Brussels, 20/08/2007 (Agence Europe) - On Monday 20 august the spokesperson for the Commissioner for economic and monetary affairs stated, “We are closely and attentively following developments on the financial markets since we note turbulence”. She noted that the markets appeared to be returning to normality and said that it was too early to tell what the impact of the storm that had recently shaken up international financial markets would be. She said that this would depend on whether this turbulence continued. The crisis has its origins in the difficulties experienced by US financial establishments specialising in the provision of subprime mortgages, which led to a loss of investor confidence, particularly banks worldwide.
Financial markets in Asia and to a more moderate extent, those in Europe, bounced back after the surprise announcement on Friday 17 August by the Federal American Reserve (FED) reducing its minimum lending rates. This unexpected initiative now poses the question of what attitude the European Central Bank (ECB) will adopt in the short term, after the latter's massive injection of more than €200bn in the Euro zone's monetary circuit in an effort to bolster liquidity on the markets. During the most recent meeting of the Council of Governors at the beginning of August, its president Jean-Claude Trichet said that the European institution would remain very vigilant and therefore prepare the markets for a new rise of ECB interest rates (EUROPE 9482). According to analysts, recent events could, however, change things or indeed set back the date for a new round of monetary tightening.
The European Commission also indicated on Monday that it was in contact with Germany about the latter's measures it intends to take in support of German banks affected by the real estate crisis in the US. Competition services at the European institution will examine whether these measures contain elements of state aid.
Financial notification agencies. The role of financial notification agencies was subject to question in this financial crisis because they had not provided sufficient early warnings to investors about the risks that some US companies active on the at risk mortgage lending market were running. These agencies have a considerable impact on the markets (Standard & Poor's Rating Services, Mood's Investors Service, Fitch Ratings) and note the financial health of quoted companies linked to risks associated with their debts. They are paid by the companies seeking assessment. They are being criticised for waiting till the spring this year before taking the first symptoms of the crisis into account that appeared in 2006 and lowering scores to some companies involved in the at risk mortgage lending sector.
In an open letter to the German Chancellor, Angel Merkel, the acting president of the G7, French president, Nicolas Sarkozy said on Thursday 16 August that it was essential to watch over the transparency of the financial markets and the precise role the notification agencies were playing in the “mapping out of risk” should be scrutinised attentively. He proposed a special meeting of G7 finance ministers before the one planned in October. This proposal was greeted with a offhandedness given that financial market transparency had been tackled at Potsdam (EUROPE 9430 and 9412). Germany has for a long time been struggling to get a voluntary international code of conduct introduced on hedge fund activities.
On the same day, the Commission responded announcing that it would be examining how the notation agencies were functioning on the stakes involving governance, possible conflicts of interest and financing. Rather un-inclined to launch the regulatory machine, Commissioner McCreevy, responsible for the internal market, will meet Eddy Wymeersch, the president of the Committee of European Securities Regulators (CESR). A Commission initiative in this area is not, however, expected to happen before the CESR publication in spring 2008 of a second specific report. At the beginning of 2007, the committee said that the combination of European directives on market abuse (2003//EC), availability of own funds (2004/39/EC) as well as the international code of conduct constituted a sufficient regulatory framework for financial notification agencies (EUROPE 9341). John Monks, Secretary General of the European Confederation of Trade Unions said, “Financial markets today are a crucial part of the real economy, responsible for providing mortgages, pensions and for providing credit for investment in innovation, R+D, and new equipment. But they have become more interested in gambling on shaky deals. How many more risks like the sub-prime mortgages are undervalued? He accused McCreevy of “monumental complacency” with regard to hedge funds. On Monday the Commissioner's spokesperson said that there had not so far not been any change in policy. (mb)