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FT Reports Europe To Sacrifice Its Banks To Bailout Sovereigns - Under €100 Billion In Bank Recap Funding Available
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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i missed that on bloomberg, thanks for brining it up. Awesome to learn I may not be nuts thinking that was the case. Well done.
No one has a crystal ball but how long, seriously, can the absolute bullshit keep spewing from Europe without a market meltdown???
Ya know guys, I don't believe in Sanat Claus, wear a tin foil hat or believe in UFOS but watching this market for years now closely, I just have that gut feeling that the markets in general are 100% fully manipulated by the oligarchy. Seriously, at this point how can the market not recognize we have a global banking insolvency crisis? Why have the U.S banks not been sussed out and leveled. I truly feel like we are living in a real life Twilight Zone episode. People are just walking around like nothing is wrong, business as usual. Talking heads, same thing.
How long can we keep playing make pretend? Is the jig ever really gonna be up or can the criminals keep this up forever????
I Love it........Goldman and Credit Suisse are estimating both this and that, making comments about this and that, downgrading and upgrading eachother periodically. That is too funny. Does anyone else recognize the insanity of it, Goldman is just as full of shit as the next bank/hedge fund, yet people still look to them for Guidance or whatever the fuck. In any other profession you would laugh in their face. These guys are ripping off the world and offering guidance all the way.
I thought the idea of the bailout of the souvereigns was meant to bailout the banks.
It was but it now appears its too much to chew. Hard choices as some must burn. Watch out for contagion!
Unless the ECB is mandated to print unlimited. Wait for Trichet to leave in ten days, his successor is an avowed ex-GS shill and printer. But if he prints in EU then FED loses out in US as USD spikes and that kills WS. Ringa ringa roses...
i have 50 cents to bail out the eu. is that enough?
Lets see if there even is an analogy for it????? GM is totally insolvent, yet issues guidance and decrees about every aspect of the auto industry from safety standards, mileage, quality control to labor relations-----------------------------------when they take Bazillions in govt money because they do the Gods Work of the auto world, its very serious business you know, and never mind that, lets just read what they have to say about everything. Companies that run themselves into the ground or over-leverage into insanity seem to have more credibility than ever.
It reminds you of the sheep singing Kumbaya while following the goat up the ramp, admiring the graceful moves of the handsome goat as he nimbly steps aside as they enter the chute to the slaughter.
Great observations, twotraps. Really clever. Goldman as Big Brother is so absurd it’s funny.
Wealth has been and is trying to continue to be redistributed from the masses to the Elite through debt. Simple as that. Pretty soon Obama's goal of reversing that will resonate with more people even though he was a catalyst to it happening in the first place. It wasn't a mistake, it was calculated. In the end the banks still won't lose and the system will be changed to ensure that no one can ever challenge the Elite again.
sounds far fetched and I agree with you. using reason and economic history will not help with future scenarios. The situation is unprecedented, and the Fed has and will continue to take unprecedented action to secure their position. THAT is what will happen, all under the guise of helping the country get back on track. There is no other possible sollution.
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At this rate, I may be able to buy a European bank on the cheap
On a long enough timeline the survival rate for everyone drops to zero, except for the banks, because what I've heard is they never die, they merely "consolidate" into another existence.
So, I guess will it be a TKO for the Banks or for Euro-sovereignty is what I'm asking.
Like someone else mentioned...
The NYFReserve(no reserves,Not Federal) will bail out any countries TBTF.
At Tax payers expense,of course.
WTG Tyler ! Slam that Euro down! I am short from 1.41 and want you to bash it down to par.
Everyone is doing everything to not have to go back and tell their people that all the promises we "promised" won't be happening and may not happen for a few decades. They can't save both the Countries and the Banks. If they save the countries the banks fail and when they fail will start the CDS dominoes. The states are just as much connected to those as the banks, and when it starts it will bring the states down also.
Socialism es MUERTE:) Get over it and get used to it.
No, socialism will thrive on private sector collapse. Private sector banks are the problem.
The question is what will they propose as new solution? Protectionism and more Keynesian home investments? Or war? Or both?
The very fact that the Euro banks have transferred their client's wealth, upto 500 billion in the last two months to US, shows you that THEY know their heads are on the anvil.
It is becoming more evident that BOTH sovereign debt and Bank Recapitalisation with real money injection, not insurance hanky panky, is BEYOND the means of the EU collectively. The ECB and the liquid sovereigns, Germany and France, ultimate bulworks behind EFSf, cannot carry on their shoulders both these stones of debt and be able to face the market convincingly. It would KILL growth in EU without solving the debt mountain issue. Rock and hard place. As ECB's only solution then would be uncontrolled money printing. That would spike the USD and send the US economy and WS into tail spin as money would run there as marginal haven. The interconnection makes this a lose-lose situation all round. Financial Globalisation is now the problem, not the solution. As the devil is contagion.
Merkel's whole strategy is to nail down the banks as the villains of excessive, past phony globalisation. The banks KNOW it, whence the flight to safety in US. This whole show can't go on. I don't know how they'll square this circle but it'll be a botched up job and the market won't believe it. French/Italian/Belgian banks are now quaking in their shoes. Lets see how Sarkozy tries to save his 3A rating which is as of today total mirage, fancy screen curtain for a dud show for another 3 months when it will become torn curtain.
2012, as projected in current EU grid-lock, is going to make 2008 melt down look like hors d'oeuvre. Keep your fishing rods handy.
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