Europe’s Plan To Address Weak Banks Risks Unraveling

Editorial: Europe’s consumer confidence up, U.S. consumers down


We’re losing our swagger as Europe is getting its swagger back. After rising for most of the year, U.S. consumer confidence fell for the second consecutive month in September to a five-month low, according to a widely watched index from the University of Michigan. The Conference Board (a private research firm that produces another oft-cited index) and a recent survey conducted by CNBC found similar results. In the CNBC poll, 61 percent of Americans expressed a downbeat view on the current state of the economy, a 5-point increase from three months ago. Americans are growing more worried that their personal income won’t keep up with inflation, that higher interest rates will make economic growth sag, and that the Washington budget wars will lead to an economy-battering partial shutdown of the government. Yet in Europe, the skies are clearing. Consumer confidence in the United Kingdom rose to the highest level in six years as real-estate prices bounced back and spending ticked up. Why is this happening? In part, because Europe is emerging from darker times. While the U.S. came out of the Great Recession in 2009, much of Europe suffered through a double-dip recession. Economic crises in Greece, Ireland and other countries threatened to be contagious. That sent confidence reeling in the Old World. Talk about role reversal.

Europe shares close down as Italian crisis persists

Unlike in the United States, where rapid infusions of capital put its banks quickly back on track, Europe’s financial system remains frozen, with lenders in countries such as Greece, Spain and Italy hurt by weak demand and soured loans. To break the “doom loop” between indebted European countries and their banks and reassure investors that stressed euro zone lenders would be dealt with on a regional level, a banking union, with the ECB as supervisor, is viewed as crucial. “The U.S. turned the leaf on its banking crisis in 2009,” said Francesco Papadia, former head of the ECB’s financial market operations, who helped guide the central bank’s management of the financial crisis. “Now the euro area has a great opportunity, probably the last one, to achieve this.” But the political will to forge full banking union has waned as the heat of the crisis has passed, and German reluctance to back a central fund that would potentially come to the rescue of any troubled euro zone bank means that the ECB is preparing to take on its role from late next year in a dangerous vacuum. The ECB, both for its own reputation and the future of the bloc, is under pressure to ensure that banks undergo a thorough health check that will force them to recognize hidden losses. But without a pan-euro-zone bailout fund, such tests could highlight problems without a convincing solution, potentially undermining the banking union project before it has fully taken off. “To really solve the asset quality concerns, you need to have a backstop. If you find a gap, you need to be confident you can fix it,” said Ronny Rehn, analyst at Keefe, Bruyette & Woods (KBW) in London. “If you don’t have this, then we might have to lie to ourselves again and say there is no problem because we couldn’t afford to fund the problem.” CONFIDENCE OR COMPROMISE The ECB wants to check the health of big banks, under a so-called Asset Quality Review (AQR), before taking over their supervision. This will also help shape wider testing of banks outside the euro zone, overseen by the European Banking Authority (EBA). In Frankfurt, home of the ECB, there is growing resignation that a pan-euro-zone backstop is unlikely and that countries may be left to prop up their banks alone, as they were when the financial crisis struck. “We’ll have to have national backstops in place,” ECB President Mario Draghi told the European Parliament earlier this week. “If it (single resolution scheme) is not there in place, it will be up to the national authorities … which is suboptimal, of course.” Such a compromise exasperates bankers, who want confidence restored to the sector so their cost of funding drops.

Europe’s oil refiners choke on flood of U.S., Asian imports

diesel output averaged 2.86 million barrels per day (bpd) in September, compared with a peak production of 2.7 million bpd at the end of last year, according to Andrew Reed, analyst at ESAI Energy. Exports from the U.S. Gulf in Q4 2013 are expected to rise by 10 percent from a year earlier to 1 million bpd, he said. Danger for Europe’s refiners is also rising in the east. The earlier-than-expected start of production at the giant 400,000 bpd Jubail refinery in Saudi Arabia, a joint venture with Total, is already remaking global trade flows as demand in the Middle East for refined product from Asia weakens. That means that Asian refiners such as India’s Reliance Industries are keen to ship more diesel and jet fuel to Europe. While diesel flows into Europe grow, European exports of excess gasoline volumes to the U.S. East Coast market, a long-established trade, are rapidly dwindling. U.S. gasoline imports averaged 562,000 bpd in July August, when demand traditionally peaks, the lowest level since 2001, according to U.S. Energy Information Administration (EIA) data. MOST VULNERABLE PLANTS Some 1.8 million barrels per day of European capacity have been mothballed since 2009, according to Deutsche Bank, leaving around 10.7 million bpd of operating capacity in the European Union plus Norway. The plants most vulnerable to closures are the less complex refineries in the Atlantic basin that rely heavily on gasoline exports, Matti Lievonen, Chief Executive of Finland’s Neste Oil refinery said earlier this month. Phillips 66 is seeking buyers for its 71,000 bpd Whitegate refinery in Ireland and U.S. firm Murphy Oil is reported to be trying to sell its Milford Haven plant in Britain.

debt worries. European shares closed down on Friday, as a growing political crisis in Italy weighed on sentiment, combined with continual U.S. debt worries. The pan-European FTSEurofirst 300 Index provisionally closed down 0.3 percent to 1,254.03 points, with the Italian FTSE MIB Index losing 1.3 percent, after the country had to pay the highest yield since June to borrow over 10-years at an auction, reflecting worries that economic reforms may be derailed if the government collapses. Italian prime minister Enrico Letta flew back from a trip to New York on Friday to meet with the country’s president and try to resolve a political crisis that is threatening to tear the government apart. The two will meet to discuss a tense political situation after Silvio Berlusconi’s center-right People of Freedom (PDL) party issued a threat on Wednesday to pull out of the country’s fragile coalition government. (Read More: Italy crisis rages as Berlusconi ‘crunch time’ nears ) Wolf Piccoli, managing director at Teneo Intelligence, told CNBC Friday that the situation is very volatile but did not expect any fresh elections to be called. “(It’s) crunch time for Berlusconi,” he said. “He knows over the next three or four weeks that it is basically the last phase of his political battle.” U.S. stocks were sharply lower Friday, with major averages poised to finish lower for the week, following the latest consumer sentiment report and as mounting concerns of a potential government shutdown weighed on markets. Congress must reach an agreement on the budget before October 1, next Tuesday, to prevent a government shutdown that could result in federal employees taking unpaid temporary leave and a delay in the payment of military personnel. Reuters reported on Wednesday that Senior Republican Jeff Sessions said there will be no shutdown or government default. House speaker John Boehner said a Republican proposal is coming that will tie federal government spending cuts to a U.S. debt limit increase. (Read More: Brawl in US Congressshould the world care?