FT Reports Europe To Sacrifice Its Banks To Bailout Sovereigns - Under €100 Billion In Bank Recap Funding AvailableSubmitted by Tyler Durden on 10/19/2011 14:22 -0500
It's 3pm: do you know where you last hour of trading bailout rumor is? Today, the Guardian passes the baton back to the FT, which however has released a report which when digested will be very negative for the zEURo.qq. It appears that in order to accommodate more funds for sovereign bailouts under the total max EFSF guarantee cap, as reported on several occasions yesterday by Zero Hedge, only €100 billion will be set aside for bank recapatialization. There is a problem with this number: it is predicated on the European Banking Authority's estimates of capital shortfalls of between €70-90 billion, the is the same EBA which 4 months ago said Dexia was in sterling health when it passed the 2nd Stress Test in pole position. As a reminder, Goldman predicted a €1 trillion capital shortfall, while Credit Suisse said €400 billion. No matter: the EU will come out with a number from its lower colon, just to make the residual maximum sovereign debt "guarantee" notional appear that much bigger. Too bad, however, that in the process it will once again crush Europe's banks which the market will suspect, rightfully so, that they are undercapitalized even post the recap, anywhere between 90% and 75% and will have to accelerate their asset liquidations to fund themselves one more day in lieu of a functioning interbank liquidity market. And so the risk flaring will shift from Europe's sovereign to Europe's banks, and their main proxy in the US - none other than Morgan Stanley which repeatedly refuted it has any exposure to France... but said nothing about its gross (gross because counterparties will blow up fast and furious) to French banks. End result: this is very bad for Europe because it means they have finally done the math and realize that to get the €2 trillion or so in EFSF insured capital they have to sacrifice their banks. Alas, there is no outcome that saves both the banks, and guarantees future European sovereign issuance under the currently contemplated structure. None.
Regardless whether one or more of the Big 3 agencies would deal a credit downgrade to the U.S., the CDS market has already spoken.
"In the depths of the 2008 crisis it was the governments that stepped in to provide a guarantee on financial assets. It was the governments that backed our savings accounts, money market funds, day-to-day business banking accounts, as well as debt issued by US banks. But what happens when confidence in the government guarantee begins to erode? We’ve seen what happened to Greece. Leverage inherent in the banking system elevated a bank run, equivalent to a mere 3.6 percent of deposits, into another full blown banking crisis. In our view it’s time for investors to acknowledge sovereign risk. The ratings agencies can opine all they want, but it seems clear to us that the only true AAA asset to protect your wealth is gold. " Eric Sprott
The most recent broker to realize that private risk does not exist as a result of global moral hazard is Deutsche Bank, which is actively promoting ta long risk/short sovereign CDS trade. That is happening as IG13 trades at its all time record tights of 77 bps. In other words, buying an index of 125 investment grade credit provides less than 1% of incremental risk return. Pretty soon the ABX trade will be buying IG. Until then, however, the only risk continues being that of sovereign balance sheet, courtesy of onboarding of virtually all private sector risk at the Central Bank and via other backstop mechanisms.