FT Reports Europe To Sacrifice Its Banks To Bailout Sovereigns - Under €100 Billion In Bank Recap Funding Available

Tyler Durden's picture

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.

From the FT:

Europe’s grand plan to strengthen its banking system is set to fall well short of current market expectations, identifying a capital shortfall of less than €100bn that must be made up over the next six to nine months, according to the latest official estimates.


The European Union’s estimate of the necessary recapitalisation effort compares with a recent Inernational Monetary Fund report that identified a €200bn hole in banks’ balance sheets stemming from sovereign debt writedowns. It also falls far short of analyst estimates that banks might have a capital deficit of up to €275bn.


Two people familiar with the outcome of an emergency stress test of Europe’s banks said the European Banking Authority, which ran the exercise, had suggested between €70bn and €90bn should be raised. That would allow banks to meet a 9 per cent threshold for their core tier one capital ratios, a key measure of financial strength that goes beyond current requirements, after marking down to market values their sovereign bond holdings of the eurozone’s peripheral states.


A fierce political debate has started over almost all the key assumptions used in the analysis but people familiar with the discussions expect any changes to reduce, rather than increase, the estimated shortfall.


European leaders are due to ratify the plan at the weekend, alongside a broader sweep of initiatives to strengthen the eurozone, including a well trailed project to use the European Financial Stability Facility as a vehicle to guarantee national governments’ sovereign debt issuance.


Apparent deadlock over a mooted state guarantee system for bank bonds, seen as crucial to thaw a frozen funding market will exacerbate fears of an impending credit crunch across Europe.


“This is going to be a damp squib all round,” said one person involved in the process.

We have no idea what a damp squib is, but we have no intention to be long on Monday when we find out.

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mayhem_korner's picture



Economists call this "scarcity."

hedgeless_horseman's picture



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.

Have to?  No.  They will just sacrifice the EUR/USD and print more Euros, which makes Turbo Tax Tim smile.

LawsofPhysics's picture

Was thinking the same thing.  Timmy and Ben will get their inflation come hell or high water.

flacon's picture

"Sovereign" ----> most over-rated word of 2011

tmosley's picture

And simultaneously the most underrated word in modern history.

dlmaniac's picture

Who do we rape taxpayers for, bankers or Sovereigns? Hmmm, such a tough decision.

AldousHuxley's picture

it is more old rapes the young because they joined the ponzi earlier and rode the boom.

America with her corrupt selfish boomer leadership will soon become Italy in the future....


"To be frank," she said, "we've been a country in decline since the 1980s – had we but seen it. Actually, there are plenty of people, including in government, who still won't see it. All we can do now is try to manage that decline a bit better."

It's also a gerontocracy, she said, "run by the old, for the old. The prime minister is 76, the president is 87, the new head of the Bank of Italy will probably be a guy in his 70s, everyone in authority is old. I'm 49, and at the university I'm still considered 'promising'. So it's very, very hard for young people. I have former PhD students working in call centres." - Italian


smart young ones are already planning to move out.

Gadfly's picture

A false paradim really in light of our highly-interconnected financial world.  But if the choice were real and distinct, most would prefer to see the banks fail.  And then the sovereigns would become the banks... and then they would fail.

semperfi's picture

INFLATE -or- DIE ???
someone's gotta go back and get a shitload of printer cartridges

Smiddywesson's picture

Have to?  No.  They will just sacrifice the EUR/USD and print more Euros, which makes Turbo Tax Tim smile.

Half right.  They will print what they need to print, while they stack gold and prepare to ramp the price of that gold so their balance sheets, well, balance.  That's the rabbit up the sleeve.

eureka's picture

NO. I've been saying it for months: European sovereigns will nake their banks take haircuts - and - US banks will carry part of it, because they rigged both European sovereigns and EWuropean banks, and insured the fiat bubble with garbage paper CDS. 

Consequently EU and EUR prevails and US and USD goes down.

Watch carefully - it will happen last minute - and then very fast.

sushi's picture

Damp squib is UK speak for a wet firecracker. It won't go off. No bang. Weak phizz. Some wisps of smoke.

RichardENixon's picture

Sounds like what's been happening when I try to bang the old lady these days.

Getagrip's picture

I'm buying all the Euros 

I'm buying all the euros I can while they are still available! If they're good enough for Switzerland, they're good enough for me!!!!











LawsofPhysics's picture

What liquidity problem?  < snark >

hedgeless_horseman's picture




...for U.S. Treasuries and Gilts, which is the reason for the season of European discontent.

Oceania has always been at war with Continental Europe.

jm's picture

Long no fear of the printing press.

hedgeless_horseman's picture



Exactly!  There is nothing to be afraid of.  These two progressive humanitarians have shown the rest of the world how to manage inflation.




The Third Man's picture

From the article....


"The whole financing deal was set up on Chavez’s order by Chavez’s head of security, Gen. Henry Rangel."


General Rangel? Is that Charlies Rangel's brother? I knew there was something fishy about that family! ;-)

falak pema's picture

is she the next president with plastic boobs?

jdelano's picture

Seq--Noooooooo!  Don't join them.  It's a disease.  Like zombification.  

Speaking of which--you know how, in the zombie movie, the hero stabs the zombie through the eye or something and he thinks it's dead but after lying there a minute it roars back to life and attacks....that's this zombie market and the hero is ZH, which ought to alternately be called ZombieHeadhunter.  

Come on Zombie Headhunter, cut off the head, cut of the head!

mayhem_korner's picture

European leaders are due to ratify the plan at the weekend, alongside a broader sweep of initiatives to strengthen the eurozone,


Seems pablum is the precursor to hopium.  As Cris Carter would say...C'mon man.

St. Deluise's picture

buy the rumour

sell the squib

ZippyBananaPants's picture

lower colon.  haha.  you must mean spinkter hole


sabra1's picture

i thought he was refering to colon powell!

dr.charlemagne's picture

well......we certainly do find ourselves in quite a pickle. LOL

PianoRacer's picture

Origin of the phrase "damp squib"

While most modern squibs used by professionals are insulated from moisture, older uninsulated squibs needed to be kept dry in order to ignite, thus a "damp squib" was literally one that failed to perform because it got wet. Often misheard as "damp squid",[8] the phrase "damp squib" has since come into general use to mean anything that fails to meet expectations.[9] The word "squib" has come to take on a similar meaning even when used alone, as a synonym for dud.

Crisismode's picture

You are just reciting Wikipedia.


Please give credit.

ZeroPoint's picture

So when does this motherfucker pop? Give me a date dammit.

lizzy36's picture

So the take away is I am not getting my damn pony again this weekend.

Well moving on to "Wanting a Hippopotamus For Christmas".

fuu's picture

You have been bad this year Lizzy, nothing but coal for you.

Poetic injustice's picture

Vagons of coal for 12 hours/day. Future of many.

Mercury's picture



No market here kid...trades on the pinks!

zorba THE GREEK's picture

The ECB and the Fed will save the banks, that is their primary purpose.

And since Central banks can print money, consider it done. 

css1971's picture

Y'know. I don't really think the ECB is a central bank... I'm not entirely sure what it is, but it certainly doesn't behave like one.

qussl3's picture

Pretty sure its deposit facility and SMP had allowed the EZ zombies to hide the various levels of decay thus far.

mynhair's picture

Christ, why can't Europe start a 'Dancing With The Czars' TV program and go veg out!

chet's picture

Almost time for the Big Short Part Duex?

mayhem_korner's picture



I think the original will need a new title once this puppy goes paws up.

Mentaliusanything's picture

Passing the LIT SQUIB (Fire in the Hole)

streblo's picture

Squibs ignite explosives/fireworks. Damp squibs don't ignite. Hence, a damp squib means fireworks are expected, but nothing happens.



s2man's picture

If something is expected to have a great effect or impact but doesn't, it is a damp squib.

eBuddha's picture

and the idiots on CNBC have a link that asks "Has Market Sentiment Diverged From Reality?" -- suggesting people are just too negative.


jdelano's picture

I was cracking up when I read that this morning--clicked on it cause I thought CNBC was actually going to comment on how insane this rally has been.  Damn near pissed myself when I realized they meant that market sentiment is "negative"  (11% rallly?) while the realities (End of the free world) are positive....

heheheheheh actually, chuckling as I write this...