Euro follow-up
Some interesting details this morning on the "recapitalize the banks" situation. The general thrust of it is that the recapitalization actually won't, in the main, be a recapitalization. Only €11bn will actually need to be raised from investors (out of a €106bn shortfall) according to Huw Van Steenis at Morgan Stanley.
How will the banks manage this financial jiggery-pokery? Well, claims Van Steemis, they will adjust risk-weightings, limit dividends, retain earnings, reduce loans and sell assets. In other words, they will do precisely what the EU doesn't want them to do (apart from restrict dividends, which wuill just make our pension funds weaker), but they will do it in such a way that the EU won't really be able to stop them doing it.
Other analysts came to the same conclusion, that banks would issue very little in terms of new stock to investors -- solely on the ground that raising capital at such a time would not be a good deal for the banks.
Van Steemis reckons that only BBVA of Spain, Germany’s Commerzbank France’s BPCE SA, Austria’s Raiffeisen Bank and four Italian banks -- UniCredit, Banco Popolare, Banca Monte dei Paschi di Siena and Unione di Banche Italiane (UBI) -- need to raise money.
However, as Peter Hahn, now at Cass, told Bloomberg, this is hardly the best way to achieve the ostensible target of the edict -- that being to increase investor confidence in the banks' stability.
It's here that the complexities of bank accounting go somewhat beyond my powers, but Bloomberg noted that :
Under the Basel rules, firms use internal models to decide how much capital to assign to assets based on their own assessment of a default. The models aren’t disclosed and banks can reach different risk-weightings for the same assets, regulators and analysts say.
Lenders also are converting hybrid securities into equity. Of the €26bn Spanish banks need to raise, €9.7bn can be found that way, Van Steenis said. Santander has €8.5bn of convertible bonds.
"The fact that the 26 billion euros could end up with less than 5 billion euros from capital-raising is a concern". Van Steenis wrote.
I write all this because it's beginning to look as if this "recapitalization" plan will actually be a "recession-inducing" plan -- definitely not what the doctor is ordering at the moment. Indeed the International Labour Organization said today that the global economy is "on the verge of a global world recession":
http://www.bbc.co.uk/news/business-15519699
As a general conclusion, what looked like the least controversial aim of the EU in its three-pronged attack on the crisis (the recapitalization), could well turn out to be the one that tips Europe into recession in 2012 and 2013, rather than moderate growth.
+++++++
Elsewhere, the markets seem to have realized that the "solution" announced on Thursday and celebrated on Friday was really a half-baked fudge of general aims that doesn't do enough and will probably struggle to do even that. Yes, the banks need recapitalizing, but, no, it can't be done at the expense of the growth that is needed to get Europe out of its current debt crisis. Put simply, the numbers don't add up. The hope of Thursday was that things could be kept going long enough for something to turn up, but even Merkel and Sarkozy are now realizing that the only way to get Italian workers to realize that the party is over is to put them through something like the Greek workers are going through now. And to manage it without democracy disintegrating will be harder still. Rome and Berlin, the Red Bridgades and the Red Army Faction (better known as Baader-Meinhof) are within most of our living memories.
In true self-interest, I'll just say that I went even more short on the euro on Friday afternoon in a move which, if I had had more confidence, I would have made 10 times as large. The euro dutifully dropped 1.5 cents over the weekend between market close Friday and market open on Monday.
So now all three of the prongs seem to be likely to unravel with unseemly haste. First, that the Greek haircut will get voted through is uncertain; Second, the Chinese don't seem to want to be a part of even a "first-loss" EFSF leveraging deal (i.e., Germany takes the first €440bn of the potential total €1trn loss); and third, the banking recapitalization masterstroke is going to turn into financial shenanigans of the highest order that will lead us to have less confidence in banks' financial stability rather than more.
Sigh, as Mr Parsimonious said in the first series of Bleak Expectations, "it's all gone a bit shit".
________
How will the banks manage this financial jiggery-pokery? Well, claims Van Steemis, they will adjust risk-weightings, limit dividends, retain earnings, reduce loans and sell assets. In other words, they will do precisely what the EU doesn't want them to do (apart from restrict dividends, which wuill just make our pension funds weaker), but they will do it in such a way that the EU won't really be able to stop them doing it.
Other analysts came to the same conclusion, that banks would issue very little in terms of new stock to investors -- solely on the ground that raising capital at such a time would not be a good deal for the banks.
Van Steemis reckons that only BBVA of Spain, Germany’s Commerzbank France’s BPCE SA, Austria’s Raiffeisen Bank and four Italian banks -- UniCredit, Banco Popolare, Banca Monte dei Paschi di Siena and Unione di Banche Italiane (UBI) -- need to raise money.
However, as Peter Hahn, now at Cass, told Bloomberg, this is hardly the best way to achieve the ostensible target of the edict -- that being to increase investor confidence in the banks' stability.
It's here that the complexities of bank accounting go somewhat beyond my powers, but Bloomberg noted that :
Under the Basel rules, firms use internal models to decide how much capital to assign to assets based on their own assessment of a default. The models aren’t disclosed and banks can reach different risk-weightings for the same assets, regulators and analysts say.
Lenders also are converting hybrid securities into equity. Of the €26bn Spanish banks need to raise, €9.7bn can be found that way, Van Steenis said. Santander has €8.5bn of convertible bonds.
"The fact that the 26 billion euros could end up with less than 5 billion euros from capital-raising is a concern". Van Steenis wrote.
I write all this because it's beginning to look as if this "recapitalization" plan will actually be a "recession-inducing" plan -- definitely not what the doctor is ordering at the moment. Indeed the International Labour Organization said today that the global economy is "on the verge of a global world recession":
http://www.bbc.co.uk/news/business-15519699
As a general conclusion, what looked like the least controversial aim of the EU in its three-pronged attack on the crisis (the recapitalization), could well turn out to be the one that tips Europe into recession in 2012 and 2013, rather than moderate growth.
+++++++
Elsewhere, the markets seem to have realized that the "solution" announced on Thursday and celebrated on Friday was really a half-baked fudge of general aims that doesn't do enough and will probably struggle to do even that. Yes, the banks need recapitalizing, but, no, it can't be done at the expense of the growth that is needed to get Europe out of its current debt crisis. Put simply, the numbers don't add up. The hope of Thursday was that things could be kept going long enough for something to turn up, but even Merkel and Sarkozy are now realizing that the only way to get Italian workers to realize that the party is over is to put them through something like the Greek workers are going through now. And to manage it without democracy disintegrating will be harder still. Rome and Berlin, the Red Bridgades and the Red Army Faction (better known as Baader-Meinhof) are within most of our living memories.
In true self-interest, I'll just say that I went even more short on the euro on Friday afternoon in a move which, if I had had more confidence, I would have made 10 times as large. The euro dutifully dropped 1.5 cents over the weekend between market close Friday and market open on Monday.
So now all three of the prongs seem to be likely to unravel with unseemly haste. First, that the Greek haircut will get voted through is uncertain; Second, the Chinese don't seem to want to be a part of even a "first-loss" EFSF leveraging deal (i.e., Germany takes the first €440bn of the potential total €1trn loss); and third, the banking recapitalization masterstroke is going to turn into financial shenanigans of the highest order that will lead us to have less confidence in banks' financial stability rather than more.
Sigh, as Mr Parsimonious said in the first series of Bleak Expectations, "it's all gone a bit shit".
________