Sovereign debt Bond Worries High on Ecofin Agenda

In today's climate of financial uncertainty, European banks have been accumulating more and more government bonds issued by their native countries. But now E.U. leaders are warning that this presents huge risks, and have placed the issue at the center of a ministerial summit this weekend.
Will Jeroen Dijsselbloem prove to be Europe's financial saviour?

From the standpoint of the banking industry, there are many advantages to government bonds, the debt securities issued by a government to support public spending.

The securities are considered negotiable at all times and are relatively low risk. As a rule, banks have been permitted to buy and hold government bonds in any amounts, and they are not even required to set aside capital on their balance sheets in return. This has made it disproportionately easy for governments to go into debt, said Jeroen Dijsselbloem, the current chairman of Ecofin, the group of E.U. finance and economics ministers.

Mr. Dijsselbloem, who is also both Dutch finance minister and head of the Eurogroup of euro-zone finance ministers, doesn’t like the fact that some banks are accumulating more and more bonds, preferably those issued by their native countries. The banks should reflect "the relative risk of the government bonds" more realistically on their balance sheets and avoid "concentration on the bonds of one country," Mr. Dijsselbloem said at the end of last year. The debt crisis, he noted, had made it clear to everyone that a rapid decline in the prices of government bonds seriously affects both the countries in question and banks.

Mr. Dijsselbloem has now placed the sensitive issue on the agenda of this weekend’s informal Ecofin meeting. In Amsterdam on Friday, the ministers will discuss the issue of whether European lawmakers should limit the sovereign debt holdings of banks. The discussion will be based on a six-page document prepared by the Netherlands, which currently holds the rotating presidency of the European Council, the E.U.’s overarching institution.

Under no circumstances should the finance ministers continue to put off the problem. Markus Ferber, European MP, CSU Party

Handelsblatt has obtained a copy of the document, in which Mr. Dijsselbloem presents several options for debate. One is to introduce "low-risk weighting" for government bonds, which would lead to the corresponding capital requirements for these securities. Another is to set mandatory upper limits for the bonds of individual countries in the banks' portfolios. A third option is to combine the first two. "Price-based threshold values for high commitments are a possibility," the document said.

The Ecofin chairman has taken on a tricky subject. Capital requirements or threshold values could lead to banks buying fewer government bonds or selling them in larger amounts. This is of particular concern for Southern European countries, which want to retain the status quo. The finance ministers of Spain, Italy and Portugal will probably push for that at the next meeting.

In contrast, Germany's finance minister, Wolfgang Schäuble, a member of the center-right Christian Democratic Union party, tends to agree with his Dutch counterpart. Mr. Schäuble has often proposed that banks deposit equity to cover government bonds, and his ideas have garnered support from his own political ranks in the European Parliament.

"The Greek crisis showed that sovereign debt is by no means risk-free," said European parliament member Markus Ferber. "Under no circumstances should the finance ministers continue to put off the problem," said Mr. Ferber, a politician with the CDU's Bavarian sister party, the Christian Social Union.

From the German and Dutch perspective, this is especially true since the European Commission, the E.U.’s executive branch, presented its draft bill on the E.U. deposit insurance, a scheme that guarantees part of savers’ bank deposits in the event their bank fails.

The remaining risks on balance sheets must first be set aside before they can be combined in a common E.U. deposit-insurance fund, thereby saddling all euro countries with the risk, said Mr. Dijsselbloem. He was probably thinking of the large amount of sovereign debt in the portfolios of Italian and French banks.

But the governments in Rome and Paris have a completely different problem that they want to discuss at the meeting. They are complaining that the E.U. bank liquidation fund, which ensures the safe winding up of failed banks, cannot access a joint credit line from all euro countries in an emergency. That option must be created "as quickly as possible" to strengthen the financial "credibility of the E.U. liquidation fund," according to a joint paper prepared by France and Italy for the Ecofin meeting.


Ruth Berschens heads Handelsblatt's Brussels office, leading coverage of European policy. To contact the author: [email protected]