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Central Bank - long-term refinancing operations by the ECB

The European Central Bank has contributed to bringing down the costs for governments to borrow money from bond markets by lending some €489 billion on favourable terms repayable over three years to more than 500 European banks in December 2011, who have in turn used the money inter alia to buy bonds from governments that previously experienced problems selling these bonds. These ECB loans to banks (called long-term refinancing operations or LTROs) also aim to relieve the shortage of bank lending to companies. On 29th February 2012 the ECB lent a further €529.5 billion to some 800 banks.The ECB has itself been buying government bonds and changed its rules on guarantees for loans so as to accept "junk"-rated government bonds.

Compact for Growth and Jobs

Following the June 2012 European Council meeting, a 'Compact for Growth and Jobs' was produced outlining a number of measures at both EU and Member State level. 

Such measures included growth-friendly fiscal consolidation, restoring normal lending, tackling unemployment (for example through apprenticeships), modernising public administration, deepening the Single Market, increasing international trade agreements and using the Multiannual Financial Framework as a catalyst for European growth.

Credit Rating Agencies

The EU Regulation on credit rating agencies entered into force in December 2010. The Regulation lays down minimum conduct of business requirements for an agency to be registered to avoid conflicts of interest (e.g. a rating analyst employed by a credit rating agency should not rate an entity in which he/she has an ownership interest), to ensure the quality of ratings (e.g. requiring the ongoing monitoring of credit ratings) and rating methodologies (which must be, inter alia, rigorous and systematic) and a high level of transparency (e.g. obligation to publish an annual Transparency Report). The Regulation also gives centralised supervision powers for credit rating agencies to the European Securities Markets Authority, which has comprehensive investigatory powers.

Proposals for a further Directive and Regulation on credit rating agencies were presented by the Commission in November 2011. These proposals would inter alia require credit rating agencies to disclose more and better information underlying their ratings, to consult issuers and investors on intended changes to their rating methodologies, to rate Member States' sovereign debt ratings every 6 months rather than 12, to publish sovereign ratings after the close of business and at least one hour before the opening of trading venues in the EU to avoid market disruption. The proposals would also require issuers to rotate every three years between the agencies that rate them, require complex structured finance instruments to have two ratings from two different rating agencies, and make credit rating agencies liable to pay damages to investors if their ratings breached the credit rating agency Regulation.

The Commission proposed a Regulation to increase transparency of 'Over The Counter' (OTC) derivatives trading in September 2010. Under the proposal, information on OTC derivative contracts would be reported to trade repositories and be accessible to supervisory authorities. More information would also be made available to all market participants. The Commission also proposes that standard OTC derivative contracts be cleared through central counterparties (CCPs). This would reduce counterparty credit risk, i.e. the risk that one party to the contract defaults.

The Regulation on Short Selling and Credit Default Swaps was adopted in February 2012. It introduces common EU transparency requirements and harmonises the powers that regulators may use in exceptional situations where there is a serious threat to financial stability as a result of so-called "short selling". "Short selling" is the practice of selling assets that have not been purchased beforehand, but which the seller may have borrowed from a third party with the intention of buying identical assets back at a later date to return to that third party. The short seller hopes to profit from a decline in the price of the assets between the sale and the repurchase, as the seller will pay less to buy the assets than it received on selling them. The Regulation includes specific rules to tackle the increased risks posed by "uncovered" or "naked" short sales, where the seller has not made arrangements to borrow the security in question. Short selling has been blamed for contributing to the current financial crisis.