Sovereign-debt debate divides EU as Schaeuble pushes for limits

Bloomberg

European Union finance ministers split over whether to impose restrictions on banks’ holdings of government bonds, as German Finance Minister Wolfgang Schaeuble found scant support from skeptical colleagues for his push to overhaul existing rules.
The Netherlands, which holds the EU’s rotating presidency, laid out five options for tackling the risks posed by banks’ state-debt pile for the bloc’s 28 finance ministers to discuss in Amsterdam. Schaeuble backed the Dutch initiative, while others, led by the Italian, Pier Carlo Padoan, warned that changes could destabilize the financial system and said the issue was too big for Europe to crack on its own.
“It’s no surprise that enthusiasm for the Dutch proposals varied in degree,” Schaeuble told reporters. “It’s also no surprise that we strongly backed the Dutch proposals.”
The EU faces a tough political battle over changes to the regulatory treatment of government bonds. The issue has become a focus of political debate in recent months because of Germany’s insistence that the euro area should reduce the risks banks are facing, including government debt on their balance sheets, before creating a common deposit insurance system to round out the so-called banking union.

Concentration Limits
The two main options on the table for dealing with sovereign bonds would be to impose limits on the concentration of debt that banks can hold, or to limit the current practice of treating many sovereign bonds as risk-free for regulatory reporting.
Schaeuble said sovereign-debt risk is closely linked with the banking-union plan to tighten financial ties in the euro area. He reiterated Germany’s insistence that EU countries need to finish implementing rules already on the books and make progress in de-risking banks’ balance books before talks can begin on any pooling of risk.
“The most preferable option is the status quo,” Padoan said, because this wouldn’t force banks to reshuffle their debt holdings, “creating the problem of where this debt will end up. This would provoke a readjustment shock in the market.”
Like Padoan, French Finance Minister Michel Sapin said the sovereign-debt conundrum is a global issue best dealt with by the Basel Committee on Banking Supervision. That preference was also stated on Friday by Jonathan Hill, the EU’s financial-services
commissioner.