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Friday, 16 June 2017

EU Council: Banking: Council agreement on creditor hierarchy, IFRS 9 and large exposures

Banking: Council agreement on creditor hierarchy, IFRS 9 and large exposures

On 16 June 2017, the Council agreed its stance on part of a package of proposals aimed at reducing risk in the banking industry, namely:

-           a draft directive on the ranking of unsecured debt instruments in insolvency proceedings (bank creditor hierarchy);

-           a draft regulation on transitional arrangements to phase in the regulatory capital impact of the IFRS 9 international accounting standard.

The draft regulation also contains a phase-out of provisions on the large exposures treatment of public sector debt denominated in non-domestic EU currencies.

Ministers asked the presidency to start talks with the European Parliament as soon as the Parliament has approved its own negotiating stance.

"These proposals set out to help make our banks more resilient to shocks in the light of new prudential standards agreed at international level. We have decided to make these texts a priority and hope the Parliament will be able to start negotiating by the end of this year", said Edward Scicluna, minister for finance of Malta, which currently holds the Council presidency.

Creditor hierarchy in insolvency proceedings

Directive 2014/59/EU on bank recovery and resolution subordinates uncovered deposits (above €100 000) to covered deposits in the event of insolvency proceedings. It establishes a preference for natural persons and SMEs. It does not provide, however, for subordination for senior unsecured debt securities versus other forms of unsecured debt claims.

Such a specification is now necessary in view of the Financial Stability Board's November 2015 'total loss-absorbing capacity' (TLAC) standard. To be implemented by global systemically important banks in 2019, the TLAC standard requires the holding of subordinated instruments ('subordination requirement').

The draft directive therefore requires member states to create a new class of 'non-preferred' senior debt, eligible to meet the subordination requirement.

It will thereby facilitate the application of EU bail-in rules in cross-border situations and avoid distortions of the EU single market. A number of member states have amended or are in the process of amending their insolvency laws. The absence of harmonised EU rules creates uncertainty for banks and investors alike.

The draft, which mainly amends article 108 of the bank recovery and resolution directive, has been made a priority amongst other banking proposals presented by the Commission in November 2016. The aim is to provide legal certainty for banks and investors.

IFRS 9 and large exposures

The regulation will mitigate the potential negative regulatory capital impact on banks of the introduction of International Financial Reporting Standard (IFRS) 9.

IFRS 9 was published by the International Accounting Standards Board in July 2014. Regulation 2016/2067 requires EU banks to use it in their financial statements for financial years starting on or after 1 January 2018.

IFRS 9 is aimed at improving the loss provisioning of financial instruments by addressing concerns that arose during the financial crisis. It responds to the G20's call for a more forward-looking model for the recognition of expected credit losses on financial assets.

Use of IFRS 9 by banks may however lead to a sudden increase in expected credit loss (ECL) provisions and a consequent sudden fall in their regulatory capital ratios. Transitional arrangements are needed from 1 January 2018, consistent with use of the new accounting standard. It was therefore decided to split and fast-track the entry into force of certain provisions from a broader November 2016 Commission proposal amending regulation 575/2013 on bank capital requirements.

The presidency prepared the resulting draft regulation, which would allow banks to add back to their 'common equity tier 1' capital a portion of the increased ECL provisions as extra capital during a five-year transitional period. That added amount will progressively decrease to zero during the course of the transitional period.

The draft regulation also provides for a three-year phase-out of an exemption from the large exposure limit for banks' exposures to public sector debt denominated in the currency of any other member state.

The exemption is used by banks in several non-eurozone member states for their euro-denominated holdings of those member states' public debt. Unless regulation 575/2013 is amended, the exemption will cease to apply after 31 December 2017. The phase-out is intended to soften the impact of its termination.

*          *          *

Agreement was reached at a meeting of the Economic and Financial Affairs Council.

The Council requires a qualified majority to adopt the two legal texts, in agreement with the Parliament. (Legal basis: articles 53(1) and 114 of the Treaty on the Functioning of the European Union).

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Economic and fiscal policies: Council approves 2017 country-specific recommendations

On 16 June 2017, the Council approved its 2017 draft recommendations and opinions on the member states' economic and fiscal policies.

Approval of the texts is a key stage in the 'European Semester', an annual policy monitoring process. Recommendations coving economic and fiscal as well as employment policies will be referred to the European Council for endorsement at its meeting on 22 and 23 June. The Council is expected to formally adopt them on 11 July 2017.

In March, the European Council endorsed policy priorities for the 2017 European Semester, as identified by the Commission in its annual growth survey:

  • boosting investment;
  • pursuing structural reforms;
  • responsible fiscal policies.

An annual process

The European Semester involves simultaneous monitoring of the member states' economic, employment and fiscal policies during a six-month period every year.

In the light of policy guidance given by the European Council annually in March, the member states present each year in April:

-        National reform programmes for their economic policies. These set out a macroeconomic scenario for the medium term, national targets for implementing the EU's "Europe 2020" strategy for jobs and growth, identification of the main obstacles to growth, and measures for growth-enhancing initiatives in the short term;

-        Stability or convergence programmes for their fiscal policies . Euro area countries present stability programmes, whereas non-euro member states present convergence programmes. The programmes set out medium-term budgetary objectives, the main assumptions about expected economic developments, a description of fiscal and economic policy measures, and an analysis of how changes in assumptions will affect fiscal and debt positions.

The Council then approves draft country-specific recommendations and opinions (CSRs), for endorsement by the European Council. It provides explanations in cases where the recommendations do not comply with those proposed by the Commission.

The 2017 CSRs are addressed to 27 of the EU's 28 member states. To avoid duplication there is no CSR for Greece, as it is subject to enhanced policy surveillance under an economic adjustment programme.

In March 2017, the Council adopted a specific draft recommendation on the economic policies of the euro area. It did so at an earlier stage so that eurozone issues be taken into account when approving the country-specific recommendations.

Next steps

The draft recommendations and opinions were approved at a meeting of the Economic and Financial Affairs Council. They will now be referred to the European Council.

The 2017 European Semester is due to conclude with adoption of the country-specific recommendations on 11 July.

The draft recommendations can be found in the following documents: Austria; Belgium; Bulgaria; Croatia; CyprusCzech Republic; Denmark; Estonia; FinlandFrance; Germany; Hungary; Ireland; Italy; Latvia; Lithuania; Luxembourg; Malta; The Netherlands; Poland; Portugal; Romania; Slovakia; Slovenia; Spain; Sweden; United Kingdom.

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Croatia and Portugal: Deficits below 3% of GDP, procedures closed

On 16 June 2017, the Council closed excessive deficit procedures for Croatia and Portugal, confirming their deficits have dropped below the EU's 3% of GDP reference value.

The Council thereby abrogated its decisions on the existence of excessive deficits in the two countries.

As a consequence, only four of the EU's 28 member states remain subject to excessive deficit procedures, continuing the positive trend since 2011. A peak was reached during a 12-month period in 2010-11 when procedures were open for 24 member states.

Member states are required by article 126 of the Treaty on the Functioning of the European Union to avoid excessive government deficits. The procedure is used to support a return to sound fiscal positions.

Following an exit from the procedure, member states remain subject to the preventive arm of the Stability and Growth Pact, the EU's fiscal rulebook.


Croatia has been subject to an excessive deficit procedure since January 2014, when it was found to be in breach of both deficit and debt criteria. The Council issued a recommendation calling for the deficit to be corrected by 2016.

The Council noted that Croatia planned a general government deficit of 5.5% of GDP for 2014, above the 3% of GDP reference value. It planned a general government gross debt reaching 62% of GDP in 2014, thus exceeding the EU's 60% debt-to-GDP reference value for government debt.

The Council set deficit targets of 4,6 % of GDP for 2014, 3,5 % of GDP for 2015 and 2,7 % of GDP for 2016.

Croatia's general government deficit amounted to 0.8% of GDP in 2016 , down from 3.4% of GDP in 2015. The Commission's 2017 spring economic forecast projects the deficit to rise to 1.1% of GDP in 2017, and to fall back to 0.9% of GDP in 2018. The deficit is thus set to remain below the 3% of GDP reference value over the forecast horizon.

Croatia's gross government debt-to-GDP ratio peaked at 86.7% in 2015 and fell to 84.2% in 2016. The spring forecast projects it to decrease further to 79.4% in 2018, backed by strong nominal GDP growth. In that manner, the 2016 debt ratio fulfils the forward-looking element of the EU's debt reduction benchmark.

The Council concluded that Croatia's deficit has been corrected.


Portugal has been subject to an excessive deficit procedure since December 2009, when the Council issued a recommendation calling for its deficit to be corrected by 2013.

In April 2011 however, after several months of market pressure on its sovereign bonds, Portugal requested assistance from international lenders. It obtained a €78 billion package of loans from the EU, the euro area and the IMF. In October 2012, the Council extended the deadline for correcting the deficit by one year to 2014, given the recession at that time in Portugal.

Economic prospects deteriorated further, and the general government deficit reached 6.4% of GDP in 2012. In June 2013, the Council extended the deadline for correcting the deficit by another year, to 2015.

Portugal exited its economic adjustment programme in June 2014.

However, its general government deficit came out at 4.4% of GDP in 2015 and it thereby missed the deadline set by the Council. Portugal's fiscal effort fell significantly short of what the Council had recommended.

In July 2016, the Council concluded that Portugal's response to its June 2013 recommendation had been insufficient.

A month later, following a reasoned request from Portugal, the Council decided not to impose a fine. It stepped up the excessive deficit procedure, calling for the deficit to be corrected by 2016 and giving notice of measures to be taken. It called on Portugal to reduce its general government deficit to 2.5% of GDP in 2016 and to implement consolidation measures amounting to 0.25% of GDP during the year.

Portugal's general government deficit amounted to 2.0% of GDP in 2016 . The Commission's 2017 spring economic forecast projects deficits of 1.8% of GDP in 2017 and 1.9% of GDP in 2018, thus remaining below the 3% of GDP reference value over the forecast horizon. The potential deficit-increasing impact of bank support measures should not put at risk the durable reduction of the deficit.

Portugal's gross government debt-to-GDP ratio reached 130.4% in 2016. The spring forecast projects it to decrease to 128.5% in 2017 and 126.2% in 2018, due to primary surpluses.

The Council concluded that Portugal's deficit has been corrected.

*         *         *

The decisions were taken at a meeting of the Economic and Financial Affairs Council.

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Eurogroup statement on Greece

The Eurogroup welcomes that agreement has been reached between Greece and the institutions on a policy package of structural measures, which aims at shoring up growth and addressing the underlying structural imbalances in public finances and paves the way for a successful completion of the second review of the ESM programme.

The Eurogroup also welcomes the adoption by the Greek parliament of the agreed prior actions for the second review, notably the ambitious post-programme fiscal package, which is composed of an income tax reform broadening the tax base and a pension reform. Together they deliver net savings of 2% of GDP which will underpin the fiscal targets post-2018. It also contains a contingent expansionary package to enhance the growth potential of the Greek economy and to improve the Greek social safety net that will be implemented provided that the agreed medium-term targets are met. We also welcome the adoption of a package of decisive measures to effectively address non-performing loans (NPL), such as establishing an active secondary market, an Out-of-Court Debt Workout framework, as well as all actions to make the Hellenic Corporation of Assets and Participations (HCAP) fully operational.

Moreover, the policy package includes a large number of structural measures aimed at enhancing the growth potential of the Greek economy. With regard to labour market reforms, the Eurogroup welcomes the adopted legislation safeguarding previous reforms on collective bargaining and bringing collective dismissals in line with best EU practices. The Eurogroup also commends the Greek authorities for adopting legislation to implement OECD recommendations to strengthen competition, to facilitate investment licensing and to further open-up regulated professions. We welcome the commitment by Greece to continue on its reform path.

The Eurogroup also commends Greece and the European Commission for the exceptional mobilisation of EU Funds to boost investment in support of jobs and growth since July 2015, for a total amount of nearly EUR 11 bn. The Eurogroup calls upon the Greek authorities to work closely with the European Commission to ensure that additional EUR 970 million made available following the review of the national cohesion policy funding envelopes for the period from 2017 - 2020 are fully absorbed. Furthermore, we commit to continue to provide high-level experts to support the design and implementation of reforms through technical assistance projects.

In parallel the Eurogroup invites Greece together with the institutions as well as relevant third parties by the end of this year to develop and support a holistic growth enhancing strategy including improvements of the investment climate. Further options for mobilizing additional funds from national development banks and other international financial institutions (such as the EIB and EBRD) should be explored. 

The Eurogroup supports the efforts of the Greek authorities to work with the European institutions on the creation of a National Development Bank that would coordinate the implementation of development and promotional activities. The Eurogroup calls upon Greece, the European Commission and IFIs to work together to strengthen the pipelines of viable investment projects. Efforts should be made to step up the technical assistance from the European Investment Advisory Hub with a view to facilitating the preparation of investable projects and the establishment of investment platforms.

Today the Eurogroup discussed again the sustainability of Greek public debt with the objective that Greece regains market access at sustainable rates. The Eurogroup reconfirmed the commitments and principles contained in the statements of May 2016. We noted that the implementation of the agreed short term debt measures already contributes to a substantial lowering of the gross financing needs (GFN) of Greece over the medium and long term and significantly improves the profile of Greek public debt.

The Eurogroup welcomes the commitment of Greece to maintain a primary surplus of 3.5% of GDP until 2022 and thereafter a fiscal trajectory that is consistent with its commitments under the European fiscal framework, which would be achieved according to the analysis of the European Commission with a primary surplus of equal to or above but close to 2% of GDP in the period from 2023 to 2060.

The Eurogroup concluded that debt sustainability should be attained within the framework of the debt measures envisaged by the Eurogroup in May 2016. In this regard, the Eurogroup recalled the assessment of debt sustainability with reference to the agreed benchmarks for gross financing needs: GFN should remain below 15% of GDP in the medium term and below 20% of GDP thereafter so as to ensure that debt remains on a sustained downward path.

The Eurogroup recalls that it stands ready to implement a second set of debt measures to the extent needed to meet the aforementioned GFN objectives, in line with the Eurogroup statement of 25 May 2016. This includes abolishing the step-up interest rate margin related to the debt buy-back tranche of the 2nd Greek programme, the use of 2014 SMP profits from the ESM segregated account, the restoration of the transfer of the equivalent of ANFA and SMP profits to Greece (as of budget year 2017), liability management operations within the current ESM programme envelope taking due account of the exceptionally high burden of some Member States, and EFSF reprofiling within the maximum Programme Authorised Amount.

The Eurogroup stands ready to implement, without prejudice to the final DSA, extensions of the weighted average maturities (WAM) and a further deferral of EFSF interest and amortization by between 0 and 15 years. As agreed in May 2016, these measures shall not lead to additional costs for other beneficiary Member States.

In order to take into account possible differences between growth assumptions in the DSA and actual growth developments over the post-programme period, the EFSF reprofiling would be recalibrated according to an operational growth-adjustment mechanism to be agreed. This mechanism will be fully specified as part of the medium-term debt relief measures, following the successful implementation of the ESM programme to make sure the GFN benchmarks defined above are respected and to ensure that the ceiling established by the EFSF Programme Authorised Amount is respected. The Eurogroup mandates the EWG to work further on this as of 2018.

At the end of the programme, conditional upon its successful implementation and to the extent necessary, this second set of measures will be implemented. The exact calibration of these measures will be confirmed at the end of the programme by the Eurogroup on the basis of an updated DSA in cooperation with the European institutions, so as to ensure debt sustainability and compliance with the European fiscal policy framework. This DSA, while based on cautious assumptions, will also take into account the impact of growth enhancing reforms and investment initiatives.

For the long term, the Eurogroup recalls the May 2016 agreement that in the case of an unexpectedly more adverse scenario a contingency mechanism on debt could be activated. The activation of this mechanism would be considered subject to a decision by the Eurogroup and could entail measures such as a further EFSF re-profiling and capping and deferral of interest payments.

Acknowledging the staff level agreement reached with Greece on policies, IMF management will shortly recommend to the IMF's Executive Board the approval in principle of Greece's request for a 14-month  Standby Arrangement.  The IMF welcomes the further specification of the debt measures given today by Member States, and agrees that it represents a major step towards Greek debt sustainability. The IMF arrangement will become effective with resources made available in accordance with its terms, provided that the programme stays on track, when IMF staff can assure to the IMF's Executive Board that there is an agreement on debt relief measures, that, appropriately calibrated at the end of the programme, would secure debt sustainability.

In view of the full implementation of all prior actions and subject to the completion of national procedures, the ESM governing bodies are expected to approve the supplemental MoU and the disbursement of the third tranche of the ESM programme amounting to EUR 8.5 bn to cover current financing needs, arrears clearing, and possibly room to start building up a cash buffer.

In view of the ending of the current programme in August 2018, the Eurogroup commits to provide support for Greece's return to the market: the Eurogroup agrees that future disbursements should cater not only for the need to clear arrears but also to further build up cash buffers to support investor's confidence and facilitate market access.

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Indicative programme - Environment Council meeting of 19 June 2017

Place:        European Convention Center Luxembourg (ECCL)
Chair:        Dr Jose A. Herrera, Minister for sustainable development, environment and climate change of Malta 

All times are approximate and subject to change

+/- 08.00

+/- 09.00
Doorstep by Minister Herrera  

+/- 10.00      
Beginning of Council meeting
Adoption of the agenda
Adoption of non-legislative A Items 

+/- 10.10      
Non-ETS sectors (public session)
- Effort sharing
- Land use, land use change and forestry
+/- 12.10      
Latest developments on the Paris Agreement (public session)
+/- 13.10      
Other business
- Project on "Development of Urban Adaptation Plans for cities with more than 100.000 inhabitants in Poland"
- Ratification of the Kigali Amendment to the Montreal Protocol 

+/- 13.20
Working lunch: Preparations for 3rd session of the UN Environment Assembley
(Guest: UNEP Executive Director, Erik Solheim)   

+/- 15.00      
EU Action Plan for nature, people and the economy
+/- 15.30         
Other business
- Waste legislative package (public session)
- Recent international meetings (Triple COPs to Basel, Rotterdam and Stockholm Convention and MOPs to the Espoo Convention)
- International Conference on the Role of Women in Mountain Regions (Alpbach, Tyrol, 18-19 April 2017)
- Outcome of the Ocean Conference (New York, 5-9 June 2017)
- Vienna Declaration: 11th Nano-Authorities Dialogue (Vienna, 29-30 March 2017)
- Work programme of the Estonian presidency 

+/- 16.30       Press conference (live streaming

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