Have Eurozone policy makers finally got it?
The signs are certainly encouraging, says Citigroup.
… in the last 2 weeks we have moved from not being sure that Europe was coordinated enough and didn’t ‘get’ it & the EFSF2 may not go through – to talk of a bazooka sized EFSF, multiple extra liquidity measures for the European Bankings system and a coordinated banks recap to ‘properly’ stressed levels, rather than the non-stressy stress tests that the investor base did not take seriously. The pace of action is speeding up rapidly and I think you would be hard pressed to suggest that the Politicians don’t ‘get it’ now.
Even the French ones.
Via Bloomberg:
France is working on a contingency plan to take stakes in the country’s banks, Le Figaro reported, citing an unidentified person familiar with the matter. The country’s state holding agency is working on the plan which would involve two or three unnamed banks, the newspaper said.
(For more on France see Tom Bradby’s Twitter feed from Wednesday).
That’s all well and good but stress testing Eurozone banks and injecting capital (again) is only part (albeit an important part) of a solution to the sovereign debt crisis.
Put bluntly there’s no amount of capital that will protect the region’s banks against a multi sovereign default. In fact, they probably wouldn’t survive an Italian default, reckons Gary Jenkins of Evolution Securities.
As we said yesterday, more bank capital is good, but solving the sovereign debt crisis would go a long way in improving the outlook for Europe’s banks. You cannot recapitalise banks to the extent they are able to withstand an Italian default and committing vast amounts of public funds without a solution alongside it that brings investor confidence in sovereign markets may well be counter-productive in the long term
And says Jenkins we still have no idea where the cash for the great European banking recap (or EuroTARP) will come from.
If the answer to that is EFSF, even in parts, then this would further reduce the amount available for supporting struggling sovereigns for which it is already widely agreed the fund is too small unless ways are found to ‘leverage’ it. If €100bn of EFSF’s €440bn are used to recapitalise banks (assuming France and Germany would not access the fund for their banks), with another €100bn already committed for the Irish and Portuguese rescues or expected to go towards the second Greek package, the remaining €190bn would last 22 weeks if the EFSF was to take over the ECB’s role of supporting secondary Spanish and Italian markets at the same pace as we have seen over the last 8 weeks (average €11bn per week).
22 weeks, eh.
One can only presume then that the EU is fully aware of this and that behind the scenes files marked “open only in the event of an emergency” are being dusted off and that what we are actually witnessing at the moment is all part of a grand plan where the banks are recapitalised whilst full support is given to the purchases of government bonds in anticipation of a larger than announced write down of Greek debt. Programs to assist with economic activity will then be announced and progress made on closer fiscal integration to end the crisis. Wales will then win the rugby world cup and I will wake up…
Quite.
It’s one thing to get the scale of the crisis, it’s quite another doing something about it.
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Some quick workings on the amount of capital Europe’s banks are likely to need.
RBS Equity Analysts estimate that marking to market distressed sovereign debt holdings, adjusting earnings to allow for current funding conditions, the removal of structural wholesale funding mismatches and P&L impairments consistent with a severe real economy recession would lower the aggregate 2013F BIS3 Core Tier 1 capital ratio by 2.3pp to 7.2%, with 19 banks would sit below 8%, EUR 109bn-260bn equity shortfall.
Related link:
A genuinely stressful stress test – FT Alphaville