The Interconnection Between the Eurozone Debt Crisis and Payments Market Harmonisation
by Bob Lyddon, Managing Director, IBOS Banking Association
Major stabilisation efforts behind the euro will certainly be undertaken this autumn, even if the legal powers of the Eurozone governments and central banks to take these measures have been questioned. In parallel, the preparations for payments market harmonisation, in the form of the Single Euro Payments Area (SEPA) continue, apparently unaffected. Indeed, the headline is that the regulation for a SEPA Migration End Date (aka the SMED) is imminent, and that market participants must then migrate to the new harmonised environment. This article challenges the separation of the two issues and tries to pinpoint where the SEPA rubber hits the Eurozone debt crisis road.
The SEPA programme outlined by the European Payments Council addresses a wide range of technical and operational matters i.e., new payment schemes, the usage of International Bank Account Number (IBAN), clearing and settlement infrastructure, governance and data standards.
SEPA is an action to underpin a Single Market, following on as it does from the Lisbon Agenda in 2000 to promote the EU to the leading knowledge-based economic zone on earth by 2010 (the end date on the original SEPA Roadmap). SEPA was also meant to contribute to much increased direct SME-to-SME trading cross-border within the EU. It is absolutely predicated on the existence of a Single Money in this Single Market. An admission either that the Single Market contains different country risks or that the euro is no longer a single currency (because it exists in many guises in what should be its purest form – central bank money) could lead to stakeholder behaviour that frustrates the SEPA programme.
Any form of central bank money should be fully fungible with all other forms of central bank money in the same currency.
Both admissions can be substantiated. It is clear that the Eurozone contains different country risks: the threat of a Greek default and the wide spread of government bond yields demonstrate this. But we also have the proof that the euro is no longer a single currency. Any form of central bank money should be fully fungible with all other forms of central bank money in the same currency, meaning they should be convertible into any other form at face value. There are four forms of central bank money in euro:
1. Notes, which are legal tender and are the obligation of the European Central Bank (ECB) (inspection of a euro note will show you that it carries the ECB acronym in five languages, but interestingly no equivalent of the statement on a GBP note from the Chief Cashier of the Bank of England – “I Promise to Pay the Bearer on Demand…”);
2. Coins, which are legal tender but bear national characteristics relating to the member of the European System of Central Banks (ESCB or Eurosystem) which struck them. Indeed the wording, for example Espana or RF Liberté – Egalité – Fraternité, implies a sovereign obligation of a country;
3. Account balances at a central bank that is a member of the ESCB, which are then the obligation of that central bank;
4. Sovereign debt of a country (the obligation of the central bank’s country).
The backing of the various forms of central bank money in euro is not as clear as, for example, the backing of the dollar by the Federal Reserve:
1. Are notes backed solely by the ECB, or by every member of the ESCB?
2. Are coins backed by the issuing NCB, or by the entire ECB and ESCB?
3. Are account balances at a central bank, as an obligation of the central bank:
i. the same as a sovereign risk obligation of the country of that central bank; or
ii. backed by the entire ECB and ESCB; or
iii. not backed by anyone else?
Further to that it is clearly not the case that the sovereign debt of Greece and other Eurozone countries can be converted into the other forms at face value, if the conversion is attempted in the open market. The only counterparty with whom that conversion can be done is the ESCB, and even then not as a purchase-and-sale, or as a repo, but as a borrowing against the sovereign debt as collateral. The ESCB will not take ownership of the bonds at an off-market price (i.e., face value) but is quite prepared to lend against them at an off-market valuation.