Tag Archives: Christine Lagarde

EU: Summit, Summa, Samarium

The top EU leaders are now dressing up for another countless crisis summit in Brussels. Over the next two days the elected representatives are going to try to agree on….on something. The single most important issue however – how the new bailout fund, EFSF is going to work – is most likely to be postponed, due to a slightly difference of opinion between Angela Merkel and Nicolas Sarkozy.

“It is hopeless in terms of what it reveals a lot about the policy process in the euro zone.”

Eurointelligence.com

Ms Christine LAGARDE, Managing Director of the International Monetary Fund, Mr Evangelos VENIZELOS, Greek Minister for Finance


I believe I agree with the analyst at www.eurointelligence.com when they characterize the already pronounced postponement of the EFSF issue as “hopeless but not serious.” There are too many loose threads in that ball, and it would probably not be safe to put it in play. But during the two-day extraordinary meeting is expected that the EU leaders comes up with something – at least some credible statements with a bit of substance.

On Thursday, France and Germany decided that they will not able to bridge their difference over the role of the EFSF by Sunday, and need more time to work out a deal.

It is not serious in the sense that there will be an agreement a few days later – in any case before the G20 summit, the Eurointelligence points out.

Adding: “But it is hopeless in terms of what it reveals a lot about the policy process in the euro zone.”

The postponement  is due to a combination of two factors: Nicolas Sarkozy’s diplomacy, and the German Bundestag’s insistence that it needs to give a mandate to the chancellor ahead of the summit.

Merkel would not have had a mandate to negotiate anything beyond the minimalist insurance solution that was recently under discussion.

She now has to crawl back to the Bundestag each time where she gets on a plane.

Merkel and Sarkozy will hold another bilateral summit on Saturday night, and will discuss the issue on Sunday. However no decisions will be taken.

In their joint communiqué, Thursday, they pretends that everything is fine.

But it did not persuade financial markets, which reacted with an increase in bond spreads.

Italy’s spread is now back at 4%, a level as we keep on point out is not consistent Italy’s sustained membership of the euro zone.

“From a market point of view, there is too much disappointment and disunity coming out of the EU right now. A further example has been the dispute between the IMF and the EU about Greece, as the IMF challenges the EU’s optimistic projections for Greek growth,” www.eorointelligence writes.

Mr François BAROIN, French Minister for Finance and Economic Affairs - Ms Elena SALGADO, Spanish Vice-President of the Government and Minister for Economic Affairs and Finance.

It also emerged that the bank recapitalization programme will fall in the too little, too late category of responses – now likely to be below €100 billion.

If you think that undercapitalized are the core of the problem, then this will not help. If you think that recapitalization will damage growth, a weak recapitalization may very well be better than a strong one –  but it will still be negative for growth.

When it comes to the EFSF, the debate is circling around the method of leveraging.

The Germans want to continue down the route the discussions had been going until Wednesday, by using a primary market insurance scheme that would allow the EFSF to insure up to €1 trillion in new debt issuance.

On the other side: The French say this is not sufficient, favoring a banking license for the EFSF.

Reuters reports that bond market experts are severely critical of the insurance schemes because it creates a two tier bond market.

If an Italian government bond was issued under this scheme, investors would no longer classify it as a sovereign bond, but as a structured product.

Another Summit on Wednesday

A follow-up summit is now scheduled for next Wednesday, according to  Frankfurter Allgemeine Zeitung.

Since there was no political agreement, chancellor Merkel was unable to deliver her speech in front of Bundestag today and to seek a negotiating mandate by the deputies as is now required after the constitutional court rulings and the legislation about the parliament’s involvement in EU decisions with budgetary implication.

So Merkel intends now to go to parliament in the beginning of next week to deliver what she could not bring to the deputies today.

Meanwhile, Wolfgang Schäuble have explicitly ruled out that the EFSF will be refinanced via the ECB as Sarkozy wants.

Damn! I would love to see some surprises for a change!

Green Light for More Money To Greece

The first thing to come out of the summit on Friday evening, was the statement about approval of the sixth trace of financial aid for Greece.

“Ministers of the euro area, meeting in Brussels on 21 October, agreed to endorse the disbursement of the sixth tranche of financial assistance to Greece. The disbursement is foreseen for the first half of November, following approval by the Board of International Monetary Fund (IMF),” the statement says.

The Eurogroup took the decision having examined the results of the fifth review of the economic adjustment programme for Greece, on the basis of a compliance report by the European Commission and a recent analysis of the sustainability of the Greek debt by the “Troika” (European Commission, IMF and European Central Bank).

The ministers also noted that the macroeconomic situation in Greece has become worse since the fourth review , but they welcomed Greece’s “substantial fiscal consolidation efforts”, especially the austerity package that the Greek parliament approved on 20 October.

Full text of the Eurogroup Communiqué,

The Eurogroup invites the Greek authorities to continue implementing structural reforms and their privatisation programme.

Related by the EconoTwist’s:

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IMF Director Christine Lagarde Sees “Crisis of Confidence”

There seems to be some kind of revival sweeping over Europe these days, with both economists, regulators and politicians suddenly starting to realize what so many have pointing out for several years: The global crisis is actually just getting started, the stimulus and the austerity measures are just not working and the financial markets has ditched most of what little confidence they once had in governmental and institutional leaders’ ability to solve basically systemic flaws in our economic system. Today, as the markets keeps tumbling, newly appointed IMF-boss, Christine Lagarde, is telling us that a “crisis of confidence” have aggravated the situation.

“The spectrum of policies available to the various governments and central banks is narrower because a lot of the ammunition was used in 2009.”

Christine Lagarde

“It is a combination of slow growth coming out of the financial crisis and heavy sovereign debt. Both fuel serious concerns about the capital and the strength of banks, notably when they hold significant volumes of sovereign bonds. Should banks experience further difficulties, further countries will be stricken. We have to break this cycle,” Mrs. Lagarde says in the interview with Der SPIEGEL. But when it comes to concrete solutions, she’s just as vague as any other politician. 

The journalists, Marc Hujer and Christian Reiermann, from Der Spiegel asks all the right questions.

But Mrs. Lagarde is an experienced politician, and her answers are exactly as precise or foggy as they need to be from the IMF point of view.

Here’s the first part of the interview:

SPIEGEL: Ms. Lagarde, the global economy is slowing, markets are volatile and banks have all but ceased lending each other money. Does the situation remind you of 2008 just before the investment bank Lehman Brothers collapsed?

Lagarde: Each moment in history is different from previous situations and it’s wrong to try to draw comparisons. At the International Monetary Fund, we see that there has been, particularly over the summer, a clear crisis of confidence that has seriously aggravated the situation. Measures need to be taken to ensure that this vicious circle is broken.

SPIEGEL: What does that circle look like?

Lagarde: It is a combination of slow growth coming out of the financial crisis and heavy sovereign debt. Both fuel serious concerns about the capital and the strength of banks, notably when they hold significant volumes of sovereign bonds. Should banks experience further difficulties, further countries will be stricken. We have to break this cycle.

SPIEGEL: What should be done?

Lagarde: When we look at the European situation, there has to be fiscal consolidation qualified by growth-intensive measures. In addition, there has to be increased recapitalization of the banks. Clearly, the two go together. The sovereign debt issue weighs on the confidence that market players have in European banks.

SPIEGEL: Don’t you think that your warning that €200 billion ($285 billion) might be missing in the balance sheets of European banks aggravates the situation of those banks?

Lagarde: In the course of our work on global financial stability, we are looking at the situation in Europe. We will publish the results of this work in a couple of weeks. More generally, we do see a need for recapitalization of European banks so they are strong enough to withstand the risks coming from sovereign borrowers and from weak growth. This is key to cutting the chains of contagion.

SPIEGEL: Is the world on the brink of a renewed recession?

Lagarde: We are in a situation where we can still avoid it. The spectrum of policies available to the various governments and central banks is narrower because a lot of the ammunition was used in 2009. But if the various governments, international institutions and central banks work together, we’ll avoid the recession.

SPIEGEL: At the moment, however, exactly the opposite would appear to be happening. Many governments have introduced austerity packages in order to make up for the vast expenditures made during the crisis. Is that wrong?

Lagarde: I wouldn’t pass general judgement on that because it’s going to be country-specific. For some countries, the path is fine and should continue as is. For others, some of the measures that have been taken are so strong, given the current deficit situation, that they can accommodate some relaxation — especially if the economy weakens further, and provided there is a clear medium-term consolidation path.

SPIEGEL: Do you consider Germany to be one of those countries which could do more to stimulate the global economy?

Lagarde: In the course of our annual country checks, our experts recently visited Germany. Their conclusion was that, under the circumstances, the fiscal consolidation path adopted by Berlin was perfectly fine.

SPIEGEL: For now.

Lagarde: Of course these things always depend on circumstances. Given Germany’s heavy reliance on exports, if demand weakens so much that it really changes the equilibrium, then it would need to be revisited.

SPIEGEL: By, for example, stimulating domestic demand?

Lagarde: Domestic demand is good for both the German economy and for the other economies surrounding Germany. I do think that domestic demand in Germany has improved since the time when I floated this idea as finance minister in France.

SPIEGEL: Given the economic climate, do you not think it dangerous when countries pass laws mandating a balanced budget, as France is considering?

Lagarde: It’s clearly a signal to market players. It shows investors the seriousness of the government’s commitment to the principle of balanced finances. The general intention behind it is good.

SPIEGEL: Would you like to see the US implement such a “debt brake” rule?

Lagarde: Each country must find the best way to signal to the markets that they are serious about public finances. The IMF has a lot of experience and we would be very happy to give a hand to those countries that actually are in the process of implementing a debt brake.

SPIEGEL: Do you think the austerity measures recently agreed to in the US go far enough?

Lagarde: Which ones do you mean?

SPIEGEL: The commitment, after weeks of disagreement about the debt ceiling, to cut federal expenditures by at least $2.4 trillion over the next 10 years.

Lagarde: Such long-term commitments are a good principle because they credibly signal an intention to reduce the deficit and consolidate public finances on a more stable course, for example in health care spending. It can indicate that a country will reduce the deficit in the medium term and yet still have enough room in the short term to put in place measures that will actually stimulate growth and help create employment.

SPIEGEL: Does the US need a new stimulus package?

Lagarde: We are in a situation of slowed growth and we have a confidence issue that culminated this summer with the downgrading of the US from its AAA status. As long as the US puts in place a credible medium-term adjustment plan, there is probably space at the moment to contain the short-term adjustment and take some of those growth-inducing measures.

Read part 2 of the interview with Chrisitine Lagarde at SPIEGEL Online:

“European Leaders Have Made Very Strong Commitments”

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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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