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Wednesday, 11 December 2013

Wall Street facing tighter scrutiny as regulators move on Volcker rule

Rule, going to vote Tuesday, aims to separate everyday banking from the kinds of high-risk trading that caused the financial crisis

Wall Street is facing tighter scrutiny of its trading activities after US regulators moved on Tuesday to impose stricter rules on the types of trades banks can make following the financial crisis.

The long-delayed “Volcker rule” is aimed at curbing high-risk trading on Wall Street of the kind blamed for triggering the worst financial crisis in living memory. But the rule hit yet another hurdle Tuesday – snow storms closed much of Washington and some staff at the top five US financial regulators looked set to vote on the rule from home.

Five years after the financial crisis, the Volcker rule has become the most controversial element of the Dodd-Frank Act, the largest overhaul of the financial system since the Great Depression.

Many details of the 71-page rule, preceded by about 900 pages of explanatory text, are still to be finalised. But according to those who have seen the final draft, it appears the new legislation will impose tougher requirements in some areas than the banks had first expected.

The rule, named after former Federal Reserve chairman Paul Volcker, aims to crack down on so-called proprietary trading – betting on financial markets for banks' own gain. The rule aims to separate everyday banking from the kinds of high-risk trading that caused the financial crisis.

The rule would curb the number of risks banks can take so that they do not exceed "the reasonably expected near-term demands of customers", the regulators said.

The rule will also tackle so-called portfolio hedging, a practice that was supposed to allow banks to offset risks with investments in other portfolios but which critics charge has been used by Wall Street to hide risky speculative bets. Under the new rule banks will be required to identify the exact risk that is being hedged.

According to the executive summary issued by the US Federal Reserve, Volcker would also prohibit “any banking entity from acquiring or retaining an ownership interest in, or having certain relationships with, a hedge fund or private equity fund,” with some exceptions. It would also require banks to establish an internal compliance programme “designed to help ensure and monitor compliance with the prohibitions and restrictions of the statute and the final rule.”

While the Volcker rule was drawn up in the wake of the financial crisis, it was given fresh impetus last year after JP Morgan Chase’s $6bn losses on the so-called “London whale” trades. The bank contended at the time that the huge risky bets being made in London were meant to hedge risks being taken elsewhere.

Wall Street’s lobbyists have won some key concessions. Some securities linked to foreign sovereign debt – money owned by foreign governments – will be exempt. There will also be exceptions for banks’ market-making desks, as long as traders are not paid in a way that rewards proprietary trading. Wall Street’s bonus culture has been seen by some as a prime cause of excessive risk taking.

“This provision of the Dodd-Frank Act has the important objective of limiting excessive risk-taking by depository institutions and their affiliates,” Federal Reserve chairman Ben Bernanke said in a statement. “The ultimate effectiveness of the rule will depend importantly on supervisors, who will need to find the appropriate balance while providing feedback to the board on how the rule works in practice.”

The rule will not come into force until July 2015 and Wall Street lawyers are now expected to comb through the document looking for loopholes and considering whether to mount a legal challenge.

Oliver Ireland, co-head of financial services practice at Morrison and Foerster, said with such an enormous rule “the devil is very much in the detail.”

“Fundamentally it’s the same rule in that it tries to put an end to prop trading,” he said. But he said he doubted it would be enough to halt the next financial crisis. The rule addresses banking entities – not hedge funds. And even in this case, where risky trades are being limited, Ireland said there was a good case that the wrong issues were being tackled.

“It’s not going to stop ‘too big to fail’. It’s not going to stop banks taking risks. Banks lend money with the expectation of getting it back and that’s fundamentally a risky business,” he said. “This is aimed at trading and if you look back at the last financial crisis that goes back to bad lending practices on mortgages. That happened before anyone had traded anything,” he said.

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Sunday, 20 October 2013

JP Morgan close to agreeing $13bn settlement with US authorities

Settlement is greater than the expected $11bn and does not release the JP Morgan from any criminal liabilities

America's largest bank, JP Morgan, is close to finalising a $13bn (£8bn) record settlement with the US authorities over a number of issues related to the subprime mortgage crisis.

The settlement, described as tentative in some reports, is even greater than the $11bn that had been expected and is said not to release the bank from any criminal liability. It would also be the largest ever between the US government and a single company.

The bank's chairman and chief executive Jamie Dimon had been involved personally in the discussions with the US Department of Justice and this month JP Morgan admitted it had incurred legal expenses of $9.2bn from regulatory investigations and lawsuits.

In total the bank has put aside $23bn for potential litigation since 2010 – and has warned this could rise by a further $6.8bn – in moves that illustrate the stunning reversal in fortunes of a bank that had survived the banking crisis relatively unscathed.

JP Morgan now faces more than a dozen investigations globally – from alleged bribery in China to a possible role in manipulating benchmark interest rates set in London known as Libor.

Dimon had steered the bank through the financial crisis without ever reporting a quarterly loss, but that record ended this month when he had to admit that legal expenses drove the firm to a loss of $400m.

The latest settlement relating to mortgage-backed securities follows a fine of more than $900m from a number of authorities over last year's London Whale trading incident, which Dimon had originally attempted to brush aside as "tempest in a teapot".

The Whale episode also lost the bank $6.2bn and Dimon's bonus was halved as a consequence.

At issue in the latest settlement is whether the bank sold mortgages that it knew were riskier than they appeared. Investors, including government-owned mortgage agencies Fannie Mae and Freddie Mac, said that the bank told them loans were safer than they were, or that the bank was negligent in not verifying information from borrowers relating to their income and their ability to repay the debt.

A sizeable chunk of the $13bn relates to customer redress. According to Bloomberg the settlement includes $4bn to the Federal Housing Finance Agency – which incorporates Fannie Mae and Freddie Mac.

Dimon secured the tentative deal in a meeting with the justice department's attorney general, Eric Holder, according to CNBC. Steve Cutler, the bank's general counsel, and Tony West, Holder's deputy, were said to be involved.

Dimon and Holder had met face-to-face in Washington last month. A well-connected figure in financial and political circles, Dimon took the helm of JP Morgan in December 2005. He is now running the biggest US bank in terms of assets.

As well as surviving the financial crisis, the banker has also resisted calls to split his joint roles at the bank.

The settlement is partly the result of JP Morgan saving two firms – Bear Stearns and Washington Mutual – which account for about 80% of the securities involved in the $13bn fine. The US government encouraged JP Morgan to rescue both institutions as they were collapsing during the financial crisis.

This month the bank said Dimon was no longer chairman of JP Morgan's main US retail banking subsidiary.

JP Morgan did not comment, and the US department of justice could not be reached.

Ongoing tempest

For all his smooth talking, it is likely that the most memorable line to emerge from the career of JP Morgan boss Jamie Dimon will be his crack about a "tempest in a teapot". That was his attempt to dismiss reports of problems in the bank's London office, where it turned out that his traders had lost $6bn.

The comment was perhaps the result of confidence gleaned from years of uninterrupted success, which included being one of the few bankers to emerge from the financial crisis with an enhanced reputation. However, the pressure is now increasing on Dimon as he wrestles with a string of legal complaints.

This was not how it was all meant to be, as Dimon has long appeared to have led a blessed life.

A protege of former Citigroup boss Sandy Weill, who is often described as a "Wall Street legend", he graduated as a Baker scholar from Harvard Business School, an honour given only to the top 5% of the graduating MBA class. His classmates included GE boss Jeff Immelt, and Dimon's future wife, Judy.

Article Source : http://www.guardian.co.uk

Monday, 14 October 2013

Nobel prize in economics: will financial crisis adjustment theory win the day?

Those in the know hope Nobel committee makes choice in 2013 that reflects the seismic changes of the past five years

After five years in which many of the pillars of economic theory have been swept away by a financial hurricane that went largely unpredicted by the majority of practitioners of the dismal science, it may be hard to believe anyone deserves to crowned with a Nobel prize in the subject.

But the winner of the Sveriges Riksbank prize in economic sciences in memory of Alfred Nobel, as it is officially called, is due to be announced on Monday, and bookmakers have come up with a packed field of runners and riders.

Yales's Robert Shiller has been high up the list for some years. He wrote a prescient book, Irrational Exuberance, published in 2000, about the stock market bubble, and followed it up with a second edition in 2005, which took the then unfashionable view that US housing looked dangerously overvalued. "If I was a betting man, I would think it had to be Shiller," said TUC economist Duncan Weldon.

Sir Tony Atkinson, of Nuffield College, Oxford, who has long worked on inequality and income distribution – seen as increasingly relevant in recent years – is also frequently mentioned. Inequality has also been a consistent concern of another much-mentioned Brit, Angus Deaton.

A more mainstream choice for the judges might be Robert Barro, of Harvard, who is in the mould of classic, free market, anti-big state economics.

But those who have been fighting for a revolution in the way economics is taught in schools and universities would like to see the Nobel committee make a choice that reflects the seismic changes of the past five years.

Wendy Carlin, of University College London, who is working on a project to shake up the economics curriculum in Britain, favours South Korean-born Hyun Song Shin, of Princeton, for example. Even before the crisis, Shin was studying the importance of leverage in the global financial system.

Carlin said there were encouraging signs that economists were adjusting to changing times. "There's a feeling that at least the occasion of the crisis has led people to think that we should be teaching economics differently," she said.

While physicists can pelt particles around the Large Hadron Collider in search of the Higgs boson, economists have to test their theories by watching messy events and unpredictable human beings in the real world.

Diane Coyle, of consultancy Enlightenment Economics, said in the light of the battering many of their prized theories have taken over the past five years or so, economists needed to switch from building big, mathematical models, to "microeconomics", which studies how firms, individuals and particular markets behave. "Let's confess that we just don't know how the macroeconomy works, and we need to have a bit of a think about that," she said.

Article Source : http://www.guardian.co.uk

Thursday, 26 September 2013

JP Morgan boss in talks over penalty fine for sub-prime bond sales

Bank's Jamie Dimon may have to settle on record $11bn penalty following recent $920m fine over 'London Whale' incident

The boss of America's biggest bank, JP Morgan, was on Thursdaypersonally negotiating a new financial settlement with US regulators over allegations stemming from the way the bank sold sub-prime mortgage bonds before the banking crisis. The settlement could reach a record $11bn (£7bn)

Jamie Dimon, one of the few bankers still at the helm of a big bank following the 2008 financial meltdown, turned up for face-to-face talks with the US attorney general, Eric Holder, at the department of justice in Washington. The negotiations prompted fresh speculation that Dimon will be forced to agree to a payout bigger than the $4.5bn paid by BP over the Gulf of Mexico oil spill.

There are suggestions JP Morgan could be forced to make $4bn of payments to consumers and $7bn of penalties to cover losses incurred from the way mortgages were packaged by JP Morgan as the financial crisis took hold.

The new payout negotiations come only a week after JP Morgan was fined $920m by regulators in the US and the Financial Conduct Authority in Britain over the $6.2bn trading losses that became known as the "London Whale" incident a year earlier.

In an unusual move, JP Morgan admitted wrongdoing and was accused of "unsafe and unsound practices" in derivatives trading taking place in the so-called chief investment office. On the same day the bank was forced to hand over $390m in fines and refunds for overcharging credit card customers.

If the new payout reaches $11bn the bank will have had to pay $30bn in fines and settlements over the past four years. It has already incurred $17.3bn in regulatory fines in the three years to 2012 and in recent regulatory filings – which contain 10 pages of legal disclosures – the bank estimated it faced a possible $6bn of further costs. The sums being discussed in Washington would be well in excess of that figure.

The timescale for concluding the discussions is so far unclear owing to the complexity of the issues and the number of US authorities involved. They include not just Holder's justice department but also the New York attorney general, the securities and exchange commission and federal housing departments.

During the crisis, JP Morgan stepped in to take over Washington Mutual and Bear Stearns and Dimon was viewed as one of the only bankers to have escaped the crisis with his reputation intact. However, the string of punishing regulatory scandals has now put him under pressure.

When US prosecutors levelled criminal charges against former JP Morgan traders in relation to the Whale incident, Preet Bharara, New York attorney general, said: "This was not a 'tempest in a teapot' [a phrase used by Dimon to describe the incident when it emerged], but rather a perfect storm of individual misconduct and inadequate internal controls."

After the Whale fine, Dimon warned that "in the coming weeks and months we need to be braced for more to come" amid speculation that his relationship with regulators is deteriorating.

Even if a settlement can be reached over the way sub-prime mortgages were packaged and sold to investors ahead of the banking crisis, JP Morgan faces a string of other potential wrangles. It is not clear if some of these could be part of the current talks.

Some of the problems related to the takeover of Bear Stearns and Washington Mutual which were big players in the once lucrative business of packaging up mortgages into what looked like safe investments. When the credit crunch hit in 2007 the value of these products collapsed and left holders with large losses.

Dimon, who earlier this faced down calls for his roles as chairman and chief executive of the bank to split, has been softening the ground for hefty settlements in recent weeks. In a staff memo last week he wrote that since 2012 more than 4,000 extra staff had been assigned to risk, compliance, legal and finance departments with an extra $1bn being spent on controls. Staff have undergone 750,000 hours of training on compliance procedures.

JP Morgan fines and settlements: the last two years

2011 Hands over $228m to settle allegations that the bank manipulated the bidding process for municipal bonds

2012 Among five banks made to pay $25bn in penalties and compensation over the robo-signing scandal (illegal repossession procedures which evicted many people from their homes unecessarily or prematurely)

2013 Among 13 banks that have to pay $9bn in cash and other help to homeowners over the robo-signing scandal

2013 Hands over $920m in fines relating to its lack of internal controls in the wake of the $6bn trading loss run up by the "London Whale" trader

2013 Hands over $410m to settle allegations of manipulating the electricity market in California

2013 Hands over $390m in fines and rebates for overcharging credit card customers

Article Source : http://www.guardian.co.uk

Thursday, 22 August 2013

India's rupee hits another record low against US dollar

Seen until recently as an inexorably rising economic power, India now looks dangerously exposed to violent market swings

India's rupee hit another record low against the dollar on Wednesday, despite policymakers taking fresh measures to try to put a floor under the sliding currency and stave off a full-blown financial crisis.

Until recently, India was constantly bracketed with China as an inexorably rising economic power; but with growth slowing sharply, the country is now among the hardest-hit of a string of developing countries that look dangerously exposed to violent swings in global markets.

When central bankers embarked on the drastic policy of quantitative easing – untested on such a large scale – they always knew it was extremely risky but judged that the price of a prolonged slump across the rich world was greater than the threat of inflating unsustainable bubbles in the world's financial markets. That judgment is about to be put to the test.

As imports become more expensive, the Indian authorities will have to try to control inflation without clobbering growth.The Federal Reserve's $85bn (£54.2bn)-a-month bond-buying spree unleashed a global tidal wave of cheap money, which flooded into emerging markets.

Since May, when Fed chairman Ben Bernanke announced his plans to "taper", and eventually halt, QE as the US recovers, these investment flows have gone into reverse. Governments in developing countries face plunging currencies and stock markets together with rising borrowing costs and some analysts are even starting to draw comparisons with the devastating Asian financial crisis of 1997-98.

India

Raghuram Rajan, the former chief economist of the International Monetary Fund, faces a baptism of fire when he starts his new job as governor of the Indian central bank next month.

With the rupee plunging to record lows against the dollar, the authorities in New Delhi face a severe test, trying to control the likely surge in inflation, as imports become more expensive, without clobbering growth. As Leif Eskesen of HSBC puts it, "the balancing act between currency stabilisation and growth protection is not easy". So far, the authorities have merely stoked the rising sense of panic in financial markets. Their latest batch of policies, announced on Tuesday night, included a promise to inject liquidity into financial markets by buying $1.2bn-worth of bonds but brought only a brief period of calm before the sell-off resumed.

If investors lose confidence in India's ability to fund its growing current account deficits, they could pile out of government bonds, pushing up interest rates across the board and squeezing the life out of the economy.

Thailand

Bangkok was the crucible of the Asian financial crisis that struck in 1997, as Thailand became the first country to call for help from the International Monetary Fund after a doomed (and costly) effort to defend its currency, the baht, against speculators.

Few analysts believe the country faces a repeat of that chaotic period but fears about the outlook for Thailand were exacerbated earlier this week by news that its economy has slipped into recession. The 0.3% decline in GDP in the second quarter, following a 1.7% contraction between January and March, marked a dramatic turnaround from 6% growth last year.

Bangkok's stock market saw a run-up of 50% between early 2011 and May; but even before investors' "taper tantrum", there had been doubts about the sustainability of its economic model, which has become increasingly reliant on rapid credit growth, with household debt rising to a worrying 80% of GDP. The Set index of leading Thai shares has dropped by more than 15% since May.

Indonesia

Indonesia's currency, the rupiah, has slipped to its lowest level against the dollar for four years, and share prices have plunged by more than 10% in the past week alone, as investors digest the risks that the Fed could soon start phasing out QE.

As well as a reversal of investment flows, Indonesia is also being hit by falling commodity prices, sparked by concerns that China's economy is slowing. That helped the country's current account deficit to increase to 4.4% of GDP in the second quarter of this year — close to levels last seen in 1996, before the Asian financial crisis, and raising the alarming prospect of a balance of payments crisis if interest rates continue to rise.

Indonesia looks particularly vulnerable to what economists call a "sudden stop" in capital flows, since as much as a third of its government bonds are owned by foreigners. During the late-90s crisis, Indonesia was forced to seek a $40bn bailout from the IMF. The controversial policies imposed in exchange for the rescue package sparked widespread protests, and led to the overthrow of the Suharto regime.

Brazil

Brazil came through the Great Recession of 2008-09 in relatively good shape, helping to feed market euphoria about a "decoupling" between the struggling West and fast-growing developing countries. Foreign investors poured $350bn into the country between 2003 and the end of last year in direct investments alone.

But growth has slowed sharply in the past couple of years and the risks of a downturn have been exacerbated by the tremors rocking global markets.

Dilma Rousseff's government has faced its own domestic political problems, including a spate of protests in June and July. But investors' worries over the Fed's plans to withdraw QE – and fears of a slowdown in China, a major market for Brazil's critical commodity exports, have left analysts scrambling to downgrade their growth forecasts. Many expect growth of little more than 2% this year, and the Brazilian real has hit a four year low.

A depreciation may be good news in the long term, helping to improve the country's trade performance; but in the short term, it will boost inflation, adding to the problems of the central bank, which has already been tightening policy to try and bring wage rises under control.

China

After a decade in which it joined the ranks of the world's economic superpowers, China's future growth path looks increasingly in doubt.

Unlike many of its fellow emerging market players, China's financial markets remain only partially open to foreign investors, so it may be less at risk from a reversal in capital flows as a result of QE coming to an end. However, Beijing has plenty of problems of its own, not least an alarming legacy of bad loans from the credit boom that was deliberately unleashed to cushion the Chinese economy against the knock on effects of the global financial crisis.

Chinese authorities have repeatedly made clear their intention to try and switch from an export-dependent model of growth, to a more balanced, consumer-led pattern. Even if that switch is managed smoothly, it will hit exporters of the commodities and investment goods, such as machine tools, for which the country has been so hungry in recent years. But there are growing fears of a "hard landing", if this radical transition goes awry.

Analysts at HSBC argue that a China crash, rather than the end of the Fed's QE programme, actually presents the greatest risk of a sudden and damaging reversal in global capital flows, from the emerging world back to the safe haven of developed countries.

Article Source : http://www.guardian.co.uk

Wednesday, 3 July 2013

Portugal's soaring bond yields spell end of line for austerity

Portugal bond yields are back to 7.5%, after briefly hitting 8%, as ministers resign and coalition government nears collapse

Here we go again. The eurozone crisis is stirring, confounding the boasts of various eurogroup leaders that the worst is past. Their claims have usually rested on the observation that governments' bond yields, and thus their borrowing costs, have fallen. The austerity medicine must be working, it is asserted, and a bright new dawn beckons just as soon as the current recession in the eurozone clears. Just look at Ireland, they say, or even Portugal, to see how bailout programmes can give countries time and space to adjust.

But look at Portugal's bond yields now: they are back to 7.5%, after briefly hitting 8% on Wednesday, as ministers resign and the centre-right coalition government edges towards collapse.

It is a radical turnaround from the position in May, when Portugal was able to raise €3bn (£2.6bn) via a ten-year bond issue at a yield of 5.7%. At that point, it seemed credible that Portugal might be able next year to exit, on schedule, its three-year €78bn bailout programme and start to fund itself in the market. If 7.5%, or worse, is sustained, forget it. The numbers don't work for an economy still deep in recession.

The political crisis in Lisbon is the market's cue to look under the bonnet of the economy. Steep tax hikes have allowed the annual budget deficit to fall but the International Monetary Fund predicted last month that public debt would peak at 124% of GDP next year "on current policies and outlook." Others think that it is too optimistic – 134% in 2015, say analysts at Barclays.

The political crisis in Lisbon is the market’s cue to look under the bonnet of the economy.One problem is lack of competitiveness. "Improvements in external competitiveness indicators remain limited," said the IMF report, noting that only a quarter of the rise in unit labour costs since 2000 has been reversed. Thus the export recovery is weak, not helped by lack of demand from neighbouring Spain. In the meantime, domestic demand has collapsed amid pay freezes and an unemployment rate of 18%. "Economic recovery is proving elusive," commented the IMF. You bet: output contracted by 3.25% last year.

The IMF's other concern was that the "social and political consensus" behind the bailout programme was weakening. It was right to worry: austerity fatigue is the cause of the current political crisis, with the coalition split over how much reform the economy can bear. It seems highly unlikely any Portuguese administration could deliver the package of cuts and tax rises that the IMF and eurozone leaders are currently demanding.

For now, the crisis is not at boiling point since Portugal can fund its next big debt repayment in September. But even at current temperatures some form of compromise between Portugal and its lenders will be necessary since it should now be clear to all that the austerity programme has run out of road.

Logic says a Greek-style write-off should happen as part of another bailout, this time with softer austerity conditions. But experience says the road to that point will be long – it always is in the eurozone. Complicating factors include: the fact that the terms of the 2011 bailout have already been tweaked twice in Portugal's favour; the IMF's anxiety for the eurozone partners to fill any funding shortfall; and Angela Merkel's election fight in September.

What happened to Mario Draghi's bond-buying pledge? Forget that, too. As the European Central Bank has always made clear, it applies only to countries that can also raise some money from the market under their own steam. Portugal, at present, doesn't fit the bill.

It's the job of the bailout lenders to get it to that point – and it means that the IMF and eurozone leaders should admit that an overload of austerity is a self-defeating strategy in Portugal.

Article Source : http://www.guardian.co.uk

Wednesday, 29 May 2013

Euro leaders unite to tackle soaring youth unemployment rates

François Hollande makes impassioned plea for jobless 'post-crisis' generation that fears it will never work

European leaders warned on Tuesday that youth unemployment – which exceeds 50% in some countries – could lead to a continent-wide catastrophe and widespread social unrest aimed at member state governments.

The French, German and Italian governments joined forces to launch initiatives to "rescue an entire generation" who fear they will never find jobs. More than 7.5 million young Europeans aged between 15 and 24 are not in employment, education or training, according to EU data. The rate of youth unemployment is more than double that for adults, and more than half of young people in Greece (59%) and Spain (55%) are unemployed.

François Hollande, the French president, dubbed them the "post-crisis generation", who will "for ever after, be holding today's governments responsible for their plight".

"Remember the postwar generation, my generation. Europe showed us and gave us the support we needed, the hope we cherished. The hopes that we could get a job after finishing school, and succeed in life," he said at conference in Paris. "Can we be responsible for depriving today's young generation of this kind of hope?"

We're talking about a complete breakdown of identifying with Europe.

"Imagine all of the hatred, the anger"What's really at stake here is, not just 'Let's punish those in power'. No. Citizens are turning their backs on Europe and the construction of the European project.

Germany's finance minister, Wolfgang Schäuble, warned that unless Europe tackled youth employment, which stands at 23.5% across the EU, the continent "will lose the battle for Europe's unity".

Italy's labour minister, Enrico Giovanni, said European leaders needed to work together to "rescue an entire generation of people who are scared [they will never find work

"We have the best ever educated generation in this continent, and we are putting them on hold," he said.

The UK Department for Work and Pensions and the Treasury were unable to say why Britain, which has a 20.7% rate of youth unemployment, was not represented at the conference in Paris on Tuesday.

Stephen Timms, shadow employment minister, attacked the coalition for remaining "utterly silent on youth unemployment".

"This government has totally failed to tackle Britain's youth jobs crisis. This government must stop sitting on the sidelines and take the urgent action we need to get young people back to work."

Hollande outlined a series of measures to tackle the problem, including a "youth guarantee" to promise everyone under 25 a job, further education or training.

The plan, which has been discussed by the European commission, will be supported by €6bn (£5bn) of EU cash over the next five years. Another €16bn in European structural funds is also set aside for youth employment projects.

Herman Van Rompuy, European council president, pledged to put the "fight against unemployment high on our agenda" at the next EU summit in June. "We must rise to the expectations of the millions of young people who expect political action," he said.

The commission estimates youth joblessness costs the EU €153bn in unemployment benefit, lost productivity and lost tax revenue. "In addition, for young people themselves, being unemployed at a young age can have a long-lasting negative 'scarring effect'," the commission said. "These young people face not only higher risks of future unemployment, but also higher risks of exclusion, of poverty and of health problems."

President Hollande at the Elysée Palace in Paris

The European ministers, who will meet German chancellor Angela Merkel to discuss the youth unemployment crisis in July, said small- and medium-sized businesses (SMEs) will form a central plank of the plans. SMEs traditionally employ the vast majority of young people, but have complained they haven't been able to borrow enough money to grow since the financial crisis struck in 2008.

Ursula von der Leyen, Germany's labour minister, said: "Many SMEs, which are the backbone of our economies, are ready to produce but need capital, or they have to pay exorbitant borrowing rates."

The minsters are working on establishing a special credit line for SMEs from the European Investment Bank (EIB), which will have a €70bn lending capacity this year.

However, Werner Hoyer, head of the EIB, warned minister not have "expectations completely over the horizon".

"Let's be honest, there is no quick fix, there is no grand plan," he admitted.

Schäuble warned that European welfare standards should not be jeopardised in order to cut youth unemployment figures. "We would have a revolution, not tomorrow, but on the very same day," he warned. Germany and Austria have the lowest rate of youth unemployment, with 8% not in work, education or training.

Article source : http://www.guardian.co.uk