European Banks Recapitalization: Really, to wait for a Greek referendum?

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The last minute requirement by Greek Premier Papandreau to get into a popular referendum shows that the political process has really been neglected and this could crop up as a critical “piece de resistance” in the European curry mix for the long Winter that the continent has undertaken. The greek issue is likely a non starter but the very thought of losing banks having to pay out 75% of the Greek debt, showed up the limitations of the Greek trillon, the inevitableness of Greek default and the inappropriate hurry by financial afficionados to declare the crisis over on the weekend ( CDS for Eurozone dropped a 100 basis points on Saturday)

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As Jean Claude Trichet also pointed out in a weekend interview with Reuters, the incumbent Mario Draghi did not talk about accelerating Italian bond bying either in this earlier comments last week, he just needed to continue Italian bond purchases even at a lower peg.

As a practitioner, this is one common problem I also face esp when there are problem trades stacked on top of each other and many who even considered Italy a hotpoint simply thought that the deal was the best EZ could get, which unfortunately for many translated into “we’re done here” esp as they had to save the Spanish Banks with CDS spreads nearing 7% and Italy ( CDS stayed above 6 on the weekend) and only keen observers and admittedly some doomsdayers only ones to cry out for the 1 tln EFSF being akin to shortchanging the investors.

Waiting for Trading stamina in the markets

The steep reaction in the global markets shows that the length of the crisis has really taken stamina out of most fund

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managers and investors’ pockets esp traders with another loss meaning a death knell to the supply of the short capital. Many were caught out in the Euro pressure earlier when they had already bett on a 1.30 level for the currency and many others had probably just decided to go long in a doomsday prophecy play out in the markets. Again with such a steep reaction on low volumes no risk on direction would have been set, destroying the charm of November investing except for those looking for stamina rich players.

Also on hand is the paucity of Cash rich balance sheets despite the $700 bln for Corporate America as that cash is spread over very few balance sheets and others would find it tough to reach out to their structured finance constituencies, raising a hitch on the call to mortgage and housing prices turnaround as well as a higher peg of growth to target for America after the good news of a 2% + GDP increase in the dull July-September quarter

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The MF Global example

The thinly capitalised MF global as Primary Dealer is a primary example of the need for ringfencing and the need for the Volcker rule making sur trading capital cannot hurt retail or corporate deposits The firm led by ex Goldman Sachs chair Jon Corzine will be bought by a Lehmanesque suitor after yesterday’s bankruptcy announcement and Chapter XI filing is completed for a plain $1 bln. Similarily Credit Suisse, hurting under a loss from Swiss Franc appreciation, is almost nulluifying its $267 bln Market risk book, reducing to half by selling off $134 bln of its assets in abid to climb down on the RWA and get back to a safe place. More program trading and HFT algorithms would add to this insecurity faser and quicker and increase the need to cirrcle the wagons over every little noise from that pond.

Related articles

• European Banks recapitalization: HSBC warns of Euro dangers, US Banks continue bad year(advantages.us)
  

  Image by Omnitographer via Flickr

• Intensity persists: ECB, FOMC, G-20 and Greek referendum in focus (tradingfloor.com)
• Averting a crisis: S&P reaffirms AAA rating for France, Italy and Greece get new Premiers (advantages.us)
• Debt crisis: as it happened – October 24, 2011 (telegraph.co.uk)
• Selling More Insurance on Europe Debt Raises Risk for U.S. Banks (businessweek.com)
• We’re on the mend…barring another Greek tragedy (zerohedge.com)
• Santander Slams Mandatory Bank Recapitalization (online.wsj.com)
• DealBook: Regulator Troubled by MF Global Dealings (dealbook.nytimes.com)