Why Europe reckons it is immune to SVB contagion

Good morning. News to start: the EU should be able to police overseas investment decisions to prevent companies from providing critical technologies to countries such as China, the bloc’s trade commissioner has told the Financial Times.

Today, our Brussels bureau chief parses confident statements that the US banking chaos won’t spread to Europe, and I explain why calls for a new Russia sanctions package face stiff resistance.

Not our problem

Eurozone policymakers were at pains to drum home one clear message last night: the EU’s banks are very different beasts from US regional banks that are currently at the centre of a crash in investor confidence.

The question, writes Sam Fleming, is whether the markets agree.

Paschal Donohoe, the eurogroup president, repeatedly stressed that the situation in Europe was “very, very different” from that in the US. 

Banks in the region have no direct exposure to failed Californian lender Silicon Valley Bank, he said, insisting euro-area lenders enjoy abundant liquidity levels and are meticulously supervised according to Basel standards.

“The problems arise from the specific business model of the Silicon Valley Bank, and the picture here in Europe is very different,” he said. “Our banks are overall in good shape.”

The confident assessment that there is no reason for transatlantic contagion from the failure of SVB and the closure of Signature Bank was also shared behind closed doors.

But it remains to be seen if investors draw the same conclusions. Some European lenders’ share prices saw double-digit declines yesterday, including Spain’s Banco Sabadell and Commerzbank of Germany, as the Stoxx banking index lost 7 per cent. It was the worst day for European banking stocks in more than a year.

The meltdown has underscored the risks in the financial system as central banks rapidly lift borrowing costs to tame inflation. Banks that face big losses on portfolios of government bonds due to higher rates or those with a hefty share of uninsured deposits (like SVB) will come under scrutiny.

Even if the eurogroup’s confidence proves well placed, that hardly means there are no policy consequences from the events. The obvious one will be seen on Thursday, when the European Central Bank next sets rates.

While analysts expect president Christine Lagarde to go ahead with a previously planned half-point rate rise, the central bank may be more non-committal on its policy intentions thereafter, given the financial stability risks clouding the outlook.

The events in California may feel very distant, but chaos in the US financial system rarely remains a local matter.

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Elusive eleventh

Eighteen days after agreeing the EU’s last sanctions package against Russia, a handful of eastern states are banging the drum for the next salvo. But the chances they will get their way are slim.

Context: since Russia’s full-scale invasion of Ukraine in February last year the EU has passed 10 packages of sanctions, targeting individuals, companies and entire sectors of the economy. They have also included bans on trading certain products, and price caps on exports such as crude oil.

A group of countries including Poland will use a meeting of ambassadors tomorrow to reiterate demands for measures targeting Russia’s nuclear energy and diamond industries and for a review of the level of the price cap on Russian oil exports.

The issue is that the first has already been vetoed by states whose nuclear plants rely on Russian supplies, action on the second has been outsourced to the G7 group of countries, and the US has made clear it thinks the third is unnecessary.

“None of the suggestions are new, we’ve heard them all before,” said an EU diplomat. “They’re welcome to raise them again but nobody is seriously considering another package.”

Those against new sanctions say that increasing the effectiveness of existing measures and closing loopholes are more important.

Furthermore, adding more sanctions against individuals (as we explained yesterday) and embargoes on specific products that Russia could repurpose for military use can be done ad hoc, officials say, and don’t need to be packaged.

That attitude is grating on sanctions proponents, who are also fighting against efforts to add exemptions and derogations to existing measures that they see as watering down their impact.

And for countries that are neither pushing for more sanctions nor in principle against them, the huge diplomatic effort required to get the 10th package over the line last month (a few hours before a midnight deadline and after weeks of haggling) has lessened the appetite.

“That was supposed to be an ‘easy’ package,” said one official involved in those tortuous negotiations. “And we all know how it turned out.”

What to watch today

1. EU finance ministers meet in Brussels.

2. Lithuanian president Gitanas Nausėda speaks at the European parliament in Strasbourg, from 10am.

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