Tag: banks

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Europe stumbles onwards

Markets have been fed a steady diet of press releases out of Europe for the past few weeks but very little substance. This is a dangerous strategy as hopes are raised and reaction to any form of disappointment will be strong. No matter how it is dressed up, we are likely to witness a substantial default of Southern European borrowers, requiring recapitalization of French and Northern European banks. With public debt close to danger levels in many of these countries, there are no ready funds available for a bailout. Quantitative easing by the ECB has been touted as a possible solution, but aversion to this is so strong — particularly in Germany — that it would be political suicide for Angela Merkel to support this. So Europe stumbles onwards, searching for a disguised form of QE solution that is palatable to German voters.

Germany’s DAX is testing support at 5600. Breach would test 5000, while respect would signal a primary advance to 7200*. 13-week Twiggs Money Flow is relatively weak and reversal below zero would warn of renewed selling pressure.

DAX Index

* Target calculation: 6400 + ( 6400 – 5600 ) = 7200 OR 5700 + ( 5700 – 5000 ) = 6400

France’s CAC-40 index is testing medium-term support at 3000. Failure would test 2700, while respect (signaled by breakout above 3350) would signal a further advance. 13-week Twiggs Money Flow remains weak and reversal below zero would also warn of renewed selling pressure.

CAC-40 Index

* Target calculation: 2700 – ( 3300 – 2700 ) = 2100

Italy’s FTSE MIB index is similarly testing support at 15000. Again, 13-week Twiggs Money Flow is weak and reversal below zero would warn of renewed selling pressure.

FTSE Italian MIB Index

* Target calculation: 13 – ( 17 – 13 ) = 9

The FTSE 100 index is testing support at 5350. Failure would test primary support at 4800, while respect (signaled by breakout above 5700) would confirm a primary advance to 6100*. Rising 13-week Twiggs Money Flow favors an advance.

FTSE 100 Index

* Target calculation: 5400 + ( 5400 – 4800 ) = 6000

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IMF Survey: Iceland’s Unorthodox Policies Suggest Alternative Way Out of Crisis

As policymakers continue to grapple with the problems facing the crisis-hit countries in the euro area and the clouded outlook for the global economy, attention has turned to Iceland, which three years ago saw its entire banking system crumble in just a few days.

Private creditors ended up shouldering most of the losses relating to the failed banks, and today Iceland is experiencing a moderate recovery. Unemployment is declining, and the government was able to return to the capital markets earlier this year.

“What was seen as a disaster for Iceland three years ago is increasingly being seen as good fortune with the passing of time. Icelanders may have lost their financial system but instead they were spared the burden of nationalizing private debt,” said Árni Páll Árnason, Minister of the Economy.

via IMF Survey: Iceland’s Unorthodox Policies Suggest Alternative Way Out of Crisis.

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There goes the neighbourhood | Steve Keen’s Debtwatch

Housing credit increased by 0.5 per cent over September (see the RBA Release for details), but this involved a further deceleration of mortgage debt…..

….The most recent figures—that prices fell 1.2% over the June to September 2011 quarter, and 2.2% from September 2010 to September 2011 (see the ABS Release for details)—confirm that mortgage debt acceleration, and not “population pressure” etc., is the key determinant of house prices.

via There goes the neighbourhood | Steve Keen’s Debtwatch.

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Europe’s Dying Bank Model – Gene Frieda – Project Syndicate

In general, the eurozone has outsized banks (assets equivalent to 325% of GDP) that are highly leveraged (the 15 largest banks’ leverage is 28.9 times their equity capital). They are also dependent on large quantities of wholesale debt – totaling €4.9 trillion (27% of total eurozone loans), with €660 billion maturing in the next two years – to fund low-yielding assets. According to Barclays Capital, the 15 largest banks increased their returns on equity by 58% between 1998 and 2007, with 90% of the gain coming from higher leverage. Returns have since collapsed.

This model’s viability depends on large amounts of cheap leverage, supported by implicit government backing.

via Europe’s Dying Bank Model – Gene Frieda – Project Syndicate.

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The Creeping Eurozone Credit Crunch | Credit Writedowns

During the 1997 Asian financial crisis, Japanese banks, getting killed with a falling Nikkei and their credit extended to Thailand and Indonesia, found that rolling off interbank lines to Korea the easiest way to shrink their balance sheets. American and European banks, not wanting to be the last out of Korea, panicked and followed the Japanese banks thus sucking in another country into the Asian crisis.

The Korean banks having to raise dollar liquidity sold their Brazilian and other emerging market bonds. Brazilian banks long their sovereign’s bonds that were declining in price had to raise liquidity and sold their Russian assets. The global margin call was on and fueled a full blown contagion and ended with the Russian debt default and LTCM crisis. Let’ hope it doesn’t come to this. Stay tuned and stay vigilant.

via The Creeping Eurozone Credit Crunch | Credit Writedowns.

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Euro-Zone Talks Hit Roadblocks – WSJ.com

BRUSSELS—Deep divisions between euro-zone governments and private banks over how much to cut Greece’s private debts threatened to undermine efforts by European leaders to agree to a broad package at a Brussels summit Wednesday night aimed at stemming the Continent’s intensifying debt crisis.

….Governments, led by Germany, have been seeking a real cut in the value of Greek government bonds held by private investors of as much as 60%. The banks, led in negotiations by Charles Dallara of the Institute of International Finance, a Washington-based international bank lobby group, offered a new proposal Tuesday night that officials said had fallen far short of that.

via Euro-Zone Talks Hit Roadblocks – WSJ.com.

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Wall Street is Still Out of Control, and Why Obama Should Call for Glass-Steagall and a Breakup of Big Banks

In the wake of the bailout, the biggest banks are bigger than ever. Twenty years ago the ten largest banks on the Street held 10 percent of America’s total bank assets. Now they hold over 70 percent.

….I doubt the President will be condemning the Street’s antics, or calling for a resurrection of Glass-Steagall and a breakup of the biggest banks. Democrats are still too dependent on the Street’s campaign money.

That’s too bad. You don’t have to be an occupier of Wall Street to conclude the Street is still out of control. And that’s bad for all of us.

via Robert Reich: Wall Street is Still Out of Control, and Why Obama Should Call for Glass-Steagall and a Breakup of Big Banks.

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Crunch Time for Franco-German Relations – WSJ.com

…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.

via Crunch Time for Franco-German Relations – WSJ.com.

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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.

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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.

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