The punchline from Grant Williams' latest edition of Things That Make You Go Hmmm (aside from endless human stupidity of course)
Europe is far too reliant on Germany and the other ‘strong’ countries for the various individual nations to be able to take care of their own problems - particularly if any localized bank recapitalizations are to be in addition to the already pledged EFSF contributions by each nation (left). What is far more likely is some kind of ‘bazooka’ or ‘shock & awe’ (to use two tired cliches) approach using the newly-approved EFSF.
If France had to recapitalize BNP and Soc Gen to the tune of €11 billion in addition to its €158 billion stake in the EFSF (as is widely suspected), it could well kiss goodbye to its AAA rating now that the ratings agencies seem to have finally found religion (Italy & Spain saw downgrades this week) and that, for a country currently running a debt-to-GDP ratio of 84%, would NOT be a good thing.
Whether a ‘station-to-station’ plan is in the works or not, it will rely on a nice, orderly procession from one country to the next and I think it has been made abundantly clear over the last year that Europe DOESN’T do ‘orderly’.
There is absolutely no way that the Eurocrats can stop the markets turning their collective eyes towards the next domino in the line at every point in the process. As they struggle to ‘fix’ the Greek situation, the markets have already done it for them and Greek 1-year bonds now yield 166%. Job done. Next up? Whether the architects of a solution are ready for it or not, it’s Spain and Italy... and France.
This week, Credit Suisse published a report that suggested the NEXT round of European Bank stress tests would value government bonds more closely than in the July stress tests - begging the question “What is the POINT of a stress test if it DOESN’T place realistic marks on the very liabilities being stress-tested?” But then, we already know the answer to THAT question, don’t we?
The report suggests a €220 billion shortfall at 66 of the participating banks (citing RBS, Deutsche Bank and BNP as being most endangered) and predicts that two-thirds of the region’s banks would fail the test - a far cry from the most recent stress tests, conducted three months ago, which gave Dexia a clean bill of health...
So if we assume the Credit Suisse numbers are correct and the recapitalization of European banks will require €220 billion (which is, coincidentally, exactly half of the size of the expanded EFSF) then it stands to reason that a much bigger amount is going to be required to in order to ring-fence the next dominos in line and that means good, old-fashioned leverage. Yes. The source of the entire problem will now be used to solve it. It’s really quite beautiful if you think about it.
Look for an announcement out of this weekend’s G-20 meetings that will mention some kind of multitrillion Euro pledge to make ‘absolutely certain’ that everything is fixed and nobody needs to worry about anything anymore.
Me? I remain skeptical - after all, we have just seen how the murine roar of little Slovakia very nearly derailed a political process that had taken six months to coordinate, and that process was required in order to approve a €440 billion bailout fund. Now, it is likely a fresh round of approvals will be required to increase it to several trillion and the largest contributor to those pledges will undoubtedly be Germany; The same Germany whose Constitutional Court ruling last month gave the Bundestag’s Budget Committee an effective veto over future activation of the EFSF, and reinforced German constitutional restrictions on the introduction of Eurobonds.
This isn’t over people - not by a LONG shot.
full report (pdf):