Tag Archives: European Union

Eni’s Gas Grid Split May Not Be Enough for the EU

A pressured push to decrease Eni’s stake in continental Europe’s largest regulated gas business has won the support of Italian government leaders and shareholders. However, if the Italian energy giant succeeds in retaining partial ownership of the company, the split could potentially run afoul of European Union rules.

Originally majority shareholders in Snam Rete Gas SpA, the country and continent’s largest regulated gas business, Eni was pushed to reduce their stake in 2009 as a part of a European Union energy liberalization accord. The move was meant to free up Italy’s gas transporting network for greater competition with regional partners.

For proponents of the ownership unbundling, which includes both anti-trust officials and shareholders, the move would benefit Eni by allowing for the deconsolidation of Snam’s 12.2 billion euro in debt, reducing Eni’s debt to 7 billion euro, allowing for increased funding of new exploration and production efforts. For regulators, the move would reduce the chance that Eni could distort natural gas flows into the European market by blocking fuel pipelines from the region’s high priced markets, which it has been accused of doing, according to Bloomberg. Further, the move would allow for the delayed implementation of a law meant to put distance between oil and gas production entities and transportation operators.

For Snam, the split would free the transportation operators to increase investment in European projects, according to the Financial Times.

While the exact details of the government-forced break-up remain uncertain, analysts have predicted that it will require Eni to reduce their stake in the company from 50 to 20 percent, garnering the firm approximately 3.5 billion. Company CEO Paolo Scaroni has signaled that the amount would help Eni increase funding towards projects in Mozambique and the Barrents Sea, according to the Financial Times.

Seemingly cleared from all sides, the deal garnered negative attention last week when the head of Italy’s gas authority remarked that Eni’s 20 percent retention of Snam would violate EU rules on the matter. While reports on the comments did not expand on how exactly they would run afoul of official regulations, given the context of EU pressure towards a reduced Eni role, the warning suggests that more divestment may be needed before moving forward.

Image: Trek Earth

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The Euro Crisis and Why It Should Matter to You, Part III – Contagion

As finance ministers and heads of state from across Europe continue to meet in tense rooms across the continent, all hoping to find some way to bring back Greece from the brink and save the Euro and possibly the community as it exits today, the drama of it all remains quite distant to too many. So what if Greece crumbles and reverts back to the drachma? What does it really matter if the Greek government place more importance on their own electoral future than actually instituting the reforms necessary to guarantee the funds needed to keep the country afloat? Why should I care if the EU sees fit to let one of their own drift away? In a word, contagion.

With an economy that is dwarfed in size with its EU neighbors and a level of individual debt that is unlikely to cause too much worry among its many creditors, Greece could probably collapse without much effect were it to exist in a vacuum. But it doesn’t. For Americans, this would individually mean a likely loss of the $6.2 billion US banks currently have on the books from Greece. Hardly an amount to dismiss but compared with the rest of Europe, its likely manageable. However, should the country be allowed to fail, a few things would likely happen, not least a significant loss of confidence in the stability of the Euro and really the European Union project. If they would allow Greece to fail in the face of the first real stress test of the new economy, who would be next? Would all eyes turn to the next in line? Would that loss of confidence spur sell-offs and quick exits from economies already struggling to put their affairs back in order? Spain is already reeling from daunting unemployment rates (nearly 23 percent) and the dismal news that their economy shrank 0.3 percent in the last quarter of 2011, so what would happen if the country’s remaining strength was sapped as investors far and wide ran for the exits? And Ireland? Or Portugal?

For now, many are looking to Italy for the effects of contagion, not least because Italy’s standing as the world’s 7th largest economy and one of the EU’s most important makes it all the more frightening to imagine it moving into a position where borrowing becomes a crippling handicap. Its already moved into that territory more times than anyone is comfortable, giving the world a glimpse of what a regional slowdown or collapse would look like.

So, what would it mean for those outside of the community? For Americans at least, it would mean the kind of stress on US lending institutions that the country’s slow recovery would not prefer to see. If Greece defaults, it may only mean $6.2 billion but looking down the road, there is Italy with its $34.8 billion, Spain with $49.6 billion, Ireland with $39.8 billion and just for the cherry on top, Portugal with its $3.9 billion. Sure, this is a doomsday scenario but taken together, the effect could be lightening fast and disastrous. Short of creating the kind of fire walls German seems to be having so much difficulty in putting into action, the contagion could be quick and deadly, putting the brakes on any US recovery.

The symptoms are widespread and difficult to address, especially with government officials from Athens to Berlin unwilling to budge in either direction, but ultimately the consequences will be for us all. I’d like to think I can hit on all the relevant points about why this all matters beyond Europe but I would like to point to a far more useful and informative resource; the recent edition of This American Life which sidestepped the pleasant story telling last week and turned the whole hour over the Planet Money team to provide a superb rundown of how it all began and how it could end.

Image: Globedia

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Some Sun Through Europe’s Financial Clouds

Driving along an elevated stretch of the A-7 toll way that runs between Malaga and Algeciras in Spain’s southern Costa del Sol, one does not have to look hard to find evidence of the country’s financial burden. Built up and across the hillsides that rise sharply from the coastline, communities of summer and retirement homes sit empty, waiting for promised buyers who have long since lost their ability to keep up with payments. If complete, many properties lack the basic amenities promised by developers before the wave of bankruptcies left the coast’s real estate market gasping for air under the weight of oversupply and a sharp drop in demand brought on by the country and continent’s broader economic slowdown. Now left empty or occupied far below capacity, these properties have become not only a glaring reminder of the region’s rush to cash in on the explosion of profit and development of the early 2000s, but also a paralyzing force on the country’s banks, now weighed down by toxic assets and real estate prices that show little sign of rebounding in the near future. This latter pressure is made all the worse as Spanish banks’ books have become the focal point for both foreign investors and EU analysts wary of the country’s immediate fiscal stability and ability to withstand the stress of the coming year. According to a recent Wall Street Journal report, these empty properties could number as high as 1.5 million in a marketplace that is near stagnate. Still, combined with the countless other toxic assets crowding the books of La Caixa and Banco Santander could prove to be a boon for some investors.

Desperate to clear their books before stricter EU monitoring rules come into play or the force of anxiety about Southern Europe becomes too much to bare, banks across Europe are moving to unload assets at reduced rates, creating a buyer’s market for US and UK investors. “European financial institutions will unload up to $3 trillion in assets over the next 18 months,” according to a New York Times report released in the final week of 2011, adding that many will be let go at reduced costs either because they are seeking out ways to reduce their balance sheets or are under strict orders to do so by increasingly impatient EU regulators.

In addition to seeking a renewed level of confidence from foreign investors, the book clearing is also part of an effort to meet a “June deadline imposed by the European Banking Authority to raise more than 114 billion euros in fresh capital.” For many, the clock is ticking.

For local banks, the impact of off-loading their assets means more cash on hand and less dead weight to scare off investors and a restructured EU treaty that could mean far greater oversight in the coming months. For investors, the offerings mean a chance to snatch up properties and stakes in European firms at cut-rate prices, as long as there are willing to look past the risk of further fiscal collapse in the region. If recent activity is any indication, many are finding ways to look past the risk.

In November, according to the Times report,

“Wells Fargo bought the $3.3 billion in real estate loans, which are backed by commercial properties in the United States, that had been owned by the former Anglo Irish Bank. Wells has also bought $2.4 billion in loans and other assets from the private Bank of Ireland, which is trying to raise 10 billion euros ($13 billion) after a bailout by the European Union and the International Monetary Fund. Even with opposition from consumer advocates, Capital One Financial could soon win final approval from the Federal Reserve for its $9 billion acquisition of ING Direct in the United States, one of the year’s biggest banking deals. Based in the Netherlands, ING has been forced by European authorities to divest ING Direct, an online bank, after ING required a $14 billion bailout following the 2008 financial crisis.”

While hardly a relief to a general public increasingly at odds with the actions of both their governments and banks, this fire-sale environment could at least provide some breathing room for economies facing a new year of little to no growth and even less confidence.

Image: Spain’s Costa del Sol, Christopher Coats

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Eurobonds – An Inevitable Conclusion?

Aside from the dismal showing of German bonds this morning, the story of the day appears to be the unveiling of EU President José Manuel Barroso’s proposed economic policy suggestions for how to pull the community out of the current downturn. As outlined in the Guardian this afternoon, the proposals amount to:

1. All 17 euro area countries would send their draft budget plans to the Commission by 15 October each year.
2. The Commission be able to request a new draft budget if the original showed serious divergences with commitments made by member states.
3. The Commission carry out closer monitoring of Member States under its ‘Excessive Deficit Procedure.’
4. The Commission would have the right to decide on enhanced surveillance of member states when financial stability is threatened.
5. The European Council could recommend to a Member State that it requests financial assistance.
6. All euro area Member States would be required to set up independent fiscal councils, and prepare budgets based on independent forecasts.

While Barroso’s pitch was weighed down by early resistance out of Berlin, it really seems like all of the points he made were inevitable conclusions of Euro proponents’ plans for community economic integration. Sure, they are coming earlier than expected and forcing more than one head of state’s hand in the matter, but greater transparency and reporting seems like a natural progression of integration plans for the community and really, in line with what I understood leaders like Merkel to be demanding more of out of Athens and Rome. Critics have pointed to a loss of economic sovereignty in the face of greater oversight from fellow member countries, but unless I missed something along the way, doesn’t an EU community of shared policies requires at least a level of lost independence in favor of the health of the larger community?   I understood that to always be part of the plan.

Which leads me to the other big confrontation of recent days – the viability of a Eurobond for member states. Sure, it would mean more short-term benefits for those countries in the most need of assistance and require the most from the countries that have kept things in order. But like the Barroso’s proposals listed above, the bonds seem like a natural evolution or endpoint for the community’s economic integration.

Again – yes, they are coming earlier than expected but if a tool that will eventually be a part of the economic community could help strengthen fellow member states in a time of crisis, why not adopt them earlier than later. Resistance from Merkel and Sarkozy is certainly understandable as it allows a level of acceptance of economic misdeeds, but if eventually, why not now? And if they insist on holding out until a more ideal time, how good do things have to be before they can be considered? Or how bad?

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