It’s now a good twelve hours since Angela Merkel tentatively suggested some kind of quid pro quo whereby Germany would play a major role in a proposed eurobank recapitalisation programme…..in return for which, the banks would take a much more serious haircut than 20%. As it stands, this latest proposal has three things missing from it:
1. Where is the money coming from?
2. Is there any sign that the banks are interested in a closer haircut – and if so, how close?
3. Given the exposures involved, how much money are we talking about?
The answers to 1 & 2 above are the same: don’t know. There is no more likely to be 3 trillion euros available from the taxpayers as there is a White Knight lender to suddenly descend from the skies bearing riches beyond even a eurocrat’s wildest dreams. And a bank is a bank is a bank: ask a bank for a pound of flesh, and it will up its collateral requirement by three pounds of flesh.
But question three is an interesting one. Not only have the US markets responded very well to this dialogue – as yet, not even a plan – but already, mainstream financial media are doing sums. The problem is, thus far the calculations make no sense at all.
Take Dexia as an example. We now have confirmation of a Franco-Belgian guarantee of 150 billion euros in liabilities for this, a comparatively Second Division eurobank. The total EFSF fund as it stands is (after expansion last week) 440 billion. So were this to be part of an EFSF bailout programme, that’s a third of the budget blown right there. Never mind whether it is an EFSF project or not for now: I’m merely doing some scale comparisons here.
Right: this from tonight’s FT website:
‘If analysts are right, €200bn or more will be needed to boost banks’ capital reserves to credible levels after applying “haircuts” on the value of the sovereign debt they hold in the most troubled eurozone nations’. So to build a ‘super-wall’ to keep the tsunami of Greek/ClubMed debt at bay is €2.3 trillion; but to recapitalise every bank in the EU costs only €200 billion? Er….really?
No, not really. Look at the small print, and this is what emerges: the €200bn is simply a modelled amount based on how much capital the eurobanks would need to borrow if the exterior lenders treated them like lepers for a whole quarter…ie, wouldn’t lend them a cent. Much further down the FT piece, this little gem sneaks in:
‘Moreover, there is now a widespread belief that the banking system must be buttressed to withstand substantial writedowns in the value of several peripheral eurozone nations’ debt. JPMorgan’s Kian Abouhossein, for example, assumes 60 per cent haircuts on the value of Greek debt, 40 per cent for Portugal and Ireland and 20 per cent for Italy and Spain.’
Sorry to be the one to tell you this FT guys, but we had noticed the writedown – let’s get real here, write-off – factor before tonight.
This ‘pan-European bank recapitalisation scheme’ is just another smoke and mirrors stunt. In precisely the same way as the EU stress tests last Spring, it takes no account at all of default by even one small country, let alone three quite big ones.
Two things to note here: one, if this is the ‘major progress’ Osborne thinks they made yesterday, then he is either putting three heavy coats of gloss on this turd, or he is daft. And two, as Frau Merkel is in principle interested in doing something like this if the banks take a bigger haircut, then we are no further forward than we were three weeks ago.
There is a broader, bottom-line point too. Given the response of the markets to this, a 3-card trick that any five year old could unravel, it really does suggest that the markets doing all this deciding round here couldn’t think their way out of a paper bag. But as veteran Sloggers will be well aware by now, I have always argued that the bourse method of raising finance for business is a sort of bedlam where they wear funny-coloured jackets.
The parallel being used by financial media tonight is the so-called Tarp scheme – Troubled Asset Relief Program – used in the US during its 2008 crisis. But there is no comparison between these two situations. At no point in the process during 2008’s credit crunch was Hank Paulson staring down the barrel of every American bank having lent $100bn to Paraguay, with Paraguay about to default, having already soaked up $77 bn. And Tarp came from the taxpayers. Anyone seen any taxpayers in Spain, Italy and Britain gagging to stump up another €200bn in one quarter, with no end to the stumping up in sight?
Tonight in the Elysee Palace (probably) President Sarkozy is sitting at a large desk somewhere listening to a lot of Sorbonniers bandying around figures like €400bn on just three banks….all of it due five seconds after Greece defaults. Greece somehow (another miracle, I suppose) has found enough money to make it through to mid November. Or at least, that’s what Venizelos says. Germany is now dead set against saving Greece; but unless somebody saves Greece, France is toast.
This much-hailed recapitalisation plan is more stalling, more gobbledygoog and more bollocks. We are precisely where we were three days ago.
Everyone involved in this slide down the mountainside is deranged. Three more examples:
This evening in Washington, Tim Geithner told a financial ideas forum that “Europe has the financial resources to deal with its sovereign debt crisis, and the question is merely one of moving more quickly and more forcefully”. OK Tim – we give up: where are they?
A few hours earlier, French Finance Minister François Baroin said the extent of private-sector involvement in bailing out Greece “may need to be reexamined following the volatility on financial markets over the summer”. In fact, this is the only approach that can now save France. I see no hint of a glimmer of a sign from the sovereign lenders as a whole that they’re up for anything like a 50% haircut.
And an hour or two before that, in the late afternoon, the IMF’s Antonio Borges proposed a bond buying plan, to be undertaken by the IMF, that could aid countries such as Spain and Italy, which face rising costs for financing in capital markets. Mr. Borges said these countries have a problem of market confidence rather than solvency. But Mr B doesn’t have the approval of IMF Trustees for the plan; it is only a variation on what the ECB has been doing for months; and last but not least, Mr B is fresh in from Planet Ding, and thus thinks that Spain doesn’t have a solvency problem.
You know, it’s a funny thing. When this inevitable outcome (the direct result of zero action to control the banks after the last mess) began to take shape late last year, it seemed to me then that only the eurocrats and the pols were mad. Now I think it highly likely that the banks, the media, he lenders, and the markets have also been infected with the EU2011 bonkers virus. This is getting to be like Invasion of the Body Snatchers: you think your neighbour is still on our side, but then suddenly he starts to say, in a dull monotone, “I think what we should do now is magic money from thin air, mist, and rabbit ears.”
As I wrote in the earlier post, the events are infinitely more exciting than the loopy-loos who keep being hit by them. It’s late, I’m off to bed. Somebody try and change the world before I wake up.