European Court of Justice’s ruling, likely to go against the EC - BBH

Research Team at BBH, thinks that the European Court of Justice is to hand down its ruling on July 19 on a case brought in 2013 by Slovenia that challenges EC's authority in requires the bailing in of creditors as a precondition for access to government funds.

Key Quotes 

“The ruling is likely to go against the EC.  This assessment is not about the merits of the case.  The outlook is based on the fact that the Advocate General issued a preliminary opinion in February against the EC.  And the ECJ follows the Advocate General more than three-quarters of the time. 

A decision which finds that the EC overreached would raise questions about the validity of at least parts of the Bank Recovery and Resolution Directive (BRRD).  It would likely strengthen Italy's Renzi who is looking to recapitalize Italian banks.  Portugal may also benefit insofar as its largest bank may need to be recapitalized. 

The recapitalization of the banks may prove to the be easiest part of the banking sector problems.  Many countries are over-banked, and bank profitability is poor.  Bank analysts argue that there are too many branches (the OECD estimated that Italy has more bank branches than pizzerias), which are a source of local employment.  The unorthodox monetary policy and negative interest rates have undermined the net interest margin, while the weak growth has undermined the demand for credit.”