Chillin' out till it needs to be funded
It’s an absurd notion but somehow.. Market volatility has come down since the middle of September, however the new stress tests and the bank results show up with markets almost ignoring everything from Apple and IBM to Coke and the Agricultural Bank of China. China’s meeting with the EU has been postponed as the fate of the EFSF hangs in the balance ahead of the weekend summit. Global markets are hanging on every word in Europe keeping Global correlation to a higher than 90% across the 24 h market window from Sydney and Shanghai to NYSE when it opens in two hours.
Markets optimistic on deal prospects at the Weekend summit may be in for a rude shock as Germany realises it is time to put its foot down on what has clearly been its stand throughout while France “falls into the abyss” of making sure that a Liquidity crisis is solved the way the world has solved such crises in the last 3 years. While the $2 tln extension for the fund thru ECB has been all but forgotten, details of the emerging disputes which the French have to compromise on appear thus:
A German Deal: Germany’s plans for the EFSF though not backed by many banks or investors, looks to cut its liabilities in the fund(s). Firstly, it could use this opportunity to quash the longer term European Stabilility Mechanism that was mooted at the ECB to replace the EFSF from 2013. Thus its preference is for a single EFSF fund and backed only by part guarantees on each tranche from the ECB to extend it to just more than a Euro 1 Trillion The Germans are also vehemently opposed to the “absurd proposition” to fund the ECB as a bank and thus allow the EFSF as part of the ECB to buy distressed paper to become a liquidity fountain for Europe’s GIPSI and other nations incl France and Austria nearing a bankruptcy of their own. The part guarantees would force the ECB as the owner of the first losses booked on the bonds and thus give them a higher rating and liquidity in the markets
Interestingly in both cases, financing costs for banks will likely rise as guaranteed sovereign paper will be the only safe bet for investors once the EFSF is extended under any of the options esp. with banks looking to recapitalise, thus needing a separate solution for the Euro 150 bln banks need to survive the new Basel adequacy regulations and in fact to stay solvent as haircuts on sovereign and bank debt bring them closer to the breaking point
A French Deal: The French realise they would the first and the biggest customers of the new regime and thus prefer that the ECB become a bank. French policy makers suggested sometime this week that ECB be granted a banking license to trade bank debt and create demand with licensing by one or more Central Banks However, even if the ECB is not to become a bank, the French option is to enable required guarantees by ECB on all sovereigns and probably banks also as they seek to recapitalise and not just a commitment to bear the first few dollars of loss. In this option the EFSF’s support will grow to Euro 2 Tln immediately and the fund will operate as a SPV(as per current structure ) with authorised funding lines from the ECB Thus EFSF becoming the owner of the “First Loss” Insurance option that is okay with the Germans
All signs are that the weekend will turn out to be a damp squib as the Euro 440 mln fund has already been drawn down by Euro 160 mln. The Greeks having passed another austerity vote late yesterday, will look to immediate approval at the summit too, while the haircut on the next rollover negotiated earlier has already urned up woefully short. Apart from Portugal and Ireland, Spain and France require immediate funding support to survive.
MORE TO COME:
Moody’s is on the verge of downgrading some Europe sovereigns as Europe gets closer to a recession after Germany’s IFO business satisfaction index sunk lower today. France has already reported a -0.3% GDP for September
The market expects the collateral solution to be reusing of the same collateral in multiple deals if the French option is approved as per the last guideline document
China wants a greater role in Europe and does need the Euro to survive in the basket of alternate reserve currencies
There are also differences between Germany and France and between the EU and the International Monetary Fund over how deep a write-down banks and insurers will have to take on Greek bond holdings to make that country’s debt sustainable.(Reuters)
A Franco German split is unlikely and intelligent commentators hope that to be the basis of any agreement strung out
Barry Ritholtz has some idea of the numbers being insured for each bank sovereign in the new dispensation which may also serve to determining its illusory size;
It is clear that the Euro Zone is considering an insurance scheme. In accordance with this scheme, the majority of losses (shared approx 80%/20% by the EFSF and investors respectively, up to a cap of between 20% – 25% (probably 20% for Italian and Spanish bonds), though higher (say 40%) for Portuguese, Greek and Irish bonds), purchased in the primary markets, will be indemnified by the EFSF. This increases the EFSF’s “firepower” to a max of E1.15tr (5 times, E230bn, uncommitted by the EFSF). Basically, that’s not enough – the market wants E2tr at least and for this plan to work – quite frankly, even more than E2tr is necessary;
Well fine but 40% for Greece still means the banks have to take a greater share than the 21% on the table and I think they will need to roll that to 60% for the investors..also a 40% and more haircut means the weaker (regional) banks will have to be ‘nationalised’
Journalistic Asides of this banking consultant
G. Though the FT has been a little choppy on the Euro (Ritholtz, Barry at the bigpicture agrees), probably stuck with its UK domicile or prejudice as is the editorial mandate for this month, its coverage is yet much above average, and the Alphaville guys are good to go to for a bench upgrade of all you need to know all the time in any market open.
H. On the subject of FT, they seem to be changing Pearson Editorial Language protocol rather often, less detail, more detail, go with it to the wrong side in opinion, that pink is decidedly yellowish
I. Ok, enough of that, Yves Smith at naked capitalism caught a couple of fly balls for Pimco Gross’s team mentioning that FT’s version of the current guideline document (” seeing that there are the two camps , do the non FRench have a document in hand? ” ) has a precondition that banks in the subject nation be solvent
On bank (re)capitalisation, the first 16 banking citizens that went under in the stress tess are waiting for govt dole outs already (FT.com)
While the banks are expected to turn to private markets first, officials said that state aid may be required. The French government appears to favour using the new €440 billion rescue fund, known as the European financial stability fund, but other member states are likely to argue for national action.
Here is the extract from Mirabelle Dictu on naked Capitalism
..a story from the Financial Times indicates that Eurozone leaders are no longer willing to give banks handouts with no strings attached.(FT)
Per the FT:
In draft guidelines, seen by the FT, for the operation of the enhanced European financial stability facility, EU governments say a “planned restructuring/resolution of financial institutions” is “the sine qua non condition” for assistance
The article continues by observing that the banks intend to retaliate by shrinking their balance sheets instead, which is code for cutting lending. They would presumably do that by letting existing loans roll off. This is blackmail, and it would be nice if the media named and shamed the bankers making these threats.
But the conundrum is that the banking sector is too large relative to the real economy(The initiative: You are probably talking about their credit assets, As GDP they are perfectly fine) , so having it downsize is a desirable outcome. But without some from of government deficit spending to offset the depressing effect of the reduction of credit, the deflationary forces in Europe will only get worse.
J. Occupy Wall Street is alive and has been painting currency notes red too. #OWS and FDL(Fire dog lake!), Occupygeorge.com