Porto/Brussels, 17/09/2007 (Agence Europe) - At their meeting in Porto, Portugal, on Friday 14 September, EU finance ministers and governors of the EU central banks issued a joint statement on the situation in Europe against the backdrop of the current turmoil on the world's money markets. They aimed to reassure investors about the EU economy's capacity remaining on track for growth whilst the financial markets are facing a rocky ride amid increased risks and huge volatility. They also discussed the preliminary lessons to be drawn from the current situation - the EU regulatory framework for financial services is solid but improvements can be made to transparency and the way the markets operate. They have not yet decided whether to take a regulatory approach or whether to leave the rules unchanged and let the markets correct themselves. At this stage, the ministers and governors are simply requesting that the Council of the EU's Economic and Financial Committee (EFC) explore options for further improving the transparency of complex financial instruments and the role of financial ratings agencies. The first part of their study may be submitted to the October ECOFIN Council.
Echoing the joint statement, the Portuguese finance minister and current acting head of the ECOFIN Council, Fernando Teixeira dos Santos, said that a period of volatility and re-evaluation of risks was being experienced on the financial markets arising from problems faced in the sub-prime mortgage market in the United States. He said that growth in the EU remained strong and the macroeconomic fundamentals were strong. He welcomed the European Central Bank's prompt action at the start of the turbulence in August, adding that the EU had a regulatory framework which functioned appropriately and which would be reinforced with implementation of Directive 2006/49/EC on sufficient own resources and the forthcoming Solvability II Directive on insurance. Teixeira dos Santos welcomed the positive impact of financial innovation on market efficiency, but also recognised that the development of ever more complicated financial products was a challenge facing national regulatory and supervisory authorities. He explained that the EFC had been instructed to study how to improve transparency of such products, along with risk management and the role of financial ratings agencies. He hoped preliminary results would be available in October.
Is there a consensus about measures to be taken? According to the Portuguese finance minister, if the EFC decides that measures have to be taken, this will have to be done. EU Single Market Commissioner Charlie McCreevy was more cautious, saying that one couldn't really talk about consensus. On whether to establish an EU market control authority, McCreevy said it wouldn't happen in his time. Stressing the efforts made over the past ten years to boost supervisory cooperation, the Commission mentioned the controversial proposal outlined in the Solvability II Directive to introduce a chief controller (see EUROPE 9465).
During the debate, Germany and France repeated their joint appeal for EU action to increase transparency on the financial markets and for a decision to be made at the March 2008 European Council (see EUROPE 9498). Germany's Finance Minister Peer Steinbruck said that they had been right to put transparency on the agenda and to focus on hedge funds at the G7 summit in Essen (see EUROPE 9359). He added that he would have appreciated greater support, particularly from the United States and even the Commission. UK Chancellor of the Exchequer Alistair Darling said that regulation had its own limits and responsibility should rest at the end of the day with banks themselves. This view was shared by Charlie McCreevy on the fringes of the Porto meeting. He said central banks could not simply bail out bad financial institutions involved in risky policies. Such action, he said, would only serve to make the situation worse in the long run because it would encourage people who give free rein to bad behaviour. The day before, the Bank of England stepped in to support Northern Rock, a UK bank and mortgage company, leading to a slump in its value on the stock exchange and panic among small savers.
Is the worst still to come or have we weathered the storm? Teixeira dos Santos said it was difficult to say because nobody knew how long it would take for the market to correct itself. Charlie McCreevy said it was impossible to say when the current credit crunch would end.
The worst case scenario puts the losses due to the market turmoil at around €1200 billion or less than 10% of total banking assets at global level, explained the president of the Dutch central bank, Nout Wellink, in Porto, adding that it could also be 50% or 25% of the total - nobody knew. Wellink said there was enough money in the coffers because financial institutions had accumulated massive sums in recent years on the world's markets due to very low interest rates. Jean-Claude Trichet used the term 'correction' rather than 'financial crisis', saying it was too early to draw any definitive conclusions.
All the ministers and European commissioners present in Porto were at pains to stress the pro-active approach of the European Central Bank since the start of the turbulence, injecting mountains of cash into the money markets to facilitate liquidity and deciding to leave the main euro interest rates unchanged at the start of the month (see EUROPE 9483 and 9496). Their opinion was in stark contrast to the comments the day before by French President Nicolas Sarkozy, who is quoted in Le Monde as saying that the ECB had a strange attitude - injecting liquidity without cutting interest rates and thereby creating facilities for speculators, but complicating matters for entrepreneurs. On Saturday 15 September, Jean-Claude Trichet, President of the ECB, defended himself saying that the ECB's action had been wise, speedy and carried out with sang-froid. He said that the ECB's price stability policy protected financial players who behave correctly and also protected European citizens' purchasing powers. EU Economic and Monetary Affairs Commissioner Joaquin Almunia backed Trichet's line, saying that the important thing was the quality of initiatives rather than the quantity. Italian Finance Minister Padoa Schioppa said that what people didn't see were the crises which had been averted due to the ECB's monetary policy.
Financial ratings agencies. Mario Draghi, the governor of Italy's central bank, said that there were not yet any concrete proposals regarding ratings agencies. These agencies are accused of delays in re-assessing the credit ratings of some US sub-prime mortgage companies despite the problems the latter were known to have with clients who were unable to pay their mortgages. Draghi said the ratings agencies were at the heart of the development of non-banking credit because the mushrooming of the market would not have been possible without them. Recognising the potential conflicts of interest that could be faced by the agencies, he said that the idea of a public evaluation of the evaluators would be a good idea. Padoa Schioppa unreservedly backed this idea. At a meeting with the president of the Committee of European Securities Regulators (CESR) earlier in the week, Charlie McCreevy asked the CESR to extend its analysis of the work of credit ratings agencies.