Tag Archives: Belgium

The Sociopathic Banking System of Europe

In spite of the recently conducted stress test of European banks, concluding that most of them have enough core capital to weather a “worst case scenario,” we now learn that they will need at least EUR 200 billion more to be on the safe side – and probably more. Here at the EconoTwist’s we’re not the only ones who think this is getting way out of hands: It seems like no one is really sure of the banks real risk exposure, not even the banks themselves, the stress test have once again proved to be a joke, and who the Hell do they think they are? – the IMF and the banking associations who think they just can demand the euro zone governments to fill up their bottomless buckets?

“This is the second time it has happened.”

 Elena Salgado

Yesterday, the IMF leaked its calculations of required capital for a recapitalization of the banks in the euro zone, well ahead of the publication of IMF’s financial stability report later this month. This amount is now  EUR 200 billion. And of course it has triggered a debate within the euro zone. But the discussion is also rather skewed: the main issue is the actual number, 200? 300? Who cares? The real problem is that we still don’t know the health of our financial system – three years after the crisis hit!

The staff at the International Monetary Fund  have triggered another fierce dispute with euro zone authorities over their estimates, showing even more cracks in the European  banks’ balance sheets, related to their holdings of troubled euro zone sovereign  debt.

Christine Lagarde

(Yeah, another quarrel – just what we need….)

The analysis, which was discussed by the IMF’s executive board in Washington  on Wednesday, are strongly rebutted by the European Central Bank and the euro zone governments, which say it is partial and misleading.

Is there anybody trustworthy, these days?

According the Financial Times, the IMF’s analysis, currently in a drafted version of its regular Global Financial  Stability Report (GFSR), uses credit default swap prices to estimate the market  value of government bonds of the three euro zone countries receiving bailout money from the IMF – Ireland, Greece and Portugal – in addition to the bonds of Italy, Spain  and Belgium.

Although the IMF analysis may be revised, two officials says one estimate  show that marking sovereign bonds to market would reduce European banks’ tangible common equity – the core measure of their capital base – by about EUR 200 billion (USD 287 billion), a drop of 10-12 per cent.

The impact could be increased  substantially, perhaps doubled, by the knock-on effects of European banks  holding assets in other banks, Financial Times writes.

In other words: the IMF estimates are just as worthless as the stress tests – the only thing that is certain is that most banks will need more substantial capital injections if they are going to survive.

Anyway – the ECB and the euro zone governments strongly rejects these estimates.

Elena_Salgado

Spanish finance minister, Elena Salgado, told the Financial Times yesterday that the fund makes a mistake by  looking only at potential losses without also taking account of holdings of German Bunds, which have risen in price.

“The IMF vision is biased,” she said. “They only see the bad part of the  debate.”

Now, that’s another “truth with modifications,” because the gains in Bunds are comparatively small in relation to the losses on other sovereign bonds.

“This is the second time it has happened,” the Spanish finance minister points out, referring to the fund’s  October 2009 GFSR, which estimated that euro zone banks had only written down USD 347 billion of USD 814 billion of probable losses from the financial crisis. IMF later revised down that total of probable total losses.

Well, I’m afraid it will not be the last time, either…

Mrs. Salgado goes on saying that the European stress tests of banks is a better indication of  their vulnerabilities.

Now, that’s just plain wrong!

The stress tests do not only lack credibility, they also assume no losses on sovereign debt holdings in the bank’s books.

As www.eurointelligence.com rightfully underlines, it is very likely that investors in Greek and peripheral debt securities will ultimately face losses, especially given the European Council has already agreed to accept a degree of private-sector participation.

Considering the decline in economic growth, now evident throughout the whole euro zone, those losses will increase substantially.

This means that the IMF estimate of an additional EUR 200 billion in bank aid most probably is overoptimistic underestimation.

But this line of argument is really a total derailing of what’s ought to be the real discussion:

In the view of the EconoTwist’s we’re looking at a 3-part problem.

First, the accounting system that has developed into a untransparet jungle of techniques, making it totally impossible for both regulators, analysts and policy makers to gain complete oversight of the bank’s real risk exposure.

This includes the off-balance sheet financing, that once upon a time was created as a special solution to fund important high-risk projects, but now being used for pure speculation – just as the traditional derivatives.

Then we have the cross-border activity. The fact that the financial industry have globalized faster than any other industry, and faster than national (local) authorities are able to handle, have created a situation where banks may speculate, taking advantage of different rules in different countries, taking on more risk with little or no need for reporting and disclosure.

To make things even more confusing, international regulators invoked a special set of rules in the aftermath of the Lehman collapse, allowing the banks to put whatever price tag they see adequate on the toxic, worthless assets they possess.

This is called a “mark-to-mark” principle.

However, new rules, now being implemented through the Basel III regulations requires that banks return to the old principle of “mark-to-market.” That means putting the actual market valuation of their assets on their balance sheet.

EU officials involved in the debate say the “mark-to-market” principle explains much of the recent fall in EU’s commercial banks’ share prices, including  French and German institutions that have large holdings of euro zone sovereign debt.

“Marking to market is a fairly brutal exercise, but these are the estimates  that hedge funds are currently making,” one official says to the FT, following criticisms  of European banks made by the International Accounting Standards Board, which sets the common bank accounting rules, to the European Securities and Markets Authority,  EU’s markets regulator.

And the third unresolved problem is called the “shadow banking system.”

See also: Major Banks Still Hide $Trillions In The Shadows

Officials say the IMF staff do not claim their estimate is a comprehensive  measure. But they say that the analysis strongly suggests European banks need to  raise more capital, an argument  recently made by Christine Lagarde, the fund’s new managing director.

No one disputes that fact.

The final report will be published in three weeks’ time just before the  IMF’s annual meetings, and is subject to revision depending on the debate  between fund staff and the fund’s executive board.

But these authorities and their officials can evaluate, calculate and estimate all they want:

Before the regulatory mess is cleaned up, things are not going to look any better and more nasty surprises can be expected.

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Europeans Are Too Depressed To Be Innovative

According to the chairman of the European Council, Herman Van Rompuy, the Europeans are too depressed to be innovative and come up with ideas that can create new jobs and help the economic recovery. That’s a statement I just can’t let pass me by without a few comments…

“Only negative messages from leaders are the wrong message coming out of the crisis. The positive outlook is key for a dynamic society.”

Herman Van Rompuy

If Europe is to remain relevant as an innovative economy, people need to be more positive and entrepreneurial and not let themselves be depressed by the economic crisis and subsequent austerity measures, EU council chairman Herman Van Rompuy said at a conference last week.

Innovation has a lot to do with behaviour, risk taking, motivation and education. You can’t have a society of very creative people only based on financial stimulus,” the Council chairman, and former Belgian premier minister, said Wednesday during a conference organised by Ernst&Young on innovation and the role of government in supporting it.

Adding that: “societal problems in Belgium and elsewhere in the EU mean that people live in a climate of despair and are depressed.”

But in order for Europe to remain at the cutting edge of innovation in areas ranging from energy to agriculture, services and digital technologies, “we need a dynamic and positive society,” based on competition “but also on generosity.”

“But crisis can be very depressive. Only negative messages from leaders are the wrong message coming out of the crisis. The positive outlook is key for a dynamic society,” Van Rompuy stressed.

According EU’s own estimates, the bloc will fall behind Asia and the US by 2025 in terms of innovation, the EUobserver.com writes.

Van Rompuy says he will not let EU leaders hide behind nice pledges, after they agreed earlier this year to give priority to areas such as education, innovation and energy.

“We will not allow this process to become a slow bureaucratic exercise, but we will follow it closely,” he says.

At an upcoming EU summit mid-June, a first assessment of these policies and country-specific recommendations will be made.

“Early 2012, I want to know what member states concretely did in the one year period to boost innovation, even in harsh times of austerity. What did they do to increase the share of innovative products and services in public procurement, to stimulate green growth, to prove the use of EU funding allocated to research and innovation,” Van Rompuy says.

I’m Too Sexy For My Shirt

Actually, I’m not quite sure to begin. So, let’s just take it from the top:

Innovation has a lot to do with behaviour, risk taking, motivation and education.”

Sure. But the main thing is trust, faith and confidence in our economy, and in  the authorities that supervise it.

And that’s exactly what is lacking at the moment, Mr. chairman!

When it comes to creativity based on financial stimulus, it’s totally irrelevant.

If people trusted the stimulus measures, they would use them.

Right now they don’t. No one is sure about how long the measures will be in place, if and when they will change, or perhaps disappear, or if more austerity is going to make it even more difficult to get loans and – in turn – get projects up and running.

That’s the real life!

Don’t Worry – Be Happy

“We need a dynamic and positive society, based on competition and generosity.”

Yeah, that would be nice, wouldn’t it?

However, I raise a big question mark with the EU Council’s recipe for creating such a society, based on the following – all too familiar – statement:

“Only negative messages from leaders are the wrong message coming out of the crisis. The positive outlook is key for a dynamic society.”

This reminds me of some conferences I attended in January 2007. Amongst the speakers were some of the most prominent economist, investors and politicians in world.

Everyone – really, I mean everyone – predicted a so-called soft landing for the global economy, after 7 years of extreme economic growth.

The experts were convinced that we would see a very slow decline, followed by a cautious growth rate over the next 3 to 5 years.

No one even mentioned the possibility of a total meltdown that started just 6 months later with the collapse of 2 Bear Stearns Hedge Funds.

So much for the positive outlooks!

Sometimes I wonder if the EU leaders – and economists – are totally unfamiliar with the term “truth”?

“Competition and generosity” – please, Mr. chairman, can you give an example where the combination of competition and generosity have led to economic success?

Oh, what the heck! Sing along: “We all live in a yellow submarine.”


Van Rompuy says he will not let EU leaders hide behind nice pledges, after they agreed earlier this year to give priority to areas such as education, innovation and energy.

“Early 2012, I want to know what member states concretely did in the one year period to boost innovation, even in harsh times of austerity. What did they do to increase the share of innovative products and services in public procurement, to stimulate green growth, to prove the use of EU funding allocated to research and innovation.”

Well, I can assure both Mr. Van Rompuy and everyone else, I’ll be waiting too…

Meanwhile, here’s a little bit of creativity for you:

Related by the Econotwist’s:


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Finally, Trichet Show Some Fire Power

As expected, the ECB had a pivotal role in determining spreads direction today. However, it didn’t turn out quite as smooth as the market was expecting. The  surprise followed soon after Jean-Claude Trichet‘s  press conference.

“It soon became clear that central banks were aggressively buying bonds, bringing to mind Trichet’s recent warning not to underestimate the ECB.”

Gavan Nolan


ECB president Jean-Claude Trichet did confirm that the ECB would delay its exit from its non-standard liquidity measures;  the three-month LTROs would remain in place until at least Q1 2011 and the other MROs until at least April 2011. This was welcomed by the markets, but it would have been a major surprise if wasn’t announced. The real surprise followed soon after the press conference.

The first reaction to Jean Claude Trichet‘s press conference was one of disappointment after the ECB president failed to provide a firm indication that the central bank was to step up bond purchases.

But soon it became clear that central banks were aggressively buying bonds, “bringing to mind Trichet’s recent warning not to underestimate the ECB,” credit analyst Gavan Nolan writes in Thursday’s Markit Intraday Alert.

“Portugal and Ireland government bonds were the main focus of the buying, with reports of some purchasing of Greek bonds also in circulation.” Nolan points out.

And the actions of the ECB caused the Markit iTraxx SovX Western Europe to whipsaw violently in a frenzy trading session.

The index was as tight as 182 basis points this morning, before widening sharply to 190 bp’s in the immediate aftermath of Trichet’s words.

Then rallied sharply to 180 bp’s when the scale of ECB bond buying became apparent.

“The rally in banks was even more emphatic, with the Markit iTraxx Senior Financials index reaching 145 bp’s, some 17 bp’s tighter than yesterday’s close,” Nolan reports.

Iberian banks, which have underperformance of late, were among the strongest tightening credits. This pulled the Markit iTraxx Europe tighter in a corporate market where only a few defensive names widened.

“The focus will now turn to tomorrow’s economic data, with non-farm payrolls, Markit PMIs and ISM Services,” Nolan concludes.

Adding: “But the ECB’s actions haven’t solved the sovereign debt problems, and some investors will already be wondering when the issue of solvency, rather than liquidity, will be addressed.”

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  • Markit iTraxx Europe 106.5bp (-6.5), Markit iTraxx Crossover 473.5bp (-30)
  • Markit iTraxx SovX Western Europe 180bp (-11)
  • Markit iTraxx Senior Financials 145bp (-17)
  • Sovereigns – Greece 885bp (-43), Spain 290bp (-26), Portugal 450bp (-32), Italy 214bp (-16), Ireland 550bp (-20), Belgium 182bp (-10), France 92bp (-4)

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Filed under International Econnomic Politics, National Economic Politics