Draghi is preparing the markets for a delay in the eurozone banking union. Two weeks ago, I covered the whole saga here:
Not only will be the banking union be delayed at least one year, but it will be watered down. Rather than supervising the 6,200 or so banks in the eurozone, the ECB will supervise each country’s national banking regulator.
This means that nothing is changing. Currently, the Spanish national bank is claiming that Spain’s banks only need €60bn to recapitalize themselves when a tanking economy and property market indicate many more bad loans than they admit.
National banking regulators are responsible to their governments. During the eurocrisis, we have learned that politicians will lie about their fiscal and economic numbers to protect their jobs. Check out Greece and Spain’s budget deficit “projections” plotted against reality:
The Germans’ ostensible protest to a banking union is that it is a conflict of interest for the ECB to both set monetary policy and supervise banks. The real reasons that Germany is delaying this action by raising this objection are really related to its own interests.
Germany has elections coming up next fall. A banking union is potentially expensive as it will now be on the hook for all of the dodgy banks in the periphery. Spain needs to bailout its whole banking system and it wants the cost of this bailout to be on Spain’s books.
Germany banks are also not in the best of health. They have loads of assets from the periphery including sovereign bonds and private loans. The last thing it wants is an independent regulator examining the books of its sparkasses and landesbanks.
As per the German eurocrisis pattern, it will make meaningless pledges to maintain the status quo, but it will not approve a banking union or open its wallet until after elections, if at all.