Notes on: EU finance ministers (Task Force) meeting to discuss changes to EU budget rules

a) Despite the multi billions packages to rescue Greece and the Euro zone yields on the European troubled countries continued to raise during the summer (e.g. 9% Greek bonds vs a German one, 3 1/2 Ireland). While the spring panic about a possible short term default has now dissipated the question of long term solvency remains.

This is particularly relevant as European Governments are planning to borrow 80 bn Euro in September vs 43 bn in August.
Agenda highlights:
- Analysis of bad loans to be eventually paid by Governments;
- Force good budgetary behavior through fiscal reform (that already started in countries like Ireland through cost cutting).

On the second point the EU proposal to coordinate member budgets (supported by Italy and other members) and will be discussed tomorrow. This should allow the EU to impose new sanctions.

Austerity or Stimulus ? I think the right answer for Europe has to be moderate austerity - more printing will only decrease confidence in the already troubled Sovereign Debt.

b) A significant development was the last Friday approval of the proposed legislation of new European market supervisors for Banking, Insurance and Securities. While these watch dogs will not directly supervise companies or markets they will set up the certain standards to prevent future crises through the reduction of systemic risk. Credit rating companies will also fall within their supervision.

This will be part of the agenda of the EU Financial Ministers meeting of tomorrow and, if approved by the European Parliament, could be in effect as of January 2011. Regulation of Hedge funds and naked short selling to curb speculative trading will also be part of the meeting discussion. Further levy on banks and a special tax on financial transactions could also gain momentum tomorrow.

The new proposed regulations are very important: as many of the European banks involved in the 2008 crisis were in fact transforming themselves in high risk hedge funds. The role of many banks, like some of the German ones, was *not* to participate in speculations like the U.S. housing bubbles but to play a vital role in developing regional economies through local loans.

c) Given that further regulators and rules will, in a form or another, be created in the Euro zone this will increase the competitiveness of the Swiss Franc and Swiss banks. As the Franc has hits a record against the euro and is close to parity with the dollar it is clear that, given the Swiss strong economy and substantial foreign reserves, the Swiss franc has replaces the old Deutschemark as safe haven currency.

Considering the already substantially losses reported by the Swiss National Bank intervention it would be difficult to support a devaluation of the franc and, unless Europe shines there could be a prolonged depression of the Euro (and other currencies) vs the franc.

In Short:
- Busy agenda for the EU finance ministers meeting of tomorrow that will include analysis of bank bad loans, implementing a EU wise system to coordinate member budgets with the capacity to impose new sanctions. European Budget austerity is a painful but necessary cure.

- The newly proposed idea to establish new European Financial regulators is necessary to avoid future crisis. Much will depend on how the idea is implemented but, essentially, poor regulation of banks caused much of the European banks troubles of 2008. Future systemic risks has to be prevented.

- European banks should increase lending to local companies to support growth and avoid "hedge-funds like" speculative deals.

- Swiss franc to retain haven status - additionally Swiss banks, given the new EU regulations, will enhance their competitiveness and increase inflows based not on tax benefits but stability and security.