The Banking and Strategy Initiative

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European Sovereign Debt Crisis: The unlikely Lehman moment for Europe

As mentioned in our previous Rinse and Repeat analysis, the situation in Europe is more interesting because of the multiple political power centers and the hegemony between the banks and the sovereigns in the political chicanery game. Rather than the one off 2008 aid weekend, a big bazooka solution is unlikely in the continent

RBS (Adrian Foster) on Insider: We always felt it was unrealistic to think that there would be a one off sort of a big

rinse wash repeat

Image by Sean MacEntee via Flickr

bazooka..package of answers to solve the problem. It really is widespread with a lot off facets to the challenges confronting Europe and hard to believe that there could be a package which could put the issue to bed once and for all..a Lehman moment for Europe is unlikely

Talks failed today over the size and scope of the bailout fund as French and Austrian debt spreads sped to a 100 pt difference on the Germans, probably as the Germans realised they were standing in for the entire Euro zone single handedly.

With each government having its own banks to bail, the equations leading to a fiscal unity financed by prolific Eurobonds may be closer but will go thru multiple Rinse and repeat cycles Corporates like Siemens have withdrawn cash from European banks over a mont h back and the money is now been handed to the ECB controlled central ‘organization’ which is getting closer to a bank structure as Trichet leaves this month and EBA reassigns capital profligacy penalties/gaps on its constituent banks after Dexia escaped the stress test noose and caused a furore over taxpayer cash as governments broke it up to se e it to preserve consumer confidence

Aside: In  an unrelated aside, China's informal lending spreads to
2 in 3 residents in a town such as Wen zu
where over 80 CEOs having borrowed $1.6 bln left home and hearth
and went awol .
When returning the amounts could go up to 50% in a year
in interest alone. and thus the squeeze on manufacturing,
not readily apparent in the 9.1% Q2 growth is likely to scare
China too( Stay tuned to our China threads over the holidays)


What exactly happened today (since the last update, with analysis)

A. More Downgrades

Moody’s downgraded 5 Spanish banks in the second or third Rinse and Repeat cycle in Spain . Banco Santander go this downgrade with BBVA, CaixaBank, La Caixa and the Cajas – CECA. This followed the Spanish sovereign downgrade this week (Live blog)

B. The Currency of the Crisis

Spanish and French auctions, closely watched for only about a month and a half have already become a close call in the last two weeks. (Insider) Last auction two weeks ago, the Spanish sovereign debt auctions (Central Bank) impressed everyone with a healthy bid cover ratio of nearly 3.5 bu tthis time 92% of the final settled amount was at the top bid, Bid cover much closer to 1 i.e. Barely the amount bid covered the amount put up for auction, and it was a much smaller one. Soon the central banks in France and Spain may further cut auction sizes and yet not get enough bidders. French auctions today went through comfortably but obviously at a much higher spread, it having increased its spread over the Bundesbank to 113 pts

C. Action moves to Germany

With French and Austrian debt close to a downgrade ( France may likely be downgraded by S&P by tonight)  and US and Chinese exports of $40 bln at risk in a slowing economy, Germany’s exports itself come under threat. The electorate will also be asked to ratify any larger EFSF roles and the planned $2 Tln EFSF extension may actually also put the existence of the Euro at risk in any polls.

D. New members at the ECB

German representation on the ECB board moves on to the politically more palatable Asmussen and with Mario Draghi and another Italian on board, German and Italian interests may also become primary motives for the ECBas multi pronged governance and political stability in the Euro has given France a couple of deep fiscal wounds it will be looking for EFSF to support as banks get down to EUR 150 bln in recapitalization at the minimum after the EBA rolls out the new stress tests ( corrections)

E.

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