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UNCLAS SECTION 01 OF 04 BRUSSELS 001482 
 
SENSITIVE 
SIPDIS 
 
NOT FOR INTERNET DISTRIBUTION 
 
E.O. 12958:  N/A 
TAGS: EFIN ECON ETRD EIND EINV EUN
SUBJECT: EUROPE FINANCIAL AND ECONOMIC REPORT:       October 28, 
2009 
 
BRUSSELS 00001482  001.2 OF 004 
 
 
Recent Events: 
----------------------- 
 
EC unveils approach for OTC derivatives: 
---------------------------------------- 
¶1. (SBU) On October 20, the European Commission published a 
Communication setting out the approach it plans to follow in 
regulating the Over-the-Counter (OTC) derivatives market in 2010. 
The future legislation will aim to: 
* Reduce counterparty risk by: (i) establishing common safety, 
regulatory and operational standards for central counterparties 
(CCPs); (ii) improving collateralization of bilaterally-cleared 
contracts; (iii) substantially raising capital charges for 
bilaterally-cleared transactions; and (iv) mandating  CCP-clearing 
for standardized contracts. 
* Reduce operational risk by promoting standardization of the legal 
terms of contracts and of contract-processing. 
* Increase transparency by: (i) requiring that positions and all 
transactions not cleared by a CCP be recorded in trade repositories; 
(ii) regulating and supervising trade repositories; (iii) mandating 
trading of standardized derivatives on exchanges; and, (iv) 
reviewing the MiFID provisions to extend pre- and post-trade 
transparency requirements to OTC markets, as well as the 
authorization and operational requirements, reporting and conduct of 
business rules to all commodity derivatives dealers. 
* Enhance market integrity and oversight by giving regulators the 
possibility to set position limits and by clarifying and extending 
the scope of market manipulation as set out in the Market Abuse 
Directive (MAD) to derivatives. 
 
The Commission said it would work with U.S. authorities to define 
which standardized contracts would be cleared centrally. 
EC consults on proposed framework for cross-border crisis management 
in the banking sector: 
--------------------------------------------- ----- 
¶2. (SBU) On October 20, the Commission published a consultation 
paper on a future framework for cross-border crisis management in 
the banking sector.  A new framework is envisaged to equip 
authorities with the right tools and provide legal certainty to 
handle cross-border banking failures, in ways that minimize costs to 
taxpayers and allow even the largest banks to fail without damaging 
financial stability.  The Commission is seeking stakeholder input on 
the following issues: 
* New supervisory tools for early intervention. 
* A framework for cross-border bank resolution. 
* Financing bank resolution 
* Harmonizing insolvency procedures 
 
EC introduces technical amendments to sectoral legislation 
empowering future ESAs: 
--------------------------------------------- - 
 
¶3. (SBU) On October 26, the Commission published a package of 
legislative proposals to complement its recently proposed 
legislation to reform the European supervisory framework.  With this 
"Omnibus" proposal, the Commission intends to make targeted changes 
to existing financial services legislation to ensure that the new 
European Supervisory Authorities (ESAs) to be created as part of the 
European System of Financial Supervisors (ESFS) - can work 
effectively.  The Omnibus proposal lays down the scope of the 
Authorities' powers: aiming to ensure a more harmonized set of 
financial rules through the possibility to develop draft technical 
standards, settle disagreements between national supervisors and 
facilitate the sharing of micro-prudential information.  The areas 
in which amendments are proposed fall broadly into the following 
categories: 
* Defining the areas in which the Authorities will be able to 
propose technical standards (with the aim of developing a single 
rule book); 
* Giving the Authorities the ability to settle disagreements between 
national supervisors; and, 
* General amendments which are necessary for existing Directives to 
operate in the context of new authorities (e.g. renaming the current 
level 3 committees). 
 
Early in 2010, the Commission plans to publish further proposals for 
technical amendments, in particular in the insurance sector, which 
is not covered by the current proposal. 
 
 
BRUSSELS 00001482  002.2 OF 004 
 
 
Member States discuss Presidency compromise on CRD II: 
--------------------------------------------- ---- 
 
¶4. (SBU) On October 15, in the context of the second revision of the 
Capital Requirement Directives (CRD II), which deals with capital 
charges for the trading book and for re-securitizations, and with 
the supervisory review of remuneration policies, Member States 
representatives discussed the following proposals by the Swedish 
Presidency: 
* 8% minimum capital requirement for the trading book.  This level 
is considered appropriate pending a study being conducted by the 
Basel Committee. 
* Higher capital charges for exposures containing one or more 
securitization positions, to reflect the higher credit risk of such 
re-securitizations. 
* Remuneration schemes would be allowed to vary according to the 
size on the firm, its internal organization and the nature, the 
scope and the complexity of its activities.  However, guaranteed 
variable remunerations should be prohibited, and substantial 
portions of the variable remuneration should be deferred. 
* Supervisory authorities could be empowered to limit variable 
remuneration. 
EC delays CRD III, de Larosiere warns of risks of imposing too high 
capital ever, the Comm central bank took control of DSB 
Bank, asmall mortgage bank.  The bank collapsed after Q consumer 
association successfully engineered a run on the bank by encouraging 
all savers to withdraw their money in protest against the ank 
issuing "reckless" mortgages.  The Dutch Qentral bank was forced to 
take over DSB aftera weekend of negotiations to sell the bank to a 
consortium of the five biggest Dutch banks failed over concerns 
about credit losses and ptential lawsuits from customers.  Wouter 
Bos, the banking 
crisis, but the banks' own irresponsible lending policies. 
 
Upcoming Issues / Events: 
------------------------- 
European Leaders to try to agree on climate financing and ESRB: 
--------------------------------------------- ----- 
 
¶8. (SBU) On October 29 and 30, the European Council will meet in 
Brussels.  The main topic is likely to the ratification of the 
Lisbon Treaty - hoping to overcome last-minute difficulties with 
Czech President Klaus.  However, the Leaders are also expected to 
tackle economic and financial issues, including trying to break an 
impasse over climate financing and endorsing the creation of the 
European Systemic Risk Board (ESRB), which has already received 
ECOFIN approval.  EU Leaders are also expected to agree on a common 
EU position for the next G-20 Finance ministerial. 
 
ECB and BoE expected to keep policies largely unchanged: 
--------------------------------------------- ----- 
 
¶9. (SBU) On November 5, the European Central Bank is expected to 
keep its monetary policy largely unchanged.  However, there is some 
speculation that the Bank of England may leave its interest rate 
unchanged, but expand its asset-purchase program after the UK's 
 
BRUSSELS 00001482  003.2 OF 004 
 
 
Office for National Statistics announced on October 26 that Q3 GDP 
shrank 0.4% (economists had expected a 0.2% rise). 
 
G-20 Finance Ministers meet to follow up on Summit decisions: 
--------------------------------------------- ----- 
 
¶10. (SBU) On November 7 and 8, the G-20 Finance Ministers and 
Central Bank Governors will meet in St. Andrews (UK) to launch the 
new G20 framework for growth agreed upon at the Pittsburgh Summit 
and to continue working on financial regulatory reform. 
 
Recent Events: 
-------------- 
 
ECOFIN agrees on exit strategies and ESRB,disagrees on climate 
financing: 
--------------------------------------------- ------ 
¶11. (SBU) On October 20, EU Finance Ministers agreed that a 
coordinated exit strategy from expansionary fiscal policy is 
necessary. 
* Withdrawal of public support to the economy will happen, but not 
before the recovery becomes sustainable.  The benchmark will be the 
Commission's next economic growth forecasts, due out on November 3; 
 
* Regardless of the pace of recovery, fiscal consolidation should be 
"started no later than 2011" and should go well beyond the 
"[excessive deficit procedure] benchmark of 0.5% of GDP per annum"; 
 
* Finance ministers said they would discuss a joint exit strategy 
when they meet again on November 10. 
¶12. (SBU) Ministers also agreed to create the European Systemic Risk 
Board (ESRB).  Under the proposal, the ECB has been given the task 
of ensuring the secretariat of the ESRB which will prepare the 
meetings, carry out analysis and fulfill an administrative role. 
However, ministers decided that "further political negotiations" are 
required on the European Supervisory Authorities in the European 
System of Financial Supervisors (ESFS). 
¶13. (SBU) On tax issues, Austria and Luxembourg vetoed approval of 
the anti-fraud agreement between the EU and Liechtenstein that could 
have opened the way for negotiating similar treaties with 
Switzerland, Andorra, Monaco, and San Marino.  Once the EU agrees to 
exchange tax info with these countries, Austria and Luxembourg will 
be required to give up banking secrecy. 
¶14. (SBU) Disagreements on climate financing remained, leaving EU 
Leaders to sort out the issue at the next European Council meeting, 
October 27-29. 
EC proposes 100 million to Armenia and 46 million for Georgia in 
MFA: 
--------------------------------------------- ----- 
¶15. (SBU) On October 16, the Commission proposed to the Council to 
provide macro-financial assistance (MFA) for up to 65 million in 
loans and 35 million in grants to Armenia.  The assistance will 
support Armenia's IMF program and would be provided in two 
installments, tentatively in the first and fourth quarter of 2010. 
 
¶16. (SBU) Separately, the Commission proposed 46 million in MFA 
grants to Georgia, as part of an EU package of up to 500 million to 
support Georgia's economic recovery in the aftermath of the 2008 
conflict with Russia.  The assistance supports Georgia's IMF 
program.  The grant would be provided in two installments, 
tentatively in the Q4 2009 and first half of 2010. 
 
EIB approves further 600 million in loans for the automotive 
industry: 
--------------------------------------------- ---- 
¶17. (SBU) On October 21, the European Investment Bank (EIB) approved 
loans to European-based car makers worth a total of 600 million.  A 
400 million loan will go to Saab for research and development for 
the improvement of fuel efficiency and safety.  Final approval is 
subject to a guarantee from the Swedish state.  A second loan worth 
200 million is for Renault to support a new production facility 
near Tangier, Morocco.  In total, since December 2008 the EIB has 
approved loans to the automotive sector totaling  7.5bn. 
 
September inflation down in both Euro area and EU27: 
--------------------------------------------- ------ 
 
¶18. (SBU) On October 15, Eurostat released official inflation 
figures for September.  Euro area inflation has been confirmed at 
 
BRUSSELS 00001482  004.2 OF 004 
 
 
-0.3% y-o-y, down from -02% y-o-y in August.  EU 27 inflation was 
0.3% y-o-y, down from 0.6% y-o-y in August. 
 
August industrial orders expected to increase, while construction 
suffers 
 
 
¶19. (SBU) According to Eurosotat estimates, industrial new orders in 
the euro area grew in August 2009 by 2.0% m-o-m, but fell 23.1% 
y-o-y.  In the EU27, new orders grew by 1.2% m-o-m, but decreased 
22.3% y-o-y. 
 
¶20. (SBU) In the construction sector, August 2009 production 
decreased by 0.4% m-o-m, and by 11.3% y-o-y.  In the EU27 
construction output also fell by 0.5% m-o-m and by 11.1% y-o-y. 
 
MURRAY