Le Crunch Is Coming

In an article in The Telegraph, Ambrose Pritchard Evans reports the latest moves from the IMF in its attempts to head off a catastrophic financial chain of events from occurring inside the eurozone. In effect, as an offset to the austerity being used by governments to balance their budgets, the IMF is asking the European Central Bank to shower money in more stimulus, to prevent a recession.

The money is needed by national banks that are running out of capital, and by governments who cannot easily raise money through bond sales.

He writes –

“Markets are not yet convinced of the central bank’s commitment to scaling up purchases if necessary to prevent a further deterioration in market functioning,” said the IMF’s Global Financial Stability Report.

The IMF called on Europe’s authorities to make sure their €500bn (£420bn) rescue fund is “fully operational” and to explain how they intend to shore up banks that fail stress tests. “Test results will need to be complemented by a plan that specifies how capital-deficient institutions would be handled. Bank reporting and disclosure standards, in general, need to be improved,” it said.

In plain English, you cannot trust many of these banks to tell the truth about their real situation. That is the main problem of course all along. Reliance has been placed on governments and financial organisations that are not trustworthy, and therefore are not creditworthy either. How can the ECB shove yet more money after the money that has already been lost or misused?

With the US trapped in depression, this really is starting to feel like 1932
Europe’s ‘toothless’ bank tests are making matters worse.

Credit Suisse said Deutsche Postbank, Italy’s Monte Dei Paschi, Greece’s Piraeus, ATE, and Helenic Postbank, as well as a clutch of Spanish cajas and German Landesbanken, are likely to fail a rigorous test and will need fresh capital.
The Swiss bank said the real value of the probe is to test whether authorities themselves are ready to rescue any bank in trouble. The backstop funds include Germany’s SoFFin with €50bn left, the FROB fund in Spain which has nearly exhausted its €12bn pre-funding, Italy’s “Tremonti” fund with €8bn left, as well as the EU’s huge Stability Facility “in extremis”.

While the IMF stopped short of calling for the ECB to launch full quantitative easing (QE), it is clearly worried that the bank’s passive policies have allowed credit to wilt and led to fresh strains in interbank lending markets and sovereign debt.

It seems that an event of some kind to bring the crisis into a new phase cannot be far away.

Ambrose Prithchard Evans.

Meanwhile Greek government 10 Year Bonds are priced at 10.4%, the same level as they were pre-bail-out, 7.4% above 10 Year US Treasuries. The problem is in the detail – especially the collateral required by the ECB to release money to Greek banks. The FT explains.

Wall Street Journal –

So far the committee has received a mildly warm reception from investors as it disclosed the names of the 91 banks it will test and announced the worst-case scenario that will be used to judge the banks. That scenario has the EU economy shrinking by about 2% this year and 1.25% in 2011, compared with current expectations of modestly positive growth in both years.

But the committee’s two-page statement didn’t address key details, including the degree to which the tests will probe banks’ ability to withstand deteriorations in the values of certain governments’ bonds. That is at the heart of investors’ fears about European banks, many of which are sitting on hefty portfolios of sovereign debt issued by fiscally challenged countries like Greece, Spain and Portugal. The results of the tests are due July 23.

Agenda: Too Little Too Late?
Heard: Europe’s Elusive Stash of Cash

“It lacks a bit of transparency,” said Stefan Kolek, a Munich-based credit strategist at UniCredit. “The first impression is you have something to hide.”

Another unknown is the fate of banks that flunk the tests. In the U.S., the 10 banks that were deemed capital-deficient under last year’s tests could choose between raising private capital or collecting government funds via the Troubled Asset Relief Program. But there’s no European equivalent of TARP, and it is unclear if risk-averse investors would be willing to pump money into a struggling European bank.

The Tap Blog is a collective of like-minded researchers and writers who’ve joined forces to distribute information and voice opinions avoided by the world’s media.

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