Moody's warns of 'high costs' of eurozone integration
by Daniel Mason
Decisions by European Union leaders at last week's summit in Brussels demonstrated their willingness to take the action needed to avoid the breakup of the eurozone, Moody's Investors' Service said in a report published today. But it warned that the closer integration in the eurozone envisioned by EU leaders could carry a high cost.
At the summit, eurozone leaders agreed to allow the new bail-out fund, the European Stability Mechanism, to directly recapitalise struggling banks. At the moment the funds are directed via governments and add to their debts. So Spain's bank bail-out of up to €100bn will initially be channelled through the government but later taken off the balance sheet when the rescue fund and a single banking supervisory authority are in place.
Leaders said the change would be made as soon as a banking supervisor was created within the European Central Bank, possibly by the end of the year – although yesterday ECB president Mario Draghi said it was more important to get the set-up right rather than do it quickly. He was speaking after the ECB cut interest rates to a new record low of 0.75 per cent in response to weakening economic indicators in the euro area.
Moody's said the measures would "reduce near-term risks of deposit runs or credit market shutdowns". It added that policy-makers showed they were "inclined to take the necessary steps to avoid the severe and profoundly credit-negative downside scenario of a gradual unravelling of the euro through additional defaults and/or exit".
The Brussels gathering came as Cyprus became the fifth euro area country – after Greece, Ireland, Portugal and Spain – to request emergency funding. European Council President Herman Van Rompuy presented a report to EU leaders sketching out possible ways towards a more closely integrated fiscal and monetary union to restore market confidence in the currency. But Moody's warned: "The path of gradual policy developments towards closer fiscal integration carries a high cost, as those euro area countries that are effectively supporting others will continue to face an increase in their contingent liabilities – which will in turn weaken their creditworthiness."
The credit rating agency also cautioned that with EU leaders still reacting to events rather than getting ahead of the markets, the "normalisation of sovereign debt markets could take a number of years, with the risk of policy accidents and rising sovereign defaults the longer the crisis persists.
Earlier this week, fellow rating agency Standard & Poor's published its response to the summit, saying that the agreements reached could "begin to stabilise the eurozone and staunch any further weakening of creditworthiness". But like Moody's it said there remained "significant" risks and said it was "unclear" whether policy-makers would be able to implement and build on the measures. Meanwhile bond markets continued to exert pressure on struggling eurozone sovereigns today – with the yield on Spanish 10-year government bonds rising to 6.9 per cent and their Italian equivalent pushing above 6 per cent.
The eurozone never had more than a sporting chance
If there had not been a global economic crisis all might have been well, in time. But the national markets within the single market showed their different degrees of resilience to the shocks which hit them – and the eurozone became an incipient transfer union – writes our secret columnist