Wednesday, November 30, 2011

Today's links

1--Watchdog leaves EU banks in dark on capital, Reuters

Excerpt: Europe's banking watchdog has delayed telling individual lenders how much capital they must raise to safeguard their survival until EU finance ministers can agree on broader plans to shore up confidence in the financial system.

The delay is a blow to banks and investors keen to get to grips with how much cash is needed as the bank sector faces multiple threats that threaten to spill over to the real economy.

The European Banking Authority (EBA) had planned to finalise by Wednesday how much cash banks need to meet a minimum 9 percent core capital -- a preliminary estimate had put it at 106 billion euros ($141.5 billion) for the 70 lenders under scrutiny.

But European Union finance ministers (Ecofin) meeting to discuss the euro zone debt crisis need to help banks as part of a wider plan. If they agree on the bank measures, the EBA is likely to release details next week, a spokeswoman for the EBA said.

The Ecofin meeting comes as concerns rise about a funding squeeze for banks next year, prompting many to step up plans to sell assets or portfolios of loans....

Banks are under pressure from worries about sovereign health, capital and liquidity, analysts said.

"For the funding markets to reopen, banks need a minimum of 160 billion euros (more capital) in a mild recession and 215 billion in a stress scenario," said Kian Abouhossein, analyst at JPMorgan.

If the credit market doesn't reopen, he said banks could face a "systemic problem" as they need to refinance 680 billion euros of debt next year. "We see funding as one of the key challenges in 2012," he said....

Commerzbank, which may face a capital shortfall of 5 billion euros, is considering transferring its loss-making real estate finance unit Eurohypo to the German state, sources close to the bank told Reuters.

The move could allow it to avoid a potentially punitive fresh state-aid inquiry by the European Commission. It has been ordered by the Commission to sell Eurohypo by the end of 2014 as a condition for approving state aid in 2008/09.

Societe Generale is selling property loans worth more than 600 million euros ($801 million) as it seeks to slash its exposure to the volatile sector and bolster its balance sheet, a person close to the situation said.

Rivals BNP Paribas and Credit Agricole and banks in Italy, Spain, Germany, Britain and Ireland are also deleveraging aggressively to meet tougher capital rules and ease funding strains.

That could put more pressure on sovereign debt or squeeze lending to the economy, according to a report prepared for the Ecofin meeting.

"There are serious concerns about a possible inappropriate deleveraging by banks when implementing the measures that would prejudice an adequate supply of lending to the real economy or put excessive additional pressure on sovereign debt," officials write in the report seen by Reuters.

2--Italy borrowing cost soars as euro pressure mounts, Reuters

Excerpt: Italy's borrowing costs hit a euro lifetime high of nearly 8 percent on Tuesday, taking the debt crisis to a new level of intensity hours before new prime minister Mario Monti was to meet euro zone finance ministers to set out his economic reform plans.

Two years into Europe's sovereign debt crisis, investors are fleeing the euro zone bond market, European banks are dumping government debt, deposits are draining from south European banks and a looming recession is aggravating the pain, fuelling doubts about the survival of the single currency.

Italy had to offer a record 7.89 percent yield to sell 3-year bonds, a stunning leap from the 4.93 percent it paid in late October, and 7.56 percent for 10-year bonds, compared with 6.06 percent at that time.

3--Merkel won't swap euro bonds for stability rules: MPs, Reuters

Excerpt: German Chancellor Angela Merkel will not make a deal at the upcoming European Union summit to stop resisting joint issuance of euro zone bonds in exchange for progress on strengthening fiscal rules, German MPs quoted her as saying on Tuesday.

Members of parliament from Merkel's center-right coalition said she told them in a closed-door meeting Europe was "a long way from euro bonds" as it made no sense to sanction euro states breaking fiscal rules on the one hand and reward them with lower interest rates via the collectivization of debt on the other.

The chancellor also reiterated her opposition to using the European Central Bank to solve the euro zone's debt problems by injecting unlimited liquidity.

4--Iceland wins in the end, Telegraph

Excerpt: The OECD has come very close to predicting a depression for Europe unless EU leaders conjure up a lender-of-last resort very quickly, and somehow manage to make the world believe that the EFSF bail-out fund really exists.

Even if disaster is avoided, the eurozone growth forecast is dreadful. Italy, Portugal, Greece will all contract through 2012, while Spain, France, Netherlands, and Germany will bounce along the bottom.

Unemployment will reach 18.5pc in Greece, 22.9pc in Spain, 14.1pc in Ireland, 13.8pc in Portugal.

Yet Iceland stands out, with 2.4pc growth and unemployment tumbling to 6.1. Well, well....

Had Iceland been in the eurozone, it would have been forced to pursue the same reactionary polices of "internal devaluation" and debt deflation being inflicted today on the mass ranks of unemployed across the arc of depression.

5--OECD calls for urgent EU action, warns of credit crunch, EU Observer

Excerpt: A bleak assessment from the Organisation for Economic Co-operation and Development (OECD) on Monday (28 November) warned that the eurozone crisis threatens the globe with a serious recession if left unresolved.

"The euro area crisis remains the key risk to the world economy," the Paris-based economic think-tank said in its biennial report, adding that the eurozone debt train crash could result in global liquidity seizing up.

"If not addressed, recent contagion to countries thought to have relatively solid public finances could massively escalate economic disruption. Pressures on bank funding and balance sheets increase the risk of a credit crunch."

The body cut its projections for growth across all OECD or developed countries from 2.3 percent in its last report to 1.6 percent in 2012, while EU states dropped in its estimations from two percent to 0.2 percent for next year.

6--Euro Zone on the Brink: A Continent Stares into the Abyss, Der Speigel

Excerpt: Business daily Handelsblatt writes:

"In the short term, Europe is the biggest threat to the global economy. Companies and investors are well advised to make contingency plans for a break-up of the euro zone. The euro can fail, even though no one wants it to. Much now depends on whether the next crisis summit on Dec. 9 will take steps towards a workable fiscal union while at the same time finding short-term funds to end the buyers' strike in bond markets....

It is now clear, however, that a broad retreat from the crisis-stricken countries is underway across almost all investor groups. "It's no longer just the banks. Now insurance companies, pension funds and even sovereign wealth funds are selling off euro-zone bonds," notes Joachim Fels, the Morgan Stanley economist. The fear of losses and of a breakup of the euro zone is driving investors away -- as are the politicians who have fueled this fear through poor decisions....

Offloading Bonds

Secondly, most banks are not trying to raise new money to reach the new equity capital requirement of 9 percent of total assets. This wouldn't even be possible, given the hyper-nervous markets. Instead, the banks are reducing the size of their balance sheets, and thus their capital requirements, by selling off assets -- such as government bonds.

According to a study by the Landesbank Baden-W├╝rttemberg (LBBW), a German state-owned bank, the banks in the core euro-zone countries have reduced their holdings of government, bank and company securities from the EU periphery by 25 percent, down to €1 trillion, since the beginning of 2010. "The trend (toward reduction) is likely to continue," the LBBW concludes....

The calendar is also accelerating the flight from government bonds. Banks, investment funds and insurance companies close their books shortly before the end of the year and make hardly any new investments. At the same time, they often sell off those securities that have brought them losses, like European government bonds. Few institutions would want to have to explain to investors why, after a debt crisis that has lasted almost two years, they are still sitting on the sovereign debt of crisis-ridden countries.

For all of these reasons, the debt-stricken nations are now cut off from access to new money, just as banks were after the Lehman Brothers' bankruptcy of 2008. Who will finance them in the future?...

Opening the Floodgates

The ECB's interventions are still somewhat justifiable, because they are limited in scope and in time. However, if the central bank were to open all the floodgates, as some are demanding, its actions would hardly be compatible with the European treaties. They expressly prohibit the ECB from financing the countries of the euro zone with the money presses. The Treaty on the Functioning of the European Union states that the central bank may not "purchase (debt instruments) directly...

Proponents of common bonds consider these calculations to be too pessimistic. In fact, they anticipate the trend moving in the opposite direction. Because the market for euro bonds would be of a similar size to the market for American treasury bonds, euro bonds would become more attractive. Common bonds would thus promote the role of the euro as a reserve currency. Both effects would increase demand for the new bonds, which in turn would bring down yields. It remains unclear whether this effect could offset the increase in interest rates.

7--German Constitutional Court at Risk of Losing Power, Der Speigel

Excerpt: behind the scenes, much more is at stake: the loss of power of the Constitutional Court in itself. The government and the court are locked in one of their biggest power struggles to date. One judge at the court described it as a "latent constitutional crisis." The government, he said, was trying to free itself of the restraints imposed on it by the constitution, and by the court.

The president of the court, Andreas Vossk├╝hle expressed it a little more cautiously. The perception of his court was at present, he said "ambivalent in parts."

On the one hand, the court had been credited for ensuring that European unity remained on a secure legal and democratic footing, he said. But on the other hand, it "is seen by some as an obstacle in overcoming the current crisis."

Court May Lose Power to Rule on EU Matters

As a result, efforts underway in Berlin to change the constitution are being viewed with mixed feelings in Karlsruhe, where the court is located -- because they are aimed at opening up greater room for maneuver in future dealings with the court.

If the constitution were to be replaced with another version through a popular referendum, this would be radical, but couldn't be criticized. But it appears that some among Chancellor Angela Merkel conservatives are considering removing the court's control over the political process through a normal amendment of the constitution. The legislature could simply deprive the judges of their jurisdiction in questions of European integration.

8--SPIEGEL Interview with Romano Prodi: "Germany Must Make a Decision or the Game Is Over", Der Speigel

Excerpt: Prodi: Think about one thing: Why is it that nobody attacks the dollar? Looking at the United States budget, the dollar is in a much worse situation than the euro. The debt state of California is much worse off than the Greek one. But the dollar is defended, also by the Fed. That makes the dollar a big, strong dog. And nobody bites a big dog.

SPIEGEL: Could the euro become a big dog, too?

Prodi: If there is the political will. Look, Germany has a really powerful position right now. Germany is the new China.

SPIEGEL: Surely that is an overstatement.

Prodi: Let's take the German-French summit. By now it is a German-German summit. You cannot say it loudly, but it is true: Chancellor Merkel, in the end, is obliged to dictate the rules.

SPIEGEL: So you are convinced that the German attitude towards euro bonds has to change in order to solve the euro crisis?

Prodi: Germany has to take a decision for Europe, or the game is over. But I don't think there is anyone in Germany who is willing to give up Europe

9--Dollar Funding Costs at ‘08 Levels Flag Sustained Credit Crunch, Businessweek

Excerpt: The cost for European banks to fund in dollars rose to the highest level since October 2008 for a fifth day, indicating a longer-lasting credit crunch than that following the collapse of Lehman Brothers Holdings Inc.

The three-month cross-currency basis swap, the rate banks pay to convert euro payments into dollars, was 154 basis points below the euro interbank offered rate at 1:40 p.m. in London, from minus 149 basis points yesterday. The gap has widened from as little as minus 8 basis points on May 4....

Banks face more sustained funding pressure compared with 2008, because investors “are panicking about the exposure to sovereign debt and any fallout from a potential breakup of the euro,” said Marchel Alexandrovich, an economist at Jefferies International Ltd. in London. “Until the political mess is resolved and there is clarity on the future of the euro, banks are going to be shrinking their balance sheets, hitting economic growth in the process,” he said.

The one-year basis swap was at 103 basis points under Euribor, compared with minus 104 basis points yesterday, data compiled by Bloomberg shows. A basis point is 0.01 percentage point.


The Euribor-OIS spread, a measure of banks’ reluctance to lend to one another, rose one basis point to 94 basis points, data compiled by Bloomberg shows. A basis point is 0.01 percentage point. The spread, which is the difference between the borrowing benchmark and overnight index swaps, was at 98 basis points on Nov. 3, the widest since March 2009.

Lenders increased overnight deposits at the European Central Bank, placing 281 billion euros ($375 billion) with the Frankfurt-based ECB yesterday, up from 256 billion euros on Nov. 25.

10--European Credit Crunch Starting As Crisis Spreads To Private Sector, Forbes

Excerpt: Pressure on bank funding and balance sheets increase the risk of a credit crunch,” noted the OECD in a gloomy note released Monday. Analysts at Barclays concur, and provide further detail. “We [have arrived] at a risky situation for the euro area economy, with clear knock-on effects to corporate funding costs both in terms of higher sovereign yields and in terms of widening corporate credit spreads on top,” explained the analysts.

Rising sovereign bond yields, particularly in core eurozone economies like Germany and France, already puts pressure on corporate bond yields, given the “risk premium” investors pay in the private sector.

A bigger problem European corporates are facing is bank deleveraging, though. According to Barclays, bank deleveraging could total €500 billion to €3 trillion, or up to 10% of eurozone bank assets. Regulators have turned up the heat on European banks to strengthen their balance sheets and improve their core tier 1 capital ratios, having set a deadline of June 2012 to reach 9%.

Banks, therefore, are relying on deleveraging, as opposed to earnings growth. Deleveraging causes economic dislocations, with overall eurozone balance sheets shrinking about 10% or nearly one third of eurozone GDP....

Bank lending standards have tightened, Barclays suggests, and debt funding costs have risen sharply, both for financials and non-financials. “Historically, such a tightening of lending standards has presaged economic weakness and a consequent rise in high yield corporate credit default rates, typically with a 12-month lag,” wrote the analysts.

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