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Monday, 27 June 2011

An SMS from Ernst (11): Short messages service

Last weekend, there was – apart from the news on the Chinese visit to Europe, that I put down in the article ‘China loves Europe’ -  a tidal wave of economic news. And if you want to describe this news in an alternating fashion, you should come up with as much varieties of the word “bad”, as you can think of.

The situation in Greece

The following article on Bloomberg is bad news in a disguise of good news. French banks have ‘voluntarily’(never was a word so much displaced) rolled over Greek sovereign debt in order to avoid a Greek default. Here are the pertinent snips:
French banks, including BNP Paribas (BNP) SA, have told the French government they are willing to partly roll over maturing Greek government bonds in a bid to avoid a default by the debt-laden nation, three people familiar with the plan said yesterday.
Under the proposal discussed in recent days between the French Banking Federation and the French Treasury, bondholders would re-invest about 70 percent of Greek sovereign debt maturing from mid-2011 to mid-2014, said one of the people directly involved with the talks.

Fifty percent of the redemptions would go into 30-year Greek securities, with the remaining 20 percent invested in a fund made of “very-high quality” securities that would back the 30-year bonds, that person said. The proposal may be altered, he said. All three people spoke on condition of anonymity because the talks are ongoing and private. 
European governments are seeking to persuade the region’s banks to voluntarily participate in Greece’s second bailout to make the country’s debt burden more sustainable. European banks held about $52 billion of Greek sovereign debt at the end of last year, according to Bank for International Settlements data, with French banks owning $15 billion, the second-largest position after German banks, which owned $22 billion.

European Union leaders at a Brussels summit that ended June 24 backed a new aid program to stave off a Greek default so long as Greek Prime Minister George Papandreou shepherds 78 billion euros ($111 billion) of austerity measures through parliament in a vote slated for June 29.

French President Nicolas Sarkozy told reporters in Brussels on June 24 that he had “no apprehensions or difficulties” about the discussions with banks, while Prime Minister Jose Luis Rodriguez Zapatero said Spanish banks are “well disposed” to private-sector involvement as their positions are “small.” Talks are also under way in the Netherlands. 
German Chancellor Angela Merkel’s government said June 24 banks and insurers will recognize their “very high interest” in sharing the burden of a Greek financial package and an agreement will be reached in the next nine days.
European finance chiefs will decide on July 3 whether Greece has met conditions for its next aid payment.
The effect of this French action to avoid a Greek default, might be the exact opposite, as  it could very well trigger a credit event in the eyes of Moody’s and Fitch. According to some financial insiders on Twitter, this French action IS even a credit event.

The discussion on the Greek government defaulting, without it being mentioned, reminds me of a classic episode of the extremely funny British comedy Fawlty Towers: don’t mention the war’.

In this case all countries in the Euro-zone are talking about Greece, like Basil Fawlty, without ‘mentioning the credit event / default’, in order not to trigger the rating agencies Fitch and Moody’s. Because, if these rating agencies would call this a credit event, all credit default swaps on Greece should be paid out. And every Euro-zone country tries to avoid that, in order to prevent a financial meltdown in the Euro-zone.

The problem is, however, that Greece is the elephant in the room and everybody knows it is there and waits for the moment its trunc blows all saving schemes away. And the trunc: that is probably the Greek opposition and population that will presumably get rid of all of Papandreou’s austerity measures.

Basel committee sets new capital demands

Some wise people said: everybody is always fighting yesterday’s war. And although this is not totally true for the new capital demands of the Basel Committee, there is a hint of truth behind it. So instead of preparing for the next financial crisis, most supervisors and officials are trying to solve the last one.

The following article on the Basel capital demands appeared on Bloomberg. Here are some pertinent snips:
Banks should be pushed to meet the higher capital requirements before a series of deadlines starting in 2013, unless earlier introduction of the rules would threaten lending, the Bank for International Settlements said.

The Basel Committee on Banking Supervision’s requirements, which will more than triple the core reserves that banks must hold to protect themselves from insolvency, are “the core regulatory response to problems revealed by the financial crisis,” the BIS said in its annual report. The stance of the group that acts as a bank for central banks echoes comments by Mervyn King, governor of the Bank of England, that U.K. lenders can “do more than just follow” the timetable for meeting the standards.
“Countries should move faster if their banks are profitable and are able to apply the standards without having to restrict credit,” the Basel, Switzerland-based BIS said. National regulators should treat the rules, known as Basel III, as a “minimum” standard that they can surpass if they wish.

Global central bank governors agreed this weekend on extra capital rules for banks whose size or systemic importance means their failure could cause another financial crisis -- a narrower set of institutions than those that will have to comply with Basel III. Regulators agreed that as many as 30 of the world’s largest lenders should face surcharges that range from 1 percentage point to as much as 2.5 percentage points of core capital to prevent them from causing another financial crisis. 
The Basel III capital rules are scheduled to be phased in from 2013 through 2019. The BIS is the parent organization of both the Basel committee and the Group of Governors and Heads of Supervision, which oversees the committee’s work.

Under Basel III, banks will be obliged to hold core Tier 1 Capital equivalent to 7 percent of their risk-weighted assets, compared with 2 percent under the previous international rules. As many as 30 of the world’s largest banks will be required to hold the additional capital under the plans agreed on this weekend, meaning they may have to hold as much as 9.5 percent in reserve.
U.K. banks can “do more than just follow” the timeframe for complying with Basel III, King told journalists in London on June 24. “It would be better if they were slightly ahead of the schedule.”

The Basel rules constitute “minimum requirements” that individual countries can exceed, the BIS said, mirroring calls by several European Union finance ministers, including George Osborne, that national regulators should be left free to toughen the rules for their banks.

German people are ‘sick and tired’ of the Euro.

Germany, together with The Netherlands the creditor of last resort for the Euro, has to deal with increasing protests against the euro on its home turf.

Bloomberg reports on the desire of German family-run companies to get an exclusion clause in the Euro treaty.

An association of German family-run companies says it wants mechanisms included in the treaty governing Europe’s single currency that would allow countries to be excluded from membership, Die Welt reported. 
Around a hundred firms belonging to the Stiftung Familienunternehmen signed a letter to lawmakers saying it should be made possible for a country to exit the euro or to be excluded for running excessive deficits, the newspaper said.
The German website writes upon an investigation executed by the ‘Frankfurter Algemeine Zeitung, on the trust of German citizens in the Euro. The article is translated to English by me. Here are the pertinent snips
Allensbach interview: Germans doubt on the Euro and the safety net
The enduring debt crisis in Greece causes increasing doubts on the common currency among the Germans people. The German trust in the Euro is decreasing during the last months, according to an investigation executed by the Frankfurter Allgemeine.
Only 19% of the people interviewed have great trust or even very great trust in the Euro, while 71% of the Germans have a negative or even very negative view towards the Euro. The other 10% has a neutral view on the Euro or withdrew from the interview.
Since April 2011, the number of Euro sceptics in Germany has risen by 5%, as then 66% stated to have lost trust in the Euro. Compared to a 2008 investigation, the results are even more dramatic: only less than half of the Germans lost their confidence in the Euro at that time.
Also the so-called ‘European safety net’, installed with lots of ‘pomp and circumstance’, enjoys little German trust. More than 65% of the German population in the interview doubts the sustainability of the protections it offers, while only 15% has enough trust in it.

I have always had a firm trust in the Euro and I am convinced that everything will work out fine in the end. But we can’t lose the Germans in this process.

Therefore I state now, what I stated a few days ago: it is time to end the bailout madness:

My reaction is: let us not go on growing the financial cancer larger and larger in our desperite attempts to avoid the car crash:·         Let Greece take the pain of a default now. It hurts for a while, but they can start to rebuild Greece with fresh energy and reduced debt. Because: if Greece has to go, it has to go and there is no way that Europe can prevent this without causing massive pain in Greece and the rest of the Euro zone. So please let us stop trying. 
·         The same goes for Portugal and Spain: their unsustainable (youth) unemployment and educational problems should be cured, before these countries can return to growth. It is not to Europe to keep for them all the balls in the air, like a juggler. Not, because I don’t like these countries, but simply because it’s impossible to do. And the financial markets know that. 
·         For Italy and Ireland, I have not so many worries: Italy is still an industrial leader with worldclass products and Ireland seems to have some light at the end of the tunnel. 
·         And as far as the Dutch banks are concerned: if they need state support again, then it is time to remove the current management layers and put a new generation of managers with more awareness in. And please let’s then get rid of the bonus boys. 
·         Also the shareholders and bondholders of the Dutch banks should in this case foot the bill for the adventures of the banks on the international investment markets. 
But please let’s stop with this bailout madness, as this not solves the situation in the PIIGS-countries, but only makes it worse. In these countries as well as in our own national financial markets

I hope the European leaders will see the truth of these words very soon.

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