Another happy night on the equity markets in Europe, once again due to a “plan” to recapitalise the banking system. As I said yesterday, the EFSF seems over-stretched to me, and I note that FTAlphaville followed up that theme this morning:
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).
The EFSF would last just 22 weeks without the ECB and that assumes a pretty conservative €100bn banks re-cap. Without the ECB providing additional support in some form or another I am struggling to see the current EFSF plan having enough fire power to stabilise Europe. The numbers simply don’t add up. With that in mind, I am suspicious that their are other plans being drawn up somehow involving the ECB even though they left rates on hold overnight.
The UK certainly isn’t waiting around to find out what Europe’s plans are. Maybe they are tying to lead the way:
The Bank of England stunned currency markets Thursday by announcing another round of quantitative easing, responding to threats to the U.K. economic recovery and prompting a steep selloff in the British pound.
The bank’s monetary policy committee voted to increase the size of its asset purchase program, financed by the issuance of central bank reserves, by 75 billion pounds (around $115 billion) to £275 billion.
With all of the excitement about possible plans for bank re-capitalisation everyone seems to have forgotten about the actual economy. If they bothered to look they would realise that there is nothing to be excited about at all:
The euro-zone economy shrank in September for the first time in over two years, with activity declining in both services and manufacturing, and the contraction may not be limited to the one month, data indicated Wednesday.
Markit Economics said its composite purchasing managers index for the currency area’s private sector fell to 49.1 from 50.7 in August. A reading below 50.0 indicates a contraction, and the PMI fell below that level for the first time since July 2009.Also, a survey of purchasing managers conducted by the financial information firm showed new orders declining for the second straight month, a sign the economy may shrink further in October.“Furthermore, the rate of decline accelerated since August to signal the largest drop in demand since July 2009,” Markit said.
And:
German factory orders unexpectedly fell for a second month in August as domestic demand waned.
Orders, adjusted for seasonal swings and inflation, declined 1.4 percent from July, when they dropped 2.6 percent, the Economy Ministry in Berlin said in a statement today. Economists forecast no change from the previous month, according to the median of 36 estimates in a Bloomberg News survey. In the year, orders rose 3.9 percent when adjusted for work days.
And:
Europe’s largest economy and the backbone of the euro zone’s now-stalled recovery, showed activity close to stagnation, while in France the rate of growth slowed to a 26-month low.
Italy’s service sector contracted for the fourth month and at a faster pace than expected, while Spain’s shrank for the third straight month.
And, even worse:
Unemployment in Spain rose by 95,817 in September, making it the worst such month for 15 years. The 2.32% increase takes the total number of unemployed to 4,226,744.
So while the market gets excited by the thought of banking bailouts the real economy continues to contract. However not everyone in the market may turn out to be happy with banks getting bailouts, especially if that involves some form of nationalisation:
Dexia SA’s planned breakup to protect its Belgian depositors and its municipal-lending business in France may leave little value for its shareholders.
About 15 years after the French-Belgian bank was created in a cross-border merger and after about 100 billion euros ($133 billion) in public guarantees and funds kept the lender afloat in the 2008-2009 period, France and Belgium are set to announce today a plan to split up its assets in a manner designed to avoid injecting more capital.
Under an option favored by France, Dexia SA may be left holding a “bad bank” with the lender’s worst assets, while Belgium assumes control of operations in that country and state entities in France buy up the French municipal-lending business, two people with knowledge of the plans said. Dexia’s market value has tumbled 29 percent in the past three days on concern shareholders will be the losers in a possible breakup.
We will have to wait and see what the final “plan” looks like.
In the meantime the initial EFSF ratification soap opera continues. As expected the Netherlands ratified the changes last night which leaves Malta and Slovakia as the last two nations to ratify.
From Malta:
A parliamentary sitting to approve Malta’s loan facility to Greece had to be adjourned at 1 am and postponed for continuation on Monday, after finance minister Tonio Fenech said he would be consulting a legal team to ensure that all amendments in the bill were “clear” and that all Malta’s financial obligations were known.
Throughout a marathon sitting, Alfred Sant repeatedly questioned the legality for approving the law, which was originally approved as an Act in July last year, and the amendment was to provide for the extension of the facility.
…
The debate will continue next Monday with a view for a final vote on the same night.
The delay in parliament’s approval comes as an embarrassment to government, as eyes are set on Malta as one of the last few countries within the eurozone to ratify the urgent increase in the fund which is intended to bailout Greece.
And Slovakia:
A junior Slovak government party wants the country out of the euro zone’s planned permanent bailout mechanism in return for supporting a plan to give more firepower to a temporary rescue fund, a demand unlikely to win support at home and abroad.
The proposal by the liberal Freedom and Solidarity party (SaS), seen by Reuters, was presented to the three other ruling parties on Thursday and will be debated ahead of a parliamentary vote next week.
Lawmakers in all but three euro zone states have ratified the plan agreed by policymakers in July to give a stronger mandate to the European Financial Stability Facility (EFSF), allowing it to recapitalise banks, buy government bonds and give credit to troubled countries.
But the SaS has blocked approval in Slovakia on the grounds that Slovaks should not bail out richer countries such as Greece that got into fiscal troubles because of profligate spending.
I certainly can’t see either of these countries having the political might to vote “no” but that wouldn’t stop the politicking. In the case of Slovakia it may even bring down the government.
But hey, this is Europe. We should all know by now that anything is possible, economic suicide is the flavour of the day.