Thursday, October 13, 2011

Today's links

1--Europe wakes up to need for bank aid plan, Reuters

Excerpt: It was a problem that Europe hoped would go away but after months of inaction, the EU has begun working on a scheme to shore up the region's struggling lenders as it battles to solve an intractable debt crisis.
A creeping freeze in interbank lending, crucial to finance, and the shunning of European lenders on money markets has increased the problems of the region's banks, already burdened with billions of euros of risky loans.

Having long played down those difficulties, the European Union is getting into gear.

"There is no secret at all that European authorities and the European Commission are all working together on a plan to bring more official, public capital into the banking sector precisely to restore confidence," the European head of the International Monetary Fund, Antonio Borges, said on Wednesday.

"There is a general consensus that this is urgent, and should be done in the next few weeks," he said, adding that Europe needed to pump as much as 200 billion euros into its banks.

Germany has also said it wants quick action to come up with bank backstops -- which, in the absence of investors, are typically state capital injections.

"Germany is prepared to move to recapitalization," Chancellor Angela Merkel said on Wednesday, signaling that European leaders would address the issue when they meet later this month.....

"The EFSF now has to give money to countries. But it should be able to capitalize banks itself. Which bank wants the Italian government, for example, as a shareholder? And which weak government wants to be a shareholder in a bank?"

Whether helping the banks with extra capital succeeds in reviving market confidence may depend on whether investors in Greek debt are forced to take bigger losses.

Should this happen, insulating banks and other European countries from the fallout may prove difficult, if not impossible, one EU official said.
"There is very little you can do. No one knows where money would run to in a situation like that. The reason (U.S. Treasury Secretary Timothy) Geithner came to Poland is because he does not have any wall (to stop contagion). Neither does the UK."

2--U.S. Bank Exposure to Europe Could Be $640 Billion, Per Congressional Paper, WSJ

Excerpt: U.S. bank exposure to the European debt crisis is estimated at $640 billion, nearly 5% of total U.S. banking assets, according to recent research papers written for Congress.

While U.S. Treasury Secretary Timothy Geithner says the U.S. banking sector’s vulnerability to the euro zone problems is “very limited,” the Congressional Research Service estimate is one of the first public assessments provided by the U.S. government that quantifies the potential risks.

According to two different reports provided to federal lawmakers last month, the debt problems of Greece, Ireland, Portugal, Italy, and Spain constitute a ”serious risk” to the European banking system, particularly German, French, and U.K. banks, which have close ties to U.S. banks. Markets believe there’s a very high likelihood Greece will default in the coming weeks. That could cause a cascade of other crises throughout Europe.
Fearing the worst, the International Monetary Fund is urging European authorities to immediately add another EUR100 billion to EUR200 billion in new capital buffers to protect against euro zone defaults.

Officials there are now scrambling to bulk up their banking system as a default could freeze lending throughout Europe, forcing the collapse of some banks.

“Given that U.S. banks have an estimated loan exposure to German and French banks in excess of $1.2 trillion and direct exposure to the PIIGS valued at $641 billion, a collapse of a major European bank could produce similar problems in U.S. institutions,” the research service warned lawmakers. The PIIGS–Portugal, Ireland, Italy, Greece and Spain–have come under increasing attack by markets fearing unsustainable government debts and weak financial sectors.

3--(Fooling the regulators) ECB Says Overnight Deposits Decline at End of Reserve Period, Bloomberg
Excerpt: The European Central Bank said overnight deposits dropped to the lowest in two months.

Euro-region banks parked 62.2 billion euros ($84.9 billion) at the ECB on the last day of the maintenance period, down from 269.2 billion euros the previous day. That’s the lowest level since Aug. 10. The ECB yesterday absorbed 273.8 billion euros in a fine-tuning tender to counter a “large positive liquidity imbalance.”

Banks need to hold a certain amount of reserves on average during an ECB maintenance period. This results in fluctuations at the end of the period as lenders seek to balance their accounts.

4--Three-Month Dollar Libor Climbs for 24th Day to Most Since 2010, Bloomberg
Excerpt: The rate at which London-based banks say they can borrow for three months in dollars rose for a 24th day, reaching the highest level since August 2010.

The London interbank offered rate, or Libor, for dollar loans climbed to 0.40083 percent from 0.3975 percent yesterday, according to data from the British Bankers’ Association. That’s the highest since Aug. 9, 2010.
Credit Agricole SA submitted the highest rate among the contributing panel of 19 lenders, at 0.46 percent today. HSBC Holdings Plc posted the lowest, at 0.275 percent.

The dollar Libor-OIS spread, a gauge of banks’ reluctance to lend, widened to 31.58 basis points at 1:42 p.m. in London, from 30.90 yesterday. That’s the widest on a closing-price basis since July 21, 2010, according to data compiled by Bloomberg.

The TED spread, or the difference between what lenders and the U.S. government pay to borrow for three months, narrowed to 39.07 basis points after reaching 39.75 basis points yesterday, the highest level since June 28, 2010.

5--As concerned Europeans we urge eurozone leaders to unite, Financial Times

Excerpt: We, concerned Europeans, call upon the governments of the eurozone to agree in principle on the need for a legally binding agreement that would: 1) establish a common treasury that can raise funds for the eurozone as a whole and ensure that member states adhere to fiscal discipline; 2) reinforce common supervision, regulation and deposit insurance within the eurozone; and 3) develop a strategy that will produce both economic convergence and growth because the debt problem cannot be solved without growth.

While a legally binding agreement is being negotiated and ratified, the governments of the eurozone must in the interim empower the European financial stability facility and the European Central Bank to co-operate in bringing the crisis under control. These institutions could then guarantee and eventually recapitalise the banking system and enable countries in need to refinance their debt, within agreed limits, at practically no cost by issuing treasury bills that can be rediscounted at the ECB.

6--Europe’s Banks in Race Against Time, WSJ

Excerpt: Angela Merkel and Nicolas Sarkozy say they will deliver a “comprehensive package” on recapitalizing Europe’s banks in time for the G-20 summit Nov. 3-4. But will reality wait that long?

For now, the vicious circle is continuing. The unmanageable debts of sovereigns undermine the banks that hold them. That makes more state-funded bailouts necessary, further weakening the finances of the states that fund them.

Exhibit A: Dexia. Over the weekend, the French, Belgian and Luxembourg governments decided to break it up and nationalize it. The costs are huge. Belgium must pay €4 billion (roughly 1.2% of GDP) to keep the bank’s operations in that country going, while state-backed lenders in France will have to find a comparable sum to keep financing the lending operations there.

In addition, Belgium will have to underwrite more than €50 billion of Dexia’s liabilities for up to 10 years, and France over €30 billion.
And then there’s a bad bank of €100 billion in toxic assets that will need to be capitalized from somewhere.

Small wonder that Moody’s Investor Service put Belgium, with a debt load of around 97% of GDP already, on review for a downgrade Friday.

7--Americans in Poll Back Taxing the Wealthy, Bloomberg

Excerpt: More than half of Republicans say wealthier Americans should pay more in taxes to bring down the federal budget deficit.

Fifty-three percent of self-identified Republicans back an increase in taxes on households making more than $250,000, a sentiment at odds with the party’s presidential candidates, who will meet tonight in a Bloomberg-Washington Post-sponsored debate focused on economic issues.

More than two-thirds of all Americans back higher taxes on the rich and even larger numbers think Medicare and Social Security benefits should be left alone, according to a Bloomberg-Washington Post national poll conducted Oct. 6-9.

More than 8 out of 10 Americans say the middle class will have to make financial sacrifices to cut the deficit even as the public strongly opposes higher taxes on middle-income families.

“While Americans see sacrifice as inevitable for the middle class, the only sacrifice to win majority support is a tax on those too wealthy to be considered middle-class,” says J. Ann Selzer, president of Des Moines, Iowa-based Selzer & Co., which consults with Bloomberg News on Polls.

8--Wall Street Sees ‘No Exit’ From Financial Woes, Bloomberg

Excerpt: Wall Street executives, facing demonstrators camped for a fourth week in New York’s financial district, say they’re anxious and angry for other reasons.

An era of decline and disappointment for bankers may not end for years, according to interviews with more than two dozen executives and investors. Blaming government interference and persecution, they say there isn’t enough global stability, leverage or risk appetite to triumph in the current slump.

“I don’t think it’s a time to make money -- this is a time to rig for survival,” said Charles Stevenson, 64, president of hedge fund Navigator Group Inc. and head of the co-op board at 740 Park Ave. The building, home to Blackstone Group LP Chairman Stephen Schwarzman and CIT Group Inc. Chief Executive Officer John Thain, was among those picketed by protesters yesterday. “The future is not going to be like a past we knew,” he said. “There’s no exit from this morass.”

An anemic global economy, the European sovereign debt crisis, U.S. unemployment stuck above 9 percent and swooning stock markets have sapped the euphoria that swept Wall Street in 2009 as it rebounded to record profits after the credit crisis. The benefits of a $700 billion taxpayer bailout and $1.2 trillion in emergency funding from the Federal Reserve have faded. Next week Goldman Sachs Group Inc. (GS) may report its second quarterly loss per share since going public in 1999, according to the average estimate of 26 analysts surveyed by Bloomberg....

Sharply” falling profits will lead to almost 10,000 financial-services job cuts in New York City by the end of 2012, according to a report released yesterday by New York State Comptroller Thomas P. DiNapoli. The prospects for Wall Street “have cooled considerably,” he said in a statement....
Leon Cooperman, the first Goldman Sachs Asset Management CEO and head of hedge fund Omega Advisors Inc. in New York, said Wall Street has been “excessively” blamed and President Barack Obama has “continued to project himself as anti-wealth, anti- business and socialist in his leanings.”

Phelan said he’s worried about “social unrest.”

“My taxes are going up,” he said. “Everybody hates me. I have two friends who bought land in New Zealand. They’re trying to convince me to go.”...
“We have too many regulations stopping democracy and not enough regulations stopping Wall Street from misbehaving,” Stiglitz, an economics professor at Columbia University, told protesters the next day. “We are bearing the cost of their misdeeds. There’s a system where we’ve socialized losses and privatized gains. That’s not capitalism.”

9--Pyrrhic Adjustment, Paul Krugman, New York Times

Excerpt: Martin Wolf is, as usual, right on point today. As he says, simply providing enough financing for European nations in debt trouble — hard enough as it is — is far from sufficient, because it doesn’t deal with the risk that forcing adjustment on the weak will fail, because of a lack of offsetting adjustment in the strong. That would not be a huge problem if those forced to adjust are small. It is a vast problem if they are large. The risk is of a downward spiral as austerity is exported and re-exported.

With a third of the euro area’s GDP in crisis countries, and with the core countries also pursuing austerity, this is a gigantic problem.

One quibble: Wolf describes Ireland as having had a “uniquely successful adjustment”. I know what he means: Ireland, alone among the euro crisis countries, has already achieved significant “internal devaluation”, that is, has managed to reduce its costs and prices compared with the core countries. But it’s really worth bearing in mind what “successful adjustment” looks like: (see chart)

A few more such successes and Ireland will be back to the 19th century.

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