The Banking & Fiscal Union under the SEM
By: Vidia Ramdeen, MPA
Article 39 & 94 of the TEC is to ensure the free rights of individuals conducting business from one sovereign to the next, and lays the groundwork for a pan European Union, essentially creating the foundation to enable discussion to further policy for development of a borderless society for contiguous & noncontiguous sovereigns. The social barriers eluding to language and culture are inherently unavoidable given the diversity of population density per capita throughout the EU sovereigns. However, over time, the social integration between the eurozone nations with & between the broader EU will take shape as a free society facilitated by a borderless system of decentralized governance per sovereign under a broader EU framework that monitors the integrated fiscal & banking union.
The precedent for the fiscal & banking union lays with Article 39 of the TEC laying reference to the free movement of goods, services, & all forms of capital within & between all member states, as well as TEC Article 94, which allows for the approximation of scope of authority governing regulation and by provisional dictum, which may be legally expressed & enforceable as a sunset law within the member states as to best facilitate the Single European Market (SEM). Articles 81-89 (NB: 81, 82, 87) provide the preliminary rules for intermarket (inter-sovereign) operations around intermarket competition. A banking authority such as a supervisor & a Sovereign Banking/Fiscal Committee (Board) to monitor for systemic risk is each established under Article 114 & Article 127(6) of the TFEU. The Alternative Investment Fund Manager (construction of a nearly risk-free eurobond) is established by Article 53(1) of the TFEU. To gain support of the eurobond, such oversight ostensibly is a requirement of the Bank of England.
Fiscal Management of Intermarket Transactions
Accountability & compliance with promulgations and due diligence checks of subsequent management activities as a function of regulation may be rendered through the use of integrated mobile devices (facilitated by apps). As more transactions are rendered in the mobile based economy, the regulation of trade & business operations between member states may be better managed by electronic approval of underlying inter-sovereign transaction within the common market framework. The implication is that an entrepreneur in Greece or Spain may migrate within any sovereign member and earn euros as easily as as if within their native sovereign. An individual can commence earning revenue w/in the intermarket (between sovereigns) by simply playing music on a sidewalk w/out worries of being overregulated. Alternatively, a business owner can expand cross border and know if their products are infringing on outstanding IP or if the expansion will monopolize the entry market relative to effecting the underlying trade between member states. The mobile based economy may easily facilitate income in-kind transfers from the sovereign to the constituent and the enable the flow of euros via the increase in velocity of economic activity back into the market economy through the use of income in-kind.
To faciliate the mobile economy (basic growth), the suggestion is to integrate the mobile telecom network (consumer based economy, private cloud) with the current eurozone central banking eurosystem (financier) & TARGET settlement system (fiscal & banking network, each operating w/in a private cloud which then disseminates information into the public cloud, as necessary) into the public & private cloud services within the I.T. & I.M fiscal & banking framework. Essentially, each customer and business account opened at a banking institution will inherently operate as a private cloud account. Business reporting and oversight via regulation of intermarket products can be facilitated using apps that enable data integration with the broader network of information management that links the sovereigns with other sovereigns (when necessary) and each sovereign to the Common Banking Committee (central banking system & subnational banking system) & to the supranational Common Budget Committee, which also liaisons to the broader European Commission.
The system of I.T & I.M will be a three-pronged approach integrating the digitalization of data from the mobile telecommunications network with the eurosystem & with the sovereign intranet and data repository of the respective sovereign, which also is integrated yet interdependently connected to the intranet of each sovereign w/in the EU for purposes of full fiscal & banking integration with the ECB & to the Common Budget Committee & Common Banking Committee. The fiscal union is really a unification of the tax base to which the common EU may integrate the combined revenue from taxes as a function of the aggregate budgetary outlay of the EU. The banking union allows for the financing of fiscal (sovereign) economic activity w/out the need for the sovereign to sell bonds privately or publicly.
Integration of the Sovereign Fiscal & Banking Union to Facilitate the Eurobond
Although the ECB will primarly oversee the banking union; reiterating from a previous post…
The fiscal controls available through Information Management can enable the TARP, necessary to insure all bank deposits as legislation proposed by the European Commission & ratified by the European Parliament, which will provide the necessary legal compliance to provide authority to the ECB to recapitalize banks (w/out the need to transfer currency reserve deposits) and to insure interbank loans, deposits-in-transit, & on savings & checking accounts (€250,000 maximum for each (savings account ostensibly receiving primary consideration over the checking account or €500,000 combined w/the savings account ostensibly receiving primary consideration). As insured banking funds may move from sovereign bank to sovereign bank, the movement of the underlying amount of funds or deposit-in-transfer is able to be monitored from the beginning bank account to the final bank account and ensured along w/the maximum allowable amount for insurable deposit of funds in the primary of beginning bank account.
The Integration of the Single European Market to the Fiscal & Banking Union
The EU Parliament may also legislate to allow for extended use of financial instruments including covered bond private placement transferable bonds (registered bonds, bond power) to enable risk hedging and debt transfers, as needed, at the supranational & suprasovereign level(s). Germany, France, & Italy may back a trilateral baking agreement to form the Common Budget Committee signed by each sovereign, which is the decentralized link from each sovereign to the supranationals via the liaison (Common Budget Committee). The fiscal document is the political & economic expression of the decentralized sovereigns therefore the fiscal mechanism tacitly enables other socioeconomic & sociopolitical mechanisms to be expressed by each sovereign, legislated (if & when deemed as necessary), and put forth by the Common Sovereign Budget Committee to the banking syndicate (if & when deemed as necessary). The Common Sovereign Budget Committee may also liaison directly with the supranationals (if & when deemed as necessary).
Therefore, the sovereign central banking system (recapitalization, BASAL III requirements) effectively acts as the fulcrum point between the ECB & the underlying sovereign subnational banks. Therefore, the necessary nexus to facilitate the fiscal & banking union between the sovereign & the bank is the respective sovereign central banking system (intermarket transaction between the ‘home’ sovereign & the sovereign where the transaction takes place). For example, the consumer & the business involved in an intermarket transaction outside of the home & domiciled country will likely incur a sales tax placed by the sovereign where the transaction takes place, to which the home sovereign will tax the aggregate income of the consumer & business. The fiscal side of the transaction involves the tax borne onto the consumer & merchant.
The current eurozone banking system is a two-tiered decentralized system involving financing operations via the eurosystem & bank settlements via the TARGET settlement system. The expansion of this system should encompass the sovereign banks at the national & subnational level. The ECB will interface with the ESM, which under the guidance of the EC, the ESM will monitor the fiscal demand of each underlying sovereign and eliminate the need for currency reserve deposits on interbank loans from the ECB to the sovereign central bank(s) to the subnational sovereign bank(s) & to the government of the sovereign (via issuance of private plaement bonds, which are then transferred from the sovereign fiscal balance sheet to the sovereign banking balance sheet, which though the integrated banking system, is approved by the Common Sovereign Fiscal & Banking Committee(s), respectively to then be tranched & packaged into registered collateralized eurobonds).
The Pooling of Debt & Creation of the Eurobond
Expansion of the eurosystem & TARGET settlement system to facilitate the ability of the ECB to extend interbank financing directly to the distressed subnational banks will prevent the unequal distribution of central bank loan-to-deposit ratio’s and financing capital as a function of the level of distress underlying the sovereign banking system. Additionally, the expansion of the system will enable sovereign banks to establish loans from the ECB rather relying on loans between sovereign central banks & effectively remove the need for LTRO bond financing. The fiscal liabilities underlying sovereign debt are transferred to the ECB along with the liabilities transferred from the sovereigns through the ESM which are then collectively pooled into a eurofund, which is a sinking fund, to be tranched & collateralized as registered bonds to then undergo packaging into tiered eurobonds. As such, the bond should be the final solution to a debt to equity problem (function of discounted cash flow financing) rather than a temporary solution within a broader debt to equity problem.
The free movement of all forms of capital between all member states is the operative dictum expressed by Article 39. The relative importance of Article 39 is to enable the full integration of the multi-sovereign fiscal & banking union under the regulatory oversight of the European Commission (EC) and financing from the ECB, which is supported via the ostensible banking trust of Northern Europe.
After expanding the eurosystem and TARGET settlement system to intergrate the sovereign & central banking fiscal & banking union, to satisfy the bundesbank & bundestag whom indirectly act for & represent the German constituency, the ECB can initially take the loss on the marked down debt from the sovereigns & the banks by financing 50% of the underlying public sovereign debt (Debt/GDP; which normally would require, in some way/shape/form, transferring the necessary amount in €’s to the banks). To accomplish this level of integration, the requisite is for each sovereign central bank to become digitally integrated to the respective sovereign government, which in turn, are to be individually connected digitally to the ESM as the funding mechanism indirectly linking the sovereigns to the ECB and subsequently to the bundesbank. The goal is to enable digital SSID based programmatic integration across the entire SEM framework via information technology to transfer banking & fiscal data (generally related to fiscal/banking debt & recapitalization needs, tax on transactions & earned income) from the central banks & sovereigns to the ECB under the auspice of Information Management, which enables tranching of the secured & unsecured underlying sovereign & banking debt into collateralized registered bonds, then rate the registered bonds and package the registered bonds into euro bonds w/in a tiered rating system.
The ECB can tranche the debt based on the underlying maturities of the issues. The interest owed on the bonds represent the cashflow promised by the sovereign upon issuance. The ECB effecively owns the rights to the interest bearing issues which have maturities with principal risk inversely related to the interest rate. The cash flow for short-term debt (0-5 yrs) maturity is roughly 4/5 of the cash flow from a longer-term (6-10 yrs) maturity. The sovereign default risk is higher on debt w/short-term maturities hence the premium rate of interest paid. The senior debt may be tranched together by similar maturities as tier 1 eurobonds, with subordinate debt with short-term maturities as tier 2 eurobonds, etc. The underlying risk is a function of the time to maturity and yield to maturity. Perpetuity or 50yr eurobonds virtually eliminate the underlying time to maturity risk as the collateralized nature of the eurbond, backed by precious metals, etc, drastically reduce the interest rate risk as a function of yield to maturity.
Reiterating from an earlier post…
An example: Spanish banks seek (for arguments sake) €147B. The FROB (surpassing the government & negating the doubling of the underlying bailout) may directly recapitalize the banks through financing received from the ECB via the integrated banking system. Within the Unified Fiscal & Banking framework, the toxic debt held by the sovereign national banks may be transferred through the sovereign central bank onto the ECB balance sheet with the ECB transferring the equivalent in euros to the FROB for recapitalization to the Spanish banks. The toxic debt, in this instance, effectively is the collateral the ECB had been requesting under the LTRO program. The exception, the Unified Sovereign Fiscal & Banking Union keeps the process internal rather involving external entities or requiring any external operations. The integrated system enables the entire process through to the packaging of the eurobond which is then issued for external purchase.
To reiterate and with further detail, the covered bond private placements may be transferred throughout the unified banking system in exchange for the toxic debt amount as a function of the corresponding principal amount in euros. The remnants of the toxic debt is essentially removed from the balance sheet of the sovereigns & of the banks and onto the balance sheet of the banking syndicate, which has the underlying assets held in precious metals & currency to which the derivative debt instruments are the covered bond private placement issues. The covered bond private placement issues are purchased by the ECB, which then is able to package & sell the covered bonds as eurobonds, which are effectively collateralized bonds, as collateralized by the underlying physical assets held on the balance sheet of each banking syndicate. The ECB and aligning central banks may continue to perform various banking operations pertaining to monetary policy such as asset purchasing of financial instruments that may seek to hedge against underlying risk to the German taxpayer. The ECB may elect to operate though the open market operations along w/the Bank of England to perform open market monetary policy asset purchasing operations and additional hedging against financial risk to the underlying sovereigns.
The issuing & financing of the eurobonds is by the German sovereign & the ECB, which will receive transfer covered bond private placement bond purchases from the underlying sovereign in return the equivalent in euro’s. The German sovereign will likely issue the eurobonds at public auction, made available to the G20 and all bidders in the global community The ECB will be responsible for financing interest payments on the eurobonds.
For all debt subsequently financed either by the ECB or the ESM, each arm of refinancing must be ratified by the Common Banking Committee, which (by vote) may be granted legislative power of attorney by the European Parliament under the auspice of the European Council. The underlying funding arm of the ESM is distributed based on expressed language and semantics governed under the auspice of Article 136 of the TFEU. The underlying risk exposure of ESM is primarily to Germany, France, & Italy to which EMU members are concerned about taking ESM bailout funds due to the level of autonomy sacrificed. The ESM however, is able to purchase debt sovereign debt thereby releasing its store of euros and thus enabling the process of stabilizing the sovereigns by purchasing & refinancing the senior & subordinate debt (to include sovereign debt & bank loans), which is mark-to-market of the secured & non-secured debt. The ECB will mitigate the underlying interest rate & principal risk exposure borne onto the ESM by repurchasing the debt held by the ESM. Once the EFSF is operational, funds from the EFSF may be disseminated via the same protocol and mechanism as the EFSF can purchase secured debt issued by the banking syndicate. As the EFSF is really a bailout funding arm of the EU that is is financed by Finland, the ECB will mitigate the underlying interest rate & principal risk exposure to Finland through repurchasing of the EFSF debt held via decentralization.
The idea is to decentralize the risk exposure from any single sovereign with underlying exposure to the ECB/IMF, ESM and/or EFSF. The idea is to also use the aforementioned liquidity vehicles to purchase marked down government & banking debt while continuing to decentralize the risk exposure to the underlying sovereigns by issuing eurobonds or ‘Deutsche land bonds’, which will enable the reissue of restructured debt from the sovereign level to be made at the supranational level and to be reissued to global economies as 50 yr or perpetuity issues at relatively low interest rates. The bonds are backed by underlying assets as well as taxes from banks (earnings received from recapitalization) and from governments via bond issues (interest paid via tax receipts). In the end, debt to GDP should be reduced as a strategic growth plan for the sovereigns is facilitated by the sovereigns to expand the economy and increase private earnings, wage growth, growth in tax receipts, and GDP growth. The integrated fiscal & banking system will be able to track taxable transactions & receipt amounts via the internal fiscal & banking (managerial accounting & monetary economic) controls afforded w/in the system of Information Management.