Financial Reform Watch

EU Finance Ministers Agree on Framework for Government Assistance to Banks

EU leaders will meet later this week for their bi-annual meeting signalling the end of the French EU Presidency.The meeting will allow the Prime Ministers and Heads of State to take stock of progress in fighting the financial crisis and to prepare for the G-20 meeting to be held in London on April 2, 2009.

In preparation for the EU summit, Member State finance ministers met this week and agreed on a common framework for providing government assistance to banks. While each state will design its own package of assistance, there are EU rules that could stand in the way of certain forms of aid. Relaxing these rules is an important goal for the finance ministers. At the same time, it is important to many of the ministers to ensure government assistance doesn’t penalize healthier banks.

In order to strike the right balance, the EU finance ministers in the Council of Ministers agreed on a common framework at the EU level for the pricing of guarantees to banks, defining minimal benchmarks, and also urged the Commission to issue guidance for precautionary early recapitalisation in order to sustain credit. The guidance should clarify the principles and conditions governing the different types of recapitalisations and also the difference between distressed and non-distressed banks.

On a related transatlantic issue, questions are being raised in Europe and the U.S. about the impact of the financial crisis on trade policy. British Prime Minister Gordon Brown sounded a concern over potential protectionist sentiment on 9 December when he said, "If we were to allow the opinion to develop that protectionism could be the result of this particular financial crisis, then it would do damage all round the world and do damage for many years to come." He went on to urge that the modalities for reaching agreement on the Doha round of world trade talks be agreed to in the trade meetings slated for next week.

In the U.S., the Bush Administration’s delegation to the trade talks is preparing to travel to the meeting over the coming weekend. However, there is a lingering concern that the meeting may be put off if it appears the support is not there in advance for an outcome the U.S. would view as favorable.

President-elect Barack Obama, meanwhile, appears to be ready to appoint California Congressman Xavier Becerra to be U.S. Trade Representative. Becerra reflects the trend in the Democratic party towards "fair trade" policy. He was an initial supporter of the North American Free Trade Agreement (NAFTA), who later recanted that support. Becerra voted against the Central America Free Trade Act (CAFTA) but in favor of the Peru trade agreement and supports lifting the trade embargo with Cuba.

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