Last night we once again saw rallies across the European and, to a smaller extent , the US markets on the back of rumours. The latest is some sort of bank re-capitalisation deal that was supposedly struck during the latest ministers meeting in Luxemburg. The only issue with the rumour is the fact that is didn’t actually happen:
The European Union doesn’t have a new plan to recapitalize banks, the European Commission said.
EU Economic and Monetary Commissioner Olli Rehn “doesn’t speak of a concrete plan in hand,” his spokesman, Amadeu Altafaj, told reporters in Brussels today. “He speaks of an initiative, of discussions in progress and he pleads for a European approach.”
Altafaj was responding to questions about Rehn’s comments to the Financial Times yesterday.
The commissioner “clearly indicated he doesn’t have a new recapitalization plan,” the commission’s chief spokeswoman, Pia Ahrenkilde Hansen, said.
As I said yesterday, the only thing that was resolved in the Ministers meeting was the convoluted Finnish collateral deal, everything else was “discussed” but not decided.
However it isn’t just the Eurocrats killing off rumours, the IMF are killing off their own actual statements:
In a dramatic turnaround, a senior official for the International Monetary Fund has retracted an earlier comment that the IMF could intervene in bond markets to support struggling Italy and Spain.
‘The fund can only lend its resources to countries, and cannot use these resources to intervene in bond markets directly,’ Antonio Borges, the head of the IMF’s Europe program, said in a statement on Wednesday.
‘Any alternative lending modalities to what we do now would require a different legal structure’ for the IMF, the statement continued, adding that such changes had not been discussed with the fund’s members.
Earlier on Wednesday, Borges had said at a news conference in Brussels that the IMF could possibly invest alongside the eurozone’s bailout fund to help Italy and Spain.
It does seem however that something is going to have to be done about re-capitalising the banks even though we have previously heard from a number Euro-crats that it was unnecessary and banks were well capitalised. I guess Dexia suddenly changed their minds:
European bank regulators will conduct a new round of stress tests on the region’s banks, the Financial Times reported Wednesday in its online edition, citing senior officials involved. The European Banking Authority is planning to provide a country-by-country breakdown of how much capital banks would need should Greece default on its debt, according to FT. A recapitalization of the region’s banks reportedly could cost as much as 200 billion euros.
This comes on top of comments by Angela Merkel about the possibility of using the EFSF as a last resort to back banks:
German Chancellor Angela Merkel said that Europe’s rescue fund will only be used as a last resort to save banks and that investors may have to take deeper losses as part of a Greek rescue.
Merkel’s comments, her most explicit on banks’ role in fighting the debt crisis since the spillover from Greece began to threaten France and Italy, followed talks with European Commission President Jose Barroso in Brussels today. Financial shares rose amid speculation that euro-area policy makers are working on plans to boost bank capital to contain the crisis.
“Time is running out” to establish if recapitalization is necessary, Merkel told reporters. Troubled banks need to first seek capital on their own and national governments will help if that’s not possible, she said.
“If a country cannot do it using its own resources and the stability of the euro as a whole is put at risk because the country has difficulties, then there’s the possibility of using the EFSF,” the European Financial Stability Facility, she said. Using the rescue fund is “always tied to a certain conditionality.”
Signals that European politicians may step up efforts to aid banks and push investors to accept bigger losses as part of a Greek bailout reflect international pressure to end the debt crisis and domestic opposition to expanding rescues. Moody’s Investors Service late yesterday followed its three-level downgrade of Italy by warning that euro-area nations rated below the top Aaa level may see their rankings cut.
That 440 billion euros is really being stretched around!
Over the last few months I have stated that I am struggling to decide whether Europe’s inability to deal with the on-going crisis is due to political reasons or something more worrying such as a misguided economic ideology. My opinion is that most of the Euro-crats genuinely believe that they are doing the right thing yet simply don’t understand the complexities of the issues they are facing. Something akin to believing that ‘cheaters never prosper’ or ‘if you try hard you will succeed’. Beautiful thinking but terribly delusional and ultimately dangerous.
The latest statements from Angela Merkel to her parliament add weight to my concern:
German Chancellor Angela Merkel stiffened her resistance to joint euro-area bond sales, saying that investors yearning for a single gesture that can end Europe’s sovereign debt crisis now will be disappointed.
The euro area has to resolve “that the time of living above our means is over once and for all” and pursue debt reduction that will stretch over “many years,” Merkel said in a speech to members of her Christian Democratic Union late yesterday in Magdeburg, eastern Germany.
While stepping up her rejection of a Greek default, she said that issuance of shared debt by euro countries isn’t the solution to the problem spilling from Greece, even though some may long for the “big bang” to end the debt crisis. “Whoever believes that has no clue about the economy,” she said.
….
Merkel said that her “entire council” of economic advisers says Greek debt should be restructured, advice that she is not prepared to take.
“If we tell a country ‘We cancel half of your debt,’ that’s a great deal,” she said. “Then the next guy will immediately show up and say he wants the same.”
“You can open any newspaper and see there’s a broad international debate,” she said. “I’m not an economist or a theorist. I and the German government have to consider the consequences of what we do.”
Merkel, speaking to the last of six regional conferences of her Christian Democrats before the party holds a national convention next month, said that she was “deeply convinced” that Europe’s problems can only be solved jointly.
A lovely message but completely disconnected from reality. This isn’t a question of morality, it is a simple question of mathematics. I am not going to go through it again, you can see my previous pieces on Greece ( here , here and here ). Put simply the economic structure of Europe and the current economic metrics of the Greek economy means that it will need to continue to receive external funding or it will default. The same is true for any of the other highly indebted non-export competitive Euro nations that attempts to de-leverage their public sector. As I have said before Europe has two choices, default or bail. Ms Merkel doesn’t seem to want to do either in the case of struggling nations yet still seems to expect a reasonable outcome for all involved. This is delusional economics, and is the reason this crisis continues to morph into something far bigger than it ever needed to be.
In other news Moody’s sees more European downgrades, Greece’s austerity protests are turning violent and Slovakia has set Oct 11 as the date for it’s EFSF showdown.