Brussels blog

Cyprus & the troika: off to a rocky start

Peter Spiegel — Fri, 24 May 2013 16:01:19 +0000

It may seem a moot point now that Cyprus’ financial system has, for all intents and purposes, collapsed in the wake of last month’s €10bn eurozone rescue that forced the island to impose capital controls on any large withdrawals from its banks.

But as part of the bailout deal, Nicosia agreed to allow international inspectors to rummage around its banks to investigate allegations of rampant money laundering that were once a major bone of contention in Berlin. The investigation was completed late last month.

Last week, a damning four-page summary of their findings written by the so-called “troika” of bailout lenders was obtained by Brussels Blog and other news organisations (we’re posting it here for the first time, since we only recently able to return to blogging after a hacker attack). The “confidential” troika summary paints a picture of lax enforcement and repeated breakdowns in anti-money laundering procedures.

This afternoon, the Cypriot central bank fired back, issuing its own two-page synopsis of the two reports – one by Deloitte, the other by Moneyval, the Council of Europe’s anti-money laundering monitoring body – which accused the troika of “drawing inferences where none exists in the original reports.” We’ve posted the Cypriot response here.

Will Slovenia be next week’s Brussels target?

Peter Spiegel — Thu, 23 May 2013 15:15:24 +0000

Bratusek: "Slovenia can on its own without any supervision resolve its problems.”

Amid all the talk that Spain, France and the Netherlands will get waivers next week on tough EU budget rules, allowing them to breach yet again Brussels-mandated deficit ceilings, there are growing signals that one country may not get let off: Slovenia.

Although Slovenia has budget deficit problems similar to its western European counterparts, Brussels’ real concern is about its banking sector, which needs another infusion of taxpayer money to return it to health as non-performing loans continue to rise. Questions about the stability of its three largest banks, all state owned, has put a target on the small former Yugoslav republic as potentially the next eurozone country to need a bailout.

As a result, Slovenia’s demarche from EU economics chief Olli Rehn on Wednesday is likely to come from a place outside the eurozone’s budget deficit rules: new post-crisis enforcement powers Rehn has never used before, the awkwardly named “excessive imbalance procedure”. This authority allows the European Commission to poke around more deeply into a eurozone country’s entire economy – not just government fiscal policy – and demand reforms under threat of swingeing fines.

Alenka Bratusek, Slovenia’s recently-minted prime minister, isn’t too pleased with the prospect of being the first eurozone country to be subject to the EIP. In a meeting with a small group of reporters after Wednesday’s EU summit, Bratusek said officials in Brussels seem to think an EIP citation would help her. She says it won’t.

A note to our readers

Peter Spiegel — Thu, 23 May 2013 08:53:23 +0000

Late last week, blogs and Twitter accounts belonging to the Financial Times became the latest news outlets to be attacked by hackers claiming to be part of the so-called Syrian Electronic Army, a band loyal to the regime of Syrian president Bashar al-Assad. Since then, the FT has been forced to lock down both this blog and its associated Twitter account, @FTBrussels.

As editors in London get on top of the problem, we are gradually reopening our blogs and official Twitter accounts. So while the hiatus here at the Brussels Blog is finally coming to an end, security restrictions remain, meaning our blogging may be less frequent for a few more days. But please have patience – we should be back at full strength shortly.

Apple pushes tax evasion on to EU summit agenda

John Aglionby — Wed, 22 May 2013 13:40:42 +0000

Tax evasion was put on to the EU summit’s agenda two months ago but the US Senate probe of Apple’s tax dealings in Ireland has pushed corporate tax avoidance to the forefront of leaders’ attention. Peter Spiegel and James Fontanella-Khan report from the summit meeting in Brussels.

Dalli and the bribery scandal that won’t go away

Peter Spiegel — Tue, 30 Apr 2013 16:09:55 +0000

Former EU health commissioner John Dalli addresses reporters after his October resignation

It may not be as sexy as then-EU industry commissioner Günter Verheugen getting photographed on a nude beach with his female chief of staff. Or as consequential as research commissioner Édith Cresson getting caught putting her dentist on the EU payroll, which led to the entire Santer Commission stepping down. But the bribery scandal leading to the forced resignation of health commissioner John Dalli in October seems unwilling to go away.

The latest wrinkle in the affair – in which a close friend of Dalli’s has been accused of soliciting a €60m bribe on Dalli’s behalf – was sparked by Malta Today, the island’s weekly newspaper, which obtained the confidential report on the Dalli investigation conducted by Olaf, the EU’s anti-fraud office, and posted it on its website.

Although the report, which Commission officials confirm is authentic, says Olaf found “no conclusive evidence” of Dalli’s direct participation “as instigator or as mastermind” of the bribery scheme, it is full of ill-timed phone calls and secret meetings between Dalli and Silvio Zammit, his friend and accused bribe solicitor – enough, Olaf found, to conclude he may have violated the code of conduct for European commissioners:

[T]here are a number of unambiguous and converging circumstantial pieces of evidence gathered in the course of the investigation indicating that Commissioner John Dalli was indeed aware of the machinations of Mr Silvio Zammit and the fact that he was using his name and position to gain financial advantages.

Reexamining the Cypriot bailout numbers. Again.

Peter Spiegel — Thu, 25 Apr 2013 16:52:51 +0000

Cypriot European Parliament member Takis Hadjigeorgiou protests during the bailout debate

Connoisseurs of the Brussels Blog, Cyprus and various forms of edible fruit will remember a tempest in a teapot that erupted last week over leaked documents we posted which appeared to show the total cost of the Cypriot bailout growing from €17bn to €23bn after the chaos following rejection of the first €10bn programme.

The dispute centred on whether the €17bn figure, used to determine the amount of new money Cyprus needed to pay for government operations and shoring up its teetering banking sector on the night the first bailout was agreed, was comparable to the €23n figure, which was included in documents produced after the second deal was signed.

Famously, Olli Rehn, the EU’s economic chief, said comparing the two numbers was akin to “comparing apples with pears and coming up with oranges”. But he didn’t detail what the reason for the discrepancy was. We took another look at the documents and figured that, if you compare apples to apples, the new figure was probably €20.6bn, for a €3.6bn difference.

Well, thanks to a senior European Commission official who walked us through the numbers – and the Dutch finance ministry, which recently posted updated programme documents on their website here, here and here – it turns out we were close. It’s actually €20.2bn. How do they get there? A quick rundown:

Syria: Fabius-Hague letter on lifting arms embargo

Peter Spiegel — Sun, 21 Apr 2013 14:29:40 +0000

France's Laurent Fabius, left, and Britain's William Hague co-authored the letter to Cathy Ashton.

[UPDATE] During Monday’s appearance with Kerry, which includes a town hall meeting with European Commission staff, Barroso is expected to announce a new “comprehensive package” of EU humanitarian aid for Syrian refugees, according to officials briefed on the initiative.

This weekend’s announcement by John Kerry, the US secretary of state, that Washington is prepared to double the amount of non-lethal aid it is sending to the mainstream opposition in Syria kicks off what is expected to be a busy week in Brussels on the issue.

Kerry is due in the Belgian capital for this week’s Nato foreign ministers’ meeting, where Syria will be debated, and officials familiar with Kerry’s schedule said there was even a discussion of his attending the EU foreign ministers’ meeting in Luxembourg on Monday. That has since been ruled out – though Kerry will meet with José Manuel Barroso, the European Commission president, on Monday ahead of the Nato ministerial.

Still, the Monday EU foreign ministers’ meeting will be the latest venue in the ongoing Franco-British effort to lift the EU’s arms embargo on the Syrian opposition. EU diplomats said they do not believe a definitive decision will be made at the meeting, but it comes just weeks before the entire sanctions regime is set to expire at the end of next month, so the deliberations are likely to become even more spirited.

For those looking to read up on the topic ahead of the Monday meeting, Brussels Blog has got its hands on the joint letter Laurent Fabius, the French foreign minister, and his British counterpart William Hague sent to Catherine Ashton, the EU foreign policy chief, last month arguing for a change in policy – we’ve posted it here, in both French and English.

Olli Rehn, Cyprus and fruit: reexamining the costs

Peter Spiegel — Wed, 17 Apr 2013 18:09:19 +0000

Rehn: critics of Cyprus bailout are "comparing apples with pears and coming up with oranges."

During a debate in the European Parliament this morning, Olli Rehn, the European Commission’s economic chief, got roughed up by MEPs lambasting the handling of the €10bn Cypriot bailout by the so-called “troika” of international lenders, of which the Commission is a member.

Jean-Paul Gauzés, the French conservative who led the debate for centre-right parties, called it “disastrous”; his centre-left counterpart, Austrian Hannes Swoboda, dubbed it “neo-colonial” and called on Rehn to disband the troika altogether.

In his response, Rehn chose instead to focus on remarks by Philippe Lamberts, a Belgian Green, who questioned why the size of Cyprus’ funding needs had risen by €6bn over the nine days between the first botched bailout agreement and the second, final deal struck the following weekend:

A month before this famous weekend, €17bn was necessary in order to render Cypriot debt sustainable. Now we found at last week it’s €23bn. Just a slight mistake, a comma here or there. Those who carry out the forecasts and estimates for you, are they incompetent…or was it: well, we’ll play around with the figures to make sure reality looks better than it really is?

Reinhart-Rogoff recrunch the numbers

Financial Times — Wed, 17 Apr 2013 09:28:48 +0000

Carmen Reinhart and Ken Rogoff have had a bad day. The two economic historians’ research, which implied that public debt overhangs can hamper economic growth, was perhaps one of the most cited pieces of work in recent years. Their advice that high debt-GDP ratios – particularly above 90 per cent – are harmful to growth, has become a widely used point in discussion. And it’s under attack by a trio at the University of Massachusetts, Amherst – Thomas Herndon, Michael Ash, and Robert Pollin.

As FT Alphaville has noted, the issue is about one of Reinhart and Rogoff’s most heavily cited papers on the importance of debt. This paper has been accused of being the victim of fat-fingered Excel coding, as well as selective use of data and odd weighting of how different episodes are weighted, which seemed – to the authors – to make little sense.

Robin Harding posted Reinhart and Rogoff’s original reply here. Overnight, the authors have worked through the numbers – and have put up a pretty robust defence of their work. They do admit the first error – there was an Excel blunder:

…Herndon, Ash and Pollin accurately point out the coding error that omits several countries from the averages in figure 2. Full stop. HAP are on point. The authors show our accidental omission has a fairly marginal effect on the 0-90% buckets in figure 2. However, it leads to a notable change in the average growth rate for the over 90% debt group.

They are, however, resisting the second issue – the selective use of data.

HAP go on to note some other missing debt data points, which they describe as “selective omissions”. This charge, which permeates through their paper, is one we object to in the strongest terms. The “gaps” are explained by the fact there were still gaps in our public data debt set at the time of this paper.

The Google EU settlement: Full details

Alex Barker — Sat, 13 Apr 2013 09:40:44 +0000

Google’s three year tussle with Brussels over its search business is almost over. Our report today outlines the substance of its pre-charge settlement with the European Commission. Once formally adopted, it will allow Google to avoid a fine, any admission of guilt and a lengthy legal battle. But the price is accepting legally binding restrictions on how it can present its search results. Google has never yielded ground to a regulator on its prized core business before.

Given the space confines, we didn’t lay out all the details of the pact in the news piece. Some of it, as will become clear, is highly technical and not ideal weekend reading. For specialists we thought it would be useful to run through the full settlement taking each of the Commissions four concerns in turn:

THE SEARCH BUSINESS:

The concern: The Commission investigators provisionally concluded that Google was potentially diverting traffic to its own specialist, or vertical search services — like Google’s finance, news, shopping and weather sites — potentially to the detriment of consumers. Brussels alleged it 1) did not to inform users clearly when it was favouring its own in-houses services and 2) did not give proper visibility to rival search engines that may provide more relevant results.

The solution: As a principle Google promises to ensure its own in-house services are clearly labelled and demarcated from the general search results. Users should be “clearly aware” they are Google in-house services, not natural search results.