More European chaos

Sorry this is late today (technical issues).

As I said yesterday it’s going to be a tough week for Europe, and last night certainly was that.

It started poorly when the Chairman of the Financial Stability Board and soon-to-be head of the European Central Bank, Italian Mario Draghi, admitted that European banks were obviously having funding problems. The Euro took a beating on the news.

This was followed by the news that Belgian-French bank Dexia was downgraded by Moody’s for exactly that reason:

Dexia SA shares fell sharply Monday after ratings agency Moody’s Investors Service Inc. said it was reviewing the Belgian-French bank for a downgrade because of problems it may have getting funding in currently difficult markets. Pressure on Dexia has been mounting in recent months, driven mainly by concerns over its exposure to euro-zone sovereign debt and its hefty amount of short-term funding.

Belgian Finance Minister Didier Reynders said over the weekend he is in talks with France over Dexia’s future structure and that governments in both countries should be ready to intervene if necessary.

Speaking to Belgian radio and television outlet RTBF, Mr. Reynders said he wasn’t negotiating splitting up the bank but said “we are in the process of looking at the best way, above all, to help it.”

Dexia received a €6.4 billion bailout during GFC1 and like many European banks has a large exposure to sovereigns, specifically Italy. There have been rumours floating around recently that Dexia is a candidate for nationalization by the Belgium government:

In the meantime the European finance ministers are meeting yet again to discuss how to handle the on-going crisis. As usual the messages are mixed, with members of supra-European establishments claiming the leverage of the EFSF is on the table:

“We are reviewing options of optimizing the use of the EFSF in order to have more out of it and make it more effective as a financial firewall to contain contagion,” said Mr. Rehn, the EU’s top official for economic and monetary affairs.

More specifically, he said, “there are options including the ECB,” and he expects they will be discussed at a meeting of finance ministers in Luxembourg Monday.

While many national ministers are claiming otherwise:

German finance minister Wolfgang Schaeuble noted that “only 10% of
the EFSF’s funds are currently occupied,” indicating that there was no
immediate pressure to increase the fund’s firepower. He also said that he was not willing to speculate about a possible
leveraging of the fund before all Eurozone member states had approved
the changes to the bailout fund.

“I ask first the implementation of the decisions of July 21 before
discussing other elements for the future. We need first to implement the
decisions taken in July,” Belgian Finance Minister Didier Reynders.

Luxembourg’s Finance Minister Luc Frieden added his voice, saying,
“leveraging of the EFSF is not a decision of today. Today will focus on
the medium to long-term roadmap.”

I’ll be amazed if anything but a new bunch of motherhood statements are the result of this meeting, but I hope to be surprised.

The group is certainly not appearing as one that has a single-minded goal. A number of European nations, including Finland, are still trying to negotiate getting collateral on any further funding for Greece and they are still struggling through the implementation of the original EFSF changes. The politicking in and around Slovakia continued last night:

Slovakia’s largest opposition party would help approve the European bailout-system overhaul if the ruling parties agree to early elections or the governing coalition is reshuffled, Smer party Chairman Robert Fico said.

The government of Prime Minister Iveta Radicova needs backing for the package designed by European Union leaders to strengthen the European Financial Stability Facility, the region’s temporary bailout fund. One ruling party, Freedom and Solidarity, or SaS, opposes the measures and Radicova must gain opposition support to push it through parliament.

Should the coalition fail to get SaS support in a Oct. 14 vote, Smer “will vote for the EFSF, but it wouldn’t be that this government will continue and pretend that everything is all right,” Fico said yesterday in a debate on state Slovak Television. “Don’t worry, the EFSF will be approved.”

Not everyone is so convinced. Germany once again applied pressure to the Slovak government:

Slovak officials hopefully know of their responsibility about putting into practice a recent reform of the euro zone’s current rescue fund, German Finance Minister Wolfgang Schaeuble said Monday.

Slovakia’s parliament still needs to vote on legislation to boost the scope and volume of the European Financial Stability Facility, or EFSF, as the rescue fund is called. Richard Sulik, the Slovak parliament speaker and leader of the second-largest government coalition party of Freedom and Solidarity, or SaS, Sunday repeated in an interview to Germany’s Frankfurter Allgemeine Sonntagszeitung that he won’t approve the changes to the EFSF inSlovakia’s parliament.

“I think my (Slovak finance minister) colleague knows we have all committed to put that (the changes to the EFSF) into practice as fast as possible,” Schaeuble said ahead of a meeting of euro zone finance ministers. “It’s like that in a democracy, legislation needs a majority in parliament. We hope that all officials in Slovakia also stand by their responsibility,” Schaeuble said.

In the meantime, the Greeks continue to struggle with their own economic suicide:

The Greek government said it passed a new budget backed by its international creditors, including larger deficits than previously forecast, as the country moves closer to securing an 8 billion-euro ($10.7 billion) aid payout needed to avoid default.

Prime Minister George Papandreou’s Cabinet also passed 6.6 billion euros of austerity measures last night to cut the 2012 deficit to 6.8 percent of gross domestic product, missing the 6.5 percent goal previously set with the EU, International Monetary Fund and European Central Bank, known as the troika. Finance Minister Evangelos Venizelos had previously said Greece would miss the targets and the troika accepted the new budget.

We now await the outcome of the meeting of ministers, as I said above I hope to be surprised.

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  1. The European banks should all be nationalised, imo. This would enable sovereign debts to be cancelled, in part. And it would avoid (temporarily) the need for large infusions of equity, which is in any case not available.

    We are watching a slow-escalating run on the Eurozone itself. The Europeans, acting collectively, can arrest this and stabilize the situation. But if they do not move soon, the weak structures they rely on will buckle and give way. The whole system will collapse. We are at the buckling point. There is not much time left for preventive action.

    • The old Keynsian socialize the losses trick.

      This premise that taxpayers will bail them out is what lets banks take risks. Nothing learned from 2008 it seems.

      Its gotta stop and over $21T needs to be cleansed from the globe.

    • No V-Raptor, it means wiping out the debt, not replacing it.

      There is no socialisation of losses – the shareholders and bondholders are wiped out – as they should, since they took the risk.

      It’s what should have been done instead of TARP in the US, IMO.

      • wipeout of shareholders and bondholders is good, but not enough- counterparties also have to take a hit. Otherwise it is what it is- socialization of losses.

        Only depositors should get some protecion to very limited extent.

        again- it is not any kind of political statement, just the math- IOU’s that can’t be repaid- won’t. Issuing new ones (taxpayer guaranteed) to replace older ones (private) won’t solve anything 🙂

    • Also see the action in the US banking sector last night. Morgan Stanley along with the other Wall Street banks is getting killed. Hopefuly its all a misunderstanding $56Trillion in derivatives exposure is nothing to worry about.

  2. RE Dexia
    Is this the smallish(?) bank that will be allowed to fail (mini-Lehmann style) to allow the ’emergency’ measures to be implemented (whatever they may be)….