
recent months.  Euro-area GDP dropped by 2.5% q-o-q in the first 
quarter of 2009, according to Eurostat's release of 3 June, driven 
mostly by an inventory adjustment and a continued sharp fall in 
investment.  On the positive side, the fall in private consumption 
was contained by the deceleration of consumer price inflation. 
While hard data have so far remained depressed, survey data have 
begun to show a pick-up in confidence in most euro-area countries. 
The report also shows that the banking support measures implemented 
by Member States since autumn 2008 have helped to avert financial 
meltdown and have had a positive impact on banks' capital and access 
to wholesale funding.  However the situation of the banking sector 
remains fragile, and further significant asset write-downs are still 
to be expected, as confirmed by a recent ECB study. 
 
OECD REPORT REVISES EUROZONE GROWTH DOWNWARDS: 
--------------------------------------------- - 
 
¶3. (SBU) In its June 23 revised economic forecast, the OECD sees few 
"green shoots" in the 16-nation euro-area, as the 2009 forecast was 
cut to show a contraction of 4.8%, compared with a 4.1% decline 
foreseen in March.  The Organization predicts stagnation for the 
Eurozone in 2010, compared with a previous 0.3% decline. OECD 
general Secretary Angel Gurria recommended that the Eurozone cuts 
interest rates further and continue the unconventional monetary 
policy as well as the stimulus policies, arguing that countries with 
room to maneuver should even increase their efforts.  He warned in 
particular Germany not to end stimulus measures prematurely. 
 
¶4. (SBU) The OECD forecast conflicts with that of the World Bank, 
which on Monday said that the global economy will contract 2.9% this 
year, compared with a previous forecast of a 1.7% decline, but 
echoes the view of the IMF which now forecasts worldwide growth next 
year of 2.4%, up from April's 1.9% estimate. 
 
EC 2009 REPORT ON EMU PUBLIC FINANCES SAYS EXIT STRATEGY NEEDED: 
--------------------------------------------- ------ 
 
¶5. (SBU) On June 23, the European Commission released its 2009 
Report on Public Finances in the EMU, which forecasts that the total 
cost of national rescue of banks is likely to lie anywhere between 
2.75 - 16.5% of EU GDP, depending on the veracity of underlying 
assumptions and the ability of governments to recover capital 
 
BRUSSELS 00000931  002 OF 005 
 
SUBJECT: EUROPE FINANCIAL AND ECONOMIC REPORT:              July 
4th, 2009 
SUMMARY: Following is the biweekly financial report from the U.S. 
Mission to the European Union.  The report is divided into three 
sections:  Economic Conditions and Policy, Financial/Monetary 
Conditions and Policy and Financial Supervision/Regulation. 
 
injections and loans.  The report also shows that an exit strategy 
strengthening fiscal policy frameworks, reforming age-related 
spending and spelling out the broad consolidation measures envisaged 
when the recovery will have taken hold is required to address the 
concerns over public finance sustainability and underpin consumer, 
business and financial market confidence. 
 
SWEDISH PRESIDENCY URGES EU MEMBER STATES NOT TO ADOPT FURTHER 
STIMULI 
--------------------------------------------- ------- 
 
¶6. (SBU) Fredrik Reinfeldt, the Swedish PM taking over the six-month 
rotating EU presidency, said that he will guide the EU based on the 
assumption that Europe's financial sector is still in crisis, and 
urged the member states not to "push on with more stimulus packages, 
because you might face additional problems with the financial 
sector." He emphasized the need to reverse the rise in EU budget 
deficits and public debt, referring to the estimates released last 
month by the ECB estimating that Eurozone banks face potential 
write-downs of $283bn between now and the end of 2010, due mainly to 
bad loans. 
 
 
 
 
 
COMMISSION ASSESSES SCPS FOR AUSTRIA, BELGIUM, SLOVENIA, SLOVAKIA 
AND ROMANIA: 
--------------------------------------------- ------- 
 
¶7. (SBU) On June 24, the European Commission examined the last five 
Stability and Convergence Programs (SCPs) on fiscal measures 
submitted by Austria, Belgium, Slovenia, Slovakia, and Romania.  As 
in other EU countries, budgetary positions are expected to 
deteriorate markedly, reflecting the global recession and the 
economic stimulus packages adopted in line with the European 
Economic Recovery Plan (EERP).  In all five countries, budgetary 
targets are subject to downside risks.  The Commission also 
concluded that Malta, Lithuania, Poland, and Romania are running 
excessive deficits and opened Excessive Deficit Procedures (EDPs) 
recommending deadlines for their correction.  On Hungary, already 
the subject of an EDP, the Commission recommends postponing the 
deadline for deficit reduction by two years, to 2011.  The 
Commission is requesting that Malta end its excessive deficit 
situation by 2010, Lithuania by 2011, Poland by 2012, and Romania by 
¶2011. 
 
ECB LEAVES RATES UNCHANGED AT 1%, AS EXPECTED: 
--------------------------------------------- - 
 
¶8. (SBU) On July 2, the Governing Council of the ECB decided that 
the interest rate on the main refinancing operations and the 
interest rates on the marginal lending facility and the deposit 
facility will remain unch and 0.25% 
respectively.IndicQarea 
improved slightly  May. However, the levows, suggesting that yQar-on-year industrial 
production growth was sQill negative in May and will remain subdued 
in June, the report said.  Managers' production expectations and 
opinion of stocks of finished goods continued to improve.  By 
contrast, orders continued to deteriorate.  The Economic Sentiment 
Indicator (ESI) rose to 73.3 points, from 70.2 points in May.  "The 
 
BRUSSELS 00000931  003 OF 005 
 
SUBJECT: EUROPE FINANCIAL AND ECONOMIC REPORT:              July 
4th, 2009 
SUMMARY: Following is the biweekly financial report from the U.S. 
Mission to the European Union.  The report is divided into three 
sections:  Economic Conditions and Policy, Financial/Monetary 
Conditions and Policy and Financial Supervision/Regulation. 
 
increase observed at sector and country level is mainly driven by 
improving expectations, as the main economic actors seem to be 
gaining confidence that the crisis is easing," the commission said 
in the report. The improvement was driven by higher consumer and 
service sector confidence in particular, and to a lesser degree by 
the industry.  Most EU countries saw improvements, with Germany, 
France and Britain showing strong gains. 
 
¶11. (SBU) The Eurozone purchasing managers' index, covering 
manufacturing and services, rose from 44.0 in May to 44.4 in June, a 
nine-month high, indicating that the recession is easing, though it 
remains below the 50 mark which indicates a contraction in activity. 
 The rate of improvement was less than expected, however, because of 
weaker performance in the service sector.  According to the 
Commission, the indices still point to a substantial contraction in 
second quarter economic activity. 
 
FINANCIAL / MONETARY POLICY AND CONDITIONS 
------------------------------------------- 
 
COUNCIL BACKS SUPERVISION AND REGULATION REFORM PROPOSALS, WITH SOME 
CHANGES: 
--------------------------------------------- --- 
 
¶12. (SBU) The June 18-19 European Council endorsed the Commission's 
May 27 proposed financial supervision and regulation reforms, with 
some changes.  The Council specifically supported: 
--The creation of a European Systemic Risk Board (ESRB), whose chair 
will be elected by the members of the ECB General Council (the 
Commission had proposed that the ECB chair, but this was opposed by 
the UK); and 
--The establishment of a European System of Financial Supervisors 
(ESFS), comprising three new European Supervisory Authorities 
(ESAs), aimed at strengthening oversight of cross border groups 
through colleges of supervisors and creating a single set of rules 
for all financial institutions across the single market.  ESAs 
should have binding decision-making powers to ensure that national 
supervisors follow the agreed-upon rules and to settle matters in 
case of disagreement among supervisors.  However, ESA decisions 
should not impinge on fiscal responsibilities of Member States (this 
differs from the Commission proposal, in spelling out that the ESAs 
will not be able to force national authorities to pay for bank 
bailouts).  ESAs should also have supervisory powers for CRAs. 
 
¶13. (SBU) The Council took stock of progress achieved in improving 
the EU financial market regulatory framework and called for further 
progress, noted the first signs of a sustainable economic recovery 
and reiterated its determination to restore jobs and growth, 
stressing that consolidation should keep pace with economic 
recovery.  In addition, the Council: 1) warned of continued weakness 
in the banking system; 2) called on Member States to "stay alert" 
for possible needs of further support; 3) welcomed the ongoing 
EU-wide bank stress-testing exercise; 4) supported the adoption by 
Latvia of new budgetary measures, 5) welcomed the intention of the 
Commission to swiftly disburse the next installment of its balance 
of payments support for Latvia; 6) called for a coordinated EU 
position for the next G20 financial crisis meeting September 24-25; 
and 7) reaffirmed that Member States have stated their readiness to 
provide 75bn in fast temporary additional support to the IMF.  The 
Council's conclusions pave the way for the Commission to introduce 
specific legislative proposals in September to implement the 
reforms.  Final adoption is expected in 2010. 
 
ECB's latest Financial Stability review warns of additional losses 
for banks in 2009: 
--------------------------------------------- --- 
 
¶14. (SBU) On June 15, the European Central Bank published its latest 
Financial Stability Review, which forecasts $283bn of additional 
losses for banks by end-2009, and considers that the risk to the 
financial sector remain high.  The main risk components have been 
identified as: 1) renewed loss of confidence in the banks; 2) 
balance sheet trouble for insurers; 3) a larger-than-expected fall 
in US house prices; and 4) an even stronger recession.  The review 
forecasts $283bn of additional bank losses for banks by end-2009. 
 
BRUSSELS 00000931  004 OF 005 
 
SUBJECT: EUROPE FINANCIAL AND ECONOMIC REPORT:              July 
4h, 2009 
SUMMARY: Following is the biweekly financial report from the U.S. 
Mission to the European Union.  The report is divided into three 
sections:  Economic Conditions and Policy, Financial/Monetary 
Conditions and Policy and Financial Supervision/Regulation. 
 
"Hard-to-value assets have remained on bank balance sheets, and the 
marked deterioration in the economic outlook has created concerns 
about the potential for sizeable loan losses," the ECB said. 
 
ECB INCREASES LIQUIDITY BY 442BN: 
---------------------------------- 
 
¶15. (SBU) The ECB organized a 442bn 12-month repo auction on June 
24, the largest and longest-dating ever, through which 1100 European 
banks have obtained new liquidity.  Bundesbank president Axel Weber 
said that while there is no systemic credit crunch, there are credit 
constraints, particularly for small companies.  Weber also stated 
that the German government's forecast of a 0.5% growth next year was 
too optimistic, and that he expects zero growth. 
 
DG COMP WARNS UK BANKS MAY NEED TO SELL ASSETS TO COMPLY WITH 
COMPETITION RULES: 
--------------------------------------------- ------- 
 
¶16. (SBU) On June 30, EC Commissioner for Competition, Neelie Kroes, 
told a British Bankers Association conference that RBS and Lloyds 
may be forced to sell assets in order to comply with EU rules on 
aid.  "The likelihood of significant divestments by RBS and Lloyds 
is strong," she said.  Under EU rules, beneficiaries of 
government-sponsored rescue plans are required to restructure their 
operations to compensate for the competitive advantage they enjoyed. 
 Lloyds and RBS have together received more than #40bn in direct UK 
government assistance, bringing the public stake in them to 43.5% 
and 70% respectively.  "Having co-operatively agreed changes to 
several German banks, our attention must turn to UK banks," she 
said.  Negotiations between the UK Treasury and the Commission are 
reportedly already underway, and decisions may be reached before 
August. 
 
FINANCIAL SUPERVISION/REGULATION: 
 
CRD AMENDMENTS POSTPONED: 
------------------------- 
 
¶17. (SBU) The European Commission postponed the publication of an 
expected revision to the Capital Requirements Directive (CRD) until 
mid-July at the earliest.  The amendment would impose a binding 
obligation on credit institutions and investment firms to have sound 
risk management and remuneration policies, and give regulators the 
power to impose financial or non-financial penalties against firms 
that fail to comply.  The amendment would also aim to increase the 
amount of capital banks have to set aside to cover re-securitization 
positions and risky assets held on their trading books.  Due 
diligence requirements for complex re-securitization and the 
supervisory process to enforce them would be increased.  Supervisors 
could potentially bar non-compliant institutions from investing in 
such instruments. The latest draft of the proposed amendment 
obtained by USEU is attached. 
 
UK, SWEDEN TO ADVOCATE VALUE OF HEDGE FUNDS, PRIVATE EQUITY: 
--------------------------------------------- ------- 
¶18. (SBU) Britain and Sweden, which takes over the EU's rotating 
presidency on July 1, agreed to work together to explain to other 
uropean nations the valu%ovenment and Financial Market Mats 
Odel.  On JulQ 1, Mr. Odel warned that the EU's focus on hedgQ funds 
and private equity is misguided and exaggerated, as neither is 
responsible for this crisis, and would lead to overregulation. 
 
CMMISSION GIVES CEIOPS A TIMETABLE FOR LEVEL 2 AQD THIRD COUNTRY 
EQUIVALENCE WORK: 
--------------------------------------------- ------ 
 
¶19. (SBU) The European Commission has publisheda letter dated 12 
 
BRUSSELS 00000931  005 OF 005 
 
SUBJECT: EUROPE FINANCIAL AND ECONOMIC REPORT:              July 
4th, 2009 
SUMMARY: Following is the biweekly financial report from the U.S. 
Mission to the European Union.  The report is divided into three 
sections:  Economic Conditions and Policy, Financial/Monetary 
Conditions and Policy and Financial Supervision/Regulation. 
 
June 2009 to the Committee of European Insurance and Occupational 
Pensions Supervisors (CEIOPS) providing an update on the Solvency II 
project and the CEIOPS' work on developing Level 2 implementing 
measures (Level 2 measures) and on third-country equivalence.  The 
Commission intends to have Level 2 measures in place at least twelve 
months before the Solvency II regime comes into effect, to CEIOPS is 
invited to provide its final advice on Level 2 measures by the end 
of January 2010.  On third country equivalence, the assessment 
process will be split into two phases, the first for the development 
of the general criteria to be used for the assessment (and which 
will be subject to the scrutiny of the European Parliament), and a 
second one to carry out the actual assessment of individual 
third-country supervisory regimes (which will take the form of a 
Commission's decision).  CEIOPS is requested to provide its final 
advice on the general criteria by March 2010, and on the actual 
assessment of the regimes of the first wave of third countries by 
July 2011. 
 
COMMISSION MOVES TO FORCE MEMBER STATES TO IMPLEMENT RULES ON 
ACCOUNTING AND AUDITING: 
--------------------------------------------- ------- 
 
¶20. (SBU) The European Commission decided to refer Austria, Ireland 
Italy and Spain to the European Court of Justice over 
non-implementation into national law of the Statutory Audit 
Directive, whose deadline expired June 29, 2008.  The Commission 
also decided to make formal requests to Belgium, Ireland, Greece, 
Luxembourg, Poland and Portugal as they have failed to fully 
implement into their national laws the latest Directive in the field 
of accounting within the prescribed deadline of September 5, 2008. 
 
Commission publishes expert group report on credit histories: 
--------------------------------------------- ----- 
¶21. (SBU) On June 15, the European Commission published the report 
of the expert group on credit histories, which had been mandated to 
identify solutions that would improve the access to and exchange of 
consumers' credit data within the EU.  The report calls for action 
in a number of areas to improve the access to and quality of credit 
data, and identifies the sharing of credit data between creditors to 
assess borrowers' creditworthiness as key in order to enhance the 
quality of creditors' loans portfolio and assist compliance with 
responsible lending obligations.  The expert group points out that 
cross-border lending is hindered by numerous differences in national 
credit reporting systems, but acknowledges the high costs of 
radically changing national credit register systems.  Thus, the 
report rejected global and complex solutions such as setting up a 
pan-European credit register or aligning all Member States to a 
single credit data model.  The consultation is open until August 
¶31. 
MURRAY