…what euro-zone leaders appear to be inching toward is yet another fudge: a Greek deal that avoids default but still falls short of putting debt on a sustainable basis; a bank recapitalization that’s not sufficient to withstand multiple defaults and an expanded bailout fund that isn’t big enough to restore the confidence of sovereign and bank debt markets. That would send a worrying signal that the rift between Germany and France hasn’t been mended. And the longer they leave it, the wider it is sure to grow.
Europe’s highly-leveraged banking sector
Comparing common equity to total assets, 10 major European banks are leveraged more than 25 to 1 (a ratio of less than 4.0%). According to The Big Picture, Dexia is the highest at close to 77 times, but the others are:
- Deutsche Bank
- Credit Agricole
- Credit Suisse
- Commerzbank
- Barclays
- ING
- BNP Paribas
- Societe Generale
- UBS.
Using total equity may indicate slightly lower leverage but the results offer some idea as to why the issue of recapitalizing banks is taking so long to resolve.
Three Ways to Save the Eurozone – Jean Pisani-Ferry – Project Syndicate
The eurozone’s creeping fragmentation is primarily the result of the mutual dependence of banks and governments. In the eurozone, banks are vulnerable to sovereign-debt crises because they hold a lot of government bonds – frequently issued by their country of origin. Governments, for their part, are vulnerable to bank crises because they are individually responsible for rescuing national financial institutions. Each episode in the current crisis illustrates the fragility caused by this interdependence.
via Three Ways to Save the Eurozone – Jean Pisani-Ferry – Project Syndicate.
Greece: Banks and Pols at Impasse
The debate over how to divide the costs of rescuing Greece is one of the central questions European officials hope to resolve at a weekend summit that comes almost two years to the day after a newly elected government in Athens admitted that the country’s finances were “off the rails.”
……On Wednesday evening, an unexpected gathering of top European officials and IMF Managing Director Christine Lagarde in Frankfurt failed to bridge a divide between Germany, which is footing much of Greek’s bill and supports larger private-sector losses, and France, which is more concerned about the impact of greater losses on its banks.
via Greece: Banks and Pols at Impasse.
My money is on Germany — and a bigger haircut for banks. Then the next headache is how to recapitalize the banks. The cause of the problem: Basel II allowed 50:1 leverage on government (including Greek) bonds.
Draft Proposes Fast, Flexible Bailout Fund – WSJ.com
According to the draft guidelines, the EFSF would replace the European Central Bank in its role of intervening in sovereign-debt markets, but the EFSF’s scope for action would be more limited. The EFSF, for example, would only be allowed to purchase euro-denominated bonds in the open market that are issued by the public sector.
On primary market purchases—bonds bought directly from issuers—the EFSF purchases would be restricted to countries already receiving aid or precautionary credit and be limited to 50% of the total auction. Purchases of sovereign bonds in primary markets would require prior approval of European finance ministers.
The guidelines also…….. allows the fund to engage in limited leveraging of its assets.
Forex overview
The euro is consolidating above $1.365; failure of support would re-test $1.315, warning of another primary decline. A 63-day Twiggs Momentum peak below the zero line would confirm a strong primary down-trend.
* Target calculation: 1.32 – ( 1.40 – 1.32 ) = 1.24
The pound retraced to test resistance at $1.59/1.60 on the weekly chart. Declining 63-day Twiggs Momentum, below zero, suggests a strong down-trend. Reversal below $1.53 would offer a target of $1.46*.
* Target calculation: 1.53 – ( 1.60 – 1.53 ) = 1.46
Canada’s Loonie resembles the Aussie dollar: reversal below short-term support at $0.975 would test $0.94. Respect of the descending trendline would also warn of a decline to $0.88*.
* Target calculation: 0.94 – ( 1.00 – 0.94 ) = 0.88
The Aussie dollar is testing support at $1.28 against its Kiwi counterpart after completing a double bottom. Respect of support would confirm the target of $1.32*.
* Target calculation: 1.28 + ( 1.28 – 1.24 ) = 1.32
The greenback is ranging in a narrow band above ¥76, supported by the Bank of Japan. 63-Day Twiggs Momentum holding below zero confirms the strong down-trend.
The greenback recovered above R8.00 on the weekly chart against the South African Rand. Expect another test of R8.50. Upward breakout would warn of an accelerating up-trend that is likely to lead to a blow-off.
* Target calculation: 8.50 + ( 8.50 – 7.70 ) = 9.30
Spanish House Prices Fall – WSJ.com
Spain’s housing-price index in the July-to-September period fell 5.5% from a year earlier—the fastest pace of decline since 2009—and was down 1.3% from the second quarter, the public-works ministry said.
And Now The Bundestag Demands A Say | ZeroHedge
According to FAZ, the German parliament, which made it all too clear wants to be heard in all future European bailout instances courtesy of the constitutional court decision in early September, has just announced it wants to be heard, this time for real, and decide, on any EFSF expansion facility and specifically the usage of more leverage to fight already unbearable systemic leverage.
Sarkozy says euro zone talks stuck, flies to Germany | Top News | Reuters
France has argued the most effective way of leveraging the European Financial Stability Facility is to turn it into a bank which could then access funding from the ECB, but both the central bank and the German government have opposed this.
“In Germany, the coalition is divided on this issue. It is not just Angela Merkel who we need to convince,” [French President Nicolas Sarkozy] told the parliamentarians at a lunch meeting, according to Charles de Courson, one of the legislators present.
His comments fueled doubts about whether euro zone leaders will be able to agree a clear and convincing plan when they meet on Sunday.
via Sarkozy says euro zone talks stuck, flies to Germany | Top News | Reuters.
Jürgen Stark: Hearing at the Committee on Economic and Monetary Affairs of the European Parliament
“Given that one of the root causes of the current sovereign debt
crisis are unsustainable fiscal policies, I want to emphasise that this calls for a clear strengthening of incentives for prudent and sustainable fiscal policies. The introduction of common bonds in the euro area would, however, clearly weaken such incentives without
offering a long-term crisis resolution.”
via Jürgen Stark: Hearing at the Committee on Economic and Monetary Affairs of the European Parliament.