Markets across Europe fell on reports that Angela Merkel is struggling to secure the Bundestag majority needed on Thursday to approve the expansion of the European €440bn (£383bn) bail-out fund. The German Chancellor also cast doubt on the terms of the second Greek bail-out - confusing traders who were focused on whether an €8bn tranche of rescue money from the first package would be delivered before Greece runs out of money. A delegation of officials from the European Union, the International Monetary Fund and the European Central Bank are due in Athens on Thursday. Amid angry strikes, the "troika" will resume the audit of Greece's finances - and decide whether to release the €8bn of funds from the May 2010 agreement. Athens has warned it will run out of money next month unless it receives the money. Ms Merkel told reporters that the result of the audit could also impact the terms of the second package agreed on July 21 this year. She said: "So we must now wait for what the troika finds out and what it tells us: do we have to renegotiate or do we not have to renegotiate?" There were reports that private bondholders may be asked to take a bigger hit. Ms Merkel said: "Of course we would prefer that the figures remain unchanged, but I cannot foretell [the troika's report]."• Plan to enlarge the European Financial Stability Mechanism is approved by the Finnish Parliament
• Europe "faces the biggest challenge in its history"
• Divisions in the eurozone over the terms of Greece's second bailout package hit bank shares
• Europe "faces the biggest challenge in its history"
• Divisions in the eurozone over the terms of Greece's second bailout package hit bank shares
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The Bank’s new Financial Policy Committee (FPC) has recommended lenders strengthen their finances by “ensuring that discretionary distributions reflected any reduction in profits”. “Discretionary distributions” is Bank shorthand for bonuses and dividends.
Although the FPC – the Bank’s financial stability watchdog – did not mention any numbers, the Bank has suggested in previous Financial Stability Reports that lenders could raise £10bn a year simply by “constraining compensation ratios while limiting dividend payouts”. That £10bn of capital, it claimed, could be used to support roughly £50bn of new lending to households and businesses. Last year, the banks paid £6.7bn in City bonuses – 8pc less than in 2009.
The Bank is acutely aware that lenders are torn between regulatory pressure to boost capital and political pressure to boost the economy by lending more. In the FPC’s inaugural meeting in June, when markets were open and earnings strong, it urged banks to do both. However, in the past couple of months, markets have slammed shut on fears of a second recession – raising the prospect of banks withdrawing credit to strengthen their balance sheets.
As a result, the FPC has dropped its demand for banks to rebuild their buffers – saying instead that “it would be natural for banks’ capital and liquidity ratios to be run down to ensure that lending to the non-financial economy was not impaired”.
Releasing banks from their most onerous regulatory requirements should improve lending and help sustain the recovery. The FPC said: “The committee advised the Financial Services Authority to encourage banks to manage their balance sheets in such a way that would not exacerbate market or economic fragility.
José Manuel Barroso said the European transaction tax should be introduced in the wake of the financial crisis.
Mr Barroso’s move comes amid growing tension within the Coalition over Britain’s relationship with Europe.
Nick Clegg will today warn that Britain should not seek to distance itself from the EU.
Mr Barroso said Europe was “facing the greatest challenge in the history of our union”.
“If we do not go for further integration, we risk fragmentation,” Mr Barroso told the European Parliament. “We need to complete our monetary union with an economic union.” However, George Osborne, the Chancellor, has said that Britain will veto the tax plan, which was proposed by the French and German governments, amid fears over the damage it will cause the City.
The Bundestag looks certain to approve enhanced powers for the eurozone's bailout fund on Thursday, but Angela Merkel's credibility is at stake. Will she get a convincing majority within her own coalition of Christian Democrats and Liberals - or will she scrape through with the votes of the main opposition parties, the Social Democrats and Greens?
A view inside the Bundestag, where German MPs are starting to debate the proposed changes to the EFSF. Photograph: Herbert Knosowski/AP While most of Merkel's own CDU party are toeing the party line, Horst Seehofer, the leader of its sister faction, the Bavarian CSU, is making life difficult for her. He recently disagreed with her contention that Europe would fail if the euro failed. "I don't see the connection," he stated bluntly.
As far as the CDU goes, its chief whip, Peter Altmeier, is confident. "As a chief whip, I have to be optimistic, but so far we have managed to win every single struggle in parliament, every single vote and that is going to happen again this Thursday," he told the BBC on Wednesday
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