As Lagarde Throws Germany And European Banks Under The Bus, Did She Just Truncate Her IMF Career?
This year's biggest winner from the botched DSK affair has been France's Christine Lagarde, who despite the dropping of all charges against the former head, is now in charge of the IMF. We admit that the ascension of Lagarde to the throne of the world's most irrelevant global bailout organization (what the IMF "does" is of not importance: the only thing that matters is who Beijing, and Chinabot, feels like rescuing today) happened even though we previously predicted that Germany would be very much against it. Well, Germany let it slide, and endorsed Lagarde. That may soon change though, after the former finance minister essentially threw the entire European (read French, Swiss and German whose assets as a % of host GDP are ridiculous... yes, a technical term) financial system under the bus at Jackson Hole, a day after Bernanke said to wait until September 20 for QE3 clarity. Per Bloomberg: "Bolstering banks’ balance sheets “is key to cutting the chains of contagion,” Lagarde said today in the text of remarks at the Federal Reserve’s annual forum in Jackson Hole, Wyoming. Without an “urgent” recapitalization, “we could easily see the further spread of economic weakness to core countries, or even a debilitating liquidity crisis." Lagarde, a former French finance minister who took the helm at the Washington-based IMF in July, said recapitalization should be “substantial.” Banks should look for funds in the markets first and seek public funds if necessary. One way to provide capital could be through the European bailout fund, she said." And now, one can see why Germany is fuming: not only will Germany soon have no choice but to fund the EFSF's sovereign bailout ration all on its own, which as we, and other have speculated, could be as large as €3.5 trillion (or about $5 trillion), but it will be Germany's duty to also fund the rescue of all banks on a parallel track. What is the additional tally? Why at least $230 billion in Europe alone in the next several months. Then again, when you get to $5 trillion, what's a few hundred billions between friends?
Banks will struggle to refinance the upcoming mountain of government-guaranteed debt that is due to mature in the next two years unless the primary market fully thaws in the coming weeks, according to bankers and investors.
Banks had planned to aggressively use the autumn period to get ahead of large refinancing requirements in 2012.
Thomson Reuters data show that the USD230bn equivalent of European bank government-guaranteed debt will mature in 2012 and US banks will have more than USD122bn maturing.
Governments started guaranteeing banks' debt issuance in September 2008 as capital and money markets froze after the failure of Lehman Brothers on September 15th.
Most of the guarantees had a three-year maturity, although Spain and France allowed banks to issue up to five years.
"The wall of upcoming maturing government-guaranteed debt is a concern, especially if the current market freeze goes on for much longer and spills over into 2012," said Martin Lukac, financials credit analyst at Principal Global Investors.
"If you look back, the government-guaranteed schemes were all established around the same time and were limited in terms of maturities which means that a lot of them are coming up at the same time, making the banks' maturity profile very frontloaded," said Lukac.
According to Thomson Reuters data, a mere USD7bn equivalent of senior was raised by European banks in July while the tally for August is even lower at just over USD1bn equivalent. This compounded poor volumes in June when USD17.4bn was sold, well below May' s figure at USD41.2bn.
All of the above is another way of saying what Zero Hedge pointed out last week: namely that Europe is now entirely shut out from capital markets, as confirmed by the following Morgan Stanley chart.
And then just to make sure her message was heard loud and clear, Lagarde added:
Lagarde also warned that the world economy is in a “dangerous new phase” and called for measures that will ensure a sustainable fiscal path in the medium term while boosting growth now. Policy makers in advanced economies are under pressure to reduce their public debt just as their economies show renewed signs of economic weakness and unemployment fails to decline.
So just when Europe thought it had the collapsing situation under control (although not if one looks at the DAX, which has tumbled over 20% in August alone), here comes the IMF and tells the country it is its duty to bail out more, more, more. Then again, anyone who read our analysis back in late July about the transition of risk from the periphery to the core, could have seen the German rout (in both stocks and CDS) coming from a mile away. As a reminder: "The most ironic outcome would be if the eurozone, in an attempt to prevent further contagion at the periphery, simply invited the vigilantes to bypass Italy (recall how everyone was shocked that instead of attacking Spain, it was Italian spreads that got destroyed in a manner of days), and head straight for the country on whose shoulders lies the fate of the entire EUR experiment?" Which is why we believe odds that Miss Lagarde will be met with a metaphorically comparable "Sofitel maid" incident as the former IMF head, just went up by a lot to quite a lot.
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