“Although it is improbable that we get a final solution to the euro area crisis,” BNP Paribas said in a financial note today, “there should be tangible advances in banking and fiscal union efforts.”

Experts forecast that free furniture plansrong>the European Central Bank may be given more supervision powers, what would set the groundwork for a euro bank deposit guarantee fund. The European Investment Bank could also update the volume of its capital resources.

“But we do not believe public debt mutualisation, nor Eurobonds will have the chance to be discussed, as Germany's opposition seems as strong as ever.”

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You recently said in an interview that world central banks could take a joint action to provide liquidity to the market. How do you think this should be done? This should be carried out in a sound manner, to show unity and strength against the markets’ blackmail. But this also must be an effective declaration of intent. However, I don’t think any of this can be done before September, or before the Greek issue is completely solved, for good or for bad.

Some analysts are surprised because the European Central Bank hasn’t activated the sovereign debt purchase plan, especially after yields of the 10-year Spanish bond exceeded 7%. What do you think about this? Bond yields of the countries that have been rescued (like Ireland and Portugal) cannot be compared to Spain's, because the magnitude and the current scenario are different. I think we are dealing with the script of a very different novel.

In your opinion, what will be the framework and the conditions for the Span

ish bailout? Implicitly, there will be a further loss of sovereignty in economic policy matters, and there will also be more punitive measures for taxpayers (they are the ones paying the price). On the other hand, social welfare will be cut down, and there will be an increased tax burden. Ultimately, we will see a continuation of the tendency initiated two years ago. We have to take into account that creditors are not Missioners of Charity.

Will Italy be next in asking for a bailout to re-float its banking system? I’m scared of thinking about that, actually… But, maybe that is precisely what is needed to make Germany change its position. Perhaps, if Italy asks for a bailout, Germany will accept the Eurobonds and we will be heading towards a more federalist European Union.

There is a lot of talk about combination of austerity and fiscal control (even president Obama has supported these ideas). Nonetheless, we cannot see a clear definition of how this should be done. Which would be the most reasonable way have a go at it? With a more federalist Europe, following the North American system. There were cases of previous “bailouts”: California or Florida are good examples. Another option is a bigger global competitiveness, although this is a difficult possibility in the short term. Regarding those people that support growth, they are right. But it should be done in a responsible manner and with repercussion on the real economy, always avoiding a new bubble.

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The Commission's report was published late 2011 as a Green Paper, a document intended to arouse discussion prior to any legislative proposal. In it, the Commission pointed out three possible ways of issuing “Stability Bonds” in terms of guarantees, moral hazard and legal construction.

1) The most complete method requires the joint guarantee of all member countries on the combined issuance of bonds that would displace national auctions. Moral hazard would be greatest, because, practically fully insured, and enjoying low funding costs, some countries could afford to experiment with bold expansionary policies. The mere possibility of irresponsible behavior would require to establish this action within a strict budget discipline.

To formally adopt this type of bond would go against EU's Fundational Treaty, article 125. Although at this point the improvisations of European politics reflect scant regard for the Treaty, a project of this nature should be directed correctly and submit to lengthy procedure regular review (at 02/05/48 EUT). The document outlines the delicate political compromise that may be necessary for countries to accept foreign interference in the sovereign process of making and approval of budgets. It doesn't exaggerate when, describing this innovation as “dramatic”.

2) Another method develops a proposal made earlier this year by the Brueghel Centre for European Studies, introducing two kinds of bonds, the so-called “blue”, which would benefit from joint liability, and the “red” ones, of entirely national risk. The joint guarantee would cover, for example, debt up to 60% of GDP. Moral hazard (budgetary indiscipline stimulus) would be smaller, the smaller the proportion of “blue bonds”. However market pressure would be bigger. This proposal would also require amendments to the Treaty. Less ambitious than the first, it would leave credit risk assessment of national issuance to the markets and therefore, the assessment of fiscal policy. Brueghel's proposal suggested including a certain discriminatory treatment against “red bonds” issuing.

3) The third possibility is simply a partial substitution of national issuance by jointly guaranteed bonds. Their credit rating would be at most the average credit ratings of all guarantors. It is difficult to anticipate how important it will be for the bonds issuing country that differential between its own risk premium and the average that market will assign to those bonds. Moral hazard is very limited because fiscal policies would not have that perfect safety net provided by guarantors, therefore it would be difficult to establish the fiscal discipline's strict framework required by the first two option

s mentioned above. Although an amendment of the Treaty would not be necessary, this possibility is a weak one and would contribute little to end with the crisis.

4) A Bini-Smaghi proposed that the Commission relegated would probably be more efficient. It would enlarge the third option mentioned offering all national issuance a joint guarantee, creating a single issuing agency for the euro zone and imposing that opinions and suggestions of the Council on each country's “stability programme” become mandatory. This proposal seems to balance lower emission costs' advantage and a discipline mechanism related to the annual debate on programs. It is unfortunate that the Commission has not explored this path, apparently practicable. Perhaps it could be readdressed by the simplified revision procedure (a 48 to 6.7 EUT).

5) Besides, in Germany's Council of Economic Experts mandatory Annual Report 2011/12, a temporary solution is outlined. Member countries should return to the starting point marked in the Treaty, eliminating over five years any excess of debt over 60%. Each country would transfer the excess to a Debt Redemption Fund, which would issue bonds with joint guarantee of the member countries, and use the proceeds for the transferred debt.

Countries would agree to a specific program of repayment of the new debt over a period of 20-25 years, which would be secured by part of their reserves plus the  irrevocable involvement of any tax figure. The strict fiscal discipline concept means that each member country would enter a debt brake clause in their constitution that reinforces the commitment of that 60% and that can be verified by an independent European institution (by the way, one wonders why the report recommends it to be the Court of Justice instead of the European Commission). If the Council of Experts reasons correctly, its model would inevitably pass Karlsruhe's constitutionality test.

It is interesting to note that Spain's current debt excess would reduce its transfers to the Fund well below Italy, Germany, France or Belgium. The threat to this model would come from the markets. After their recent behavior, it won't be easy for them to easily accept a five-year-delay to verify the Fund's performance.

Any of these models necessarily requires two things: a quick start and strenght against volatile market behaviour. The EC's third proposal is the only one that could start within a short period, but simply joint guarantee tool could hardly be the basis for introducing rigorous economic policy commitments. All other proposals need a longer time to get going. All of them require hard negotiations between countries on the set of guarantees and the budgetary discipline framework. One way or another they all require modifications to the Treaty which, almost certainly, cannot be introduced under the simplified procedure. All of them (perhaps excluding the Redemption Fund) depend on the German's Constitutional Court decision.

Time is, in itself, an unfavourable factor. Markets only react to the immediate. In short, really effective proposals need time, which the most scarce variable in a crisis, while its discrete objectives drag rapid implementation proposal's efficiency.

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Yet, Italian and Spanish banks are not alone. On Friday June 8, just before learning about the Spanish operation, it became public that the French-Belgian Dexia rescue (according to those infamous stress test, this was the healthiest entity) will need a further €10-billion injection to add to the €40 billion initially budgeted. While it is true that the French banks haven't suffered a single default, the French banking industry's quote is little more than 0.20 in book value on the Eurostoxx50.

In Germany, there have been outstanding failures, and a strong injection of public capital to try to redress their balances. But let's be reminded that a year ago, Michael Barnier warned that the Spanish savings banks were in a situation comparable to their German counterparts. True enough, Germany is growing and Greece, Portugal, Ireland, Spain and Italy de

finitely are not. France isn't either. Thus, Germany attracts all the capital of the euro zone. Growth cleans balances, recession makes them rot. But investors have not completely forgotten that Spain submitted 95% of its financial system to the stress tests, while other large euro zone countries only offered half  of theirs with some last-minute withdrawal to avoid the shame of failing, like the German Helaba.

How does all this look? It looks, it smells and it tastes like a general bankruptcy. It is. Still in 2007, the prices of all the world's assets were determined by a constant flow of seemingly infinite credit: US or Spanish homes, businesses, for which it was paid 12, 13 and even more times the ebitda. When the credit markets collapsed, those valuations vanished in thin air. Who can buy a house without credit? What about acquiring a company? These assets were, still are, the collateral of all this huge mountain of credits accumulated by banks, in which now even apparently risk-free assets like sovereign bonds need provisioning. President Barack Obama rightly said that austerity alone can not be the only way out of our current global financial and economic demise. We need liquidity and credit for ratings to rebound and make assets safer. Otherwise, any capital cushion will be insufficient and will feed a downward spiral for a long, long time.

Obama is right: European banks need recapitalisation and Europe needs growth. Until now, although German Chancellor Angela Merkel seems to be improving her listening, Berlin has been committed to push its own agenda, which would entail further banking, fiscal and political integration before the 'socialisation of interest rates' or, more commonly known, Eurobonds. Fortunately, both recipes are perfectly complementary so, logically, there should be no major problems… All right, all right, wishful thinking.

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MADRID | An Spanish offensive seems to have been deployed in all fronts. Spain's King Juan Carlos in Brazil called on the European Union to advance its integration because the problem, he said, rather than economic, is political. Meanwhile, president Mariano Rajoy introduced in a Senate session what the Spanish position will be in the next European summit: Europe needs a horizon, make clear that the euro is not in question and help countries in trouble. In his opinion, it is necessary to go towards a greater fiscal and banking integration, under a European supervisor, with a pan-European fund of bank deposit guaranteed. And Eurobonds.

The deputy president Soraya Saenz de Santamaria also referred to the budgetary adjustment:

“Spain is now leading the reform effort in the European Union as a whole, and everybody is beginning to recognise that effort.”

Against the 'an State soon to be bailed out' stigma, some Spanish bankers came today to the fore to criticise the way Spain's entities are now the focus of tensions. Amado Franco, president of Ibercaja, which is one of the big sized Spanish savings banks in a merger process, explained to the listeners of the SER radio station that

“the Spanish financial institutions, after the lates

I Want To Get Back With Him

t two reforms, leaving aside the intervened institutions, undoubtedly, are much healthier than the German financial system, the French or the Italian, this is quite clear. What happens is that we are in a maelstrom of vanishing trust.”

In his view, the problem comes from not having separated the good from the bad banks before the financial reforms.

Most Spanish bankers remarked that Spain has taken 95% of its financial system through the stress tests, while Germany, Italy and France have tested theirs only up to a 50%, with flagrant cases, like the withdrawal from the probe of Germany's Helaba, which was believed it would surely fail the stress test.

Agency Moody's Investors Service added today pressure on Berlin, where the government maintain the fiercest opposition to proposals recently made in Madrid but that are shared with the new French president, too, as the use Eurobonds. Moody's took various negative rating actions on some German banks and their subsidiaries. As a result, the long-term debt and deposit ratings for six groups and one German subsidiary of a foreign group have declined by one notch. Moody's also downgraded the long-term debt and deposit ratings for several subsidiaries, by up to three notches.

According to the agency, its rating actions were driven by the increased risk of further shocks emanating from the euro area debt crisis, in combination with the banks' limited loss-absorption capacity.

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