If you think the forthcoming mega-bailout of Italy is nothing to do with us, Mr Cameron, think again…
Mr Cameron seems to think that the United Kingdom, as an EU state outside the Eurozone, would not have to cough up if there were another round of bailouts in the Eurozone periphery. In particular, the financial condition of Italy, the third largest economy in the Eurozone, is currently giving serious cause for concern (see below). Well, I’ve just read a paper sponsored by the Bruges Group, pithily entitled The UK’s liabilities to the financial mechanisms of the European Union. This paper, written by Bob Lyddon who has had a distinguished banking career and who now runs his own consultancy, argues that, so long as we remain an EU member, we could be just as liable for further bailouts as Eurozone members.
The liabilities of the UK to the European Investment Bank (EIB) and the European Central Bank (ECB) are technically on a several-but-not-joint basis. That means that the UK is not contractually obliged to pay the claims of other Member States if they find themselves in financial difficulty. But our contractual liability to the European Union itself is on a joint-and-several basis. This is because we have a partial liability for the entire EU budget which, as well as the cash budget for EU expenditure, includes obligations towards various funds, financial “facilities” and guarantee schemes associated with bailing out failing Eurozone members.
The EU, as we know, runs a budget – but not a budget deficit. Member States are obliged to contribute enough such that the EU runs a surplus. Members’ contributions are met from VAT, customs and sugar levies and a payment based on the member state’s Gross National Income (GNI) as a proportion of total EU GNI. The portion of the EU budget dedicated to those financial facilities (which are called, in the jargon, Multiannual Financial Frameworks or MFF) is currently 1.23 percent of EU GNI. According to Moody’s that works out at €40 billion per annum, or €280 billion over the seven years that the MFF is supposed to last.
Now the internal mechanics of the EU budgetary system dictate that, in the event that a member state is unable to meet its obligations towards the EU budget because they are impecunious, then the contributions of solvent EU states shall be raised accordingly. In theory, if all Member States, except those which still carry a AAA rating (Germany, Denmark, Sweden Netherlands, Luxembourg and the UK), were to go bust then those six countries alone would be liable for the entire EU budget.
Of course that’s not going to happen. But a more likely scenario is that the UK would be called upon to contribute to the Macro Financial Assistance Programme and the European Fund for Strategic Investments (neither of which has any stated ceiling). Lyddon calculates that the maximum theoretical liability for the UK in respect of these various commitments could be, over the next seven years, a cool €441.1 billion.
Then there could be further calls on the subscribed capital of the ECB and the EIB, the balance sheets of which are ballooning, even though we are not beneficiaries of the ECB’s QE programme and British obligations account for only about 8 percent of the EIB’s liabilities. All Member States are obliged to be shareholders in the ECB, whether they are Eurozone members or not. (The Bank of England has a 13.67 percent stake). And apparently, if a call on a guarantee is made by the EIB, the cash required to honour it comes out of the EU budget. In other words, European institutions generate debts which are honoured by Member States.
Bob Lyddon is probably one of a very small band of forensic bankers and accountants who truly understand the hideously intricate spider’s web of financial commitments that the Brussels Euro-crats have woven together since the eruption of the European Sovereign Debt Crisis in 2010.
All this was done far away from the prying eyes of national parliaments. We, the people, are the ultimate mugs who have to pay up if these commitments are triggered, even though all this has been concocted without any input from our elected representatives. Moreover, as Boris pointed out on BBC R4 this morning, we have surrendered the veto with regard to financial arrangements. Reading Bob Lyddon’s fastidiously researched paper makes you think that, if we stay in the EU, we may as well close the Mother of Parliaments down (and Holyrood to boot) altogether and save ourselves the trouble of pretending to be a democracy.
Meanwhile more Euro-trouble looms. Greece is due to make large-scale repayments of debt to the ECB in July but will not be able to do so without the next €4 billion tranche of further assistance. But the real concern right now is Italy. The Italian banking system has been under strain for some time: it is carrying as estimated €360 billion of non-performing loans (NPLs). On 11 April the Banca d’Italia launched a fund with a capital of €5 billion to hoover up some of these bad loans. It’s called the Atlante (Atlas) fund – presumably after the titan of Greek mythology whose job it was to hold the sky aloft so that it did not come crashing down. Italian bank shares initially rallied but last week they slumped on fears that Atlas might stumble. Many Italian banks are now trading at less than half of book value.
Italy has a debt-to-GDP ratio of about 133 percent. The Italian government does not have the resources to bail out the banking sector – it would require EU assistance. True, people have been talking about an Italian default for years and it has not happened – but the numbers just get worse. Bob Lyddon shows that Italy is already the fourth largest beneficiary of the MFF spider web, after Greece, Portugal and Spain.
The increasing strain within the Eurozone and further recourse to these “stabilisation” facilities could ultimately negatively impact the UK’s credit rating.
By the way, if the British people vote IN on 23 June, it is quite probable that Britain’s rebate from the EU – worth some £6.1 billion in 2014 – will be threatened with the axe. They wouldn’t need to keep us sweet anymore. We are already, after Germany, the second largest net contributor to EU coffers with net outgoings to the EU of some £10 billion in 2014. I don’t believe that we would ever get this down to nothing as some more starry-eyed OUT-ers believe: we would still have to pay dues to get access to the Single Market. But this could easily be financed by the partial removal of automatic benefits for all EU migrants.
This is an important contribution to the debate. The OUT brigade have six weeks left now to persuade the British people that OUT is actually the less risky option.