Flashback ( on ECB’s Mario Draghi):
– Mario Draghi (Wikipedia):
Draghi was then vice chairman and managing director of Goldman Sachs International and a member of the firm-wide management committee (2002–2005). A controversy existed on his duties while employed at Goldman Sachs. Pascal Canfin (MEP) asserted Draghi was involved in swaps for European governments, namely Greece, trying to disguise their countries’ economic status.
– French banks downgraded by Moody’s (Telegraph, Dec. 9, 2011):
Moody’s has downgraded BNP Paribas, Societe Generale, and Credit Agricole warning their creditworthiness is being damaged by the fragile operating environment for European banks.
The agency cut its ratings on the long-term debt of BNP and Credit Agicole by one notch to Aa3, concluding reviews that began in June and were continued in September. Societe Generale’s long-term debt was cut by one notch to A1.
The downgrades were driven by the increasing difficulties the banks were having in raising funding and the worsening economic outlook, Moody’s said.
The news comes a day after the European Banking Authority (EBA), warned the region’s banks must find €114.7bn of extra capital in order to withstand the euro zone debt crisis and restore investor confidence.
Moody’s said its ratings did take into account the fact that all three French banks were likely to benefit from state support if the crisis deepened.
“Liquidity and funding conditions have deteriorated significantly,” said Moody’s, adding that the banks have historically relied on wholesale funding markets.
“The probability that the will face further funding pressures has risen in line with the worsening European debt crisis.”
– Eurozone banking system on the edge of collapse (Telegraph, Dec. 9, 2011):
Senior analysts and traders warned of impending bank failures as a summit intended to solve the European crisis failed to deliver a solution that eased concerns over bank funding.
The European Central Bank admitted it had held meetings about providing emergency funding to the region’s struggling banks, however City figures said a “collateral crunch” was looming.
“If anyone thinks things are getting better then they simply don’t understand how severe the problems are. I think a major bank could fail within weeks,” said one London-based executive at a major global bank.
Many banks, including some French, Italian and Spanish lenders, have already run out of many of the acceptable forms of collateral such as US Treasuries and other liquid securities used to finance short-term loans and have been forced to resort to lending out their gold reserves to maintain access to dollar funding.
“The system is creaking. There is a large amount of stress,” said Anthony Peters, a strategist at Swissinvest, pointing to soaring interbank lending rates.
CreditSights’ weekly funding report said the ECB had effectively become the central clearer for the region’s banks as lenders are increasingly distrustful about funding one another.
Bank deposits with the ECB now stand at their highest level since June 2010 at €905bn (£772bn) as lenders withdraw deposits held with their peers and put them into the central bank. At the same time, banks in major eurozone countries such as France and Italy have become increasingly reliant on central bank funding. This follows the trend seen in smaller countries like Ireland where lenders have effectively becomes taxpayer-funded “zombie” banks.
Alastair Ryan, a banks analyst at UBS, said there would be “no Lehman moment” – or single catastrophic event – for the European banking sytem, but added that without a full backstop of bank liabilities by governments the system would “struggle to finance itself in the next year in a durable way”.
“The system at the moment hasn’t got funding of a duration that allows it to function, so it’s failing,” he said.
Others think the eurozone banks are heading for a catastrophe and the worry is growing that a major bank could collapse within weeks.
The results of the fourth round of European Banking Authority (EBA) stress tests conducted in just under 18 months pointed to a €115bn capital shortfall in the eurozone financial system, with German banks showing the most notable deterioration in their core capital ratios.
Moody’s on Friday downgraded France’s three largest banks, BNP Paribas, Credit Agricole and Societe Generale in light of what the US rating agency said were “liquidity and funding constraints”. The banks’ downgrade came despite Moody’s acknowledging the three lenders could depend on a higher level of French taxpayer support in future.
Two weeks ago, rumours abounded that it was the near failure of a major French lender that had been the trigger for a massive co-ordinated intervention by the world’s largest central banks to shore up the banking system.
The fear is the European authorities do not have the financial firepower to deal with the banks’ problems. Analysts at BarCap say that even if the European rescue funds were able to raise €1 trillion of funding this would only meet the needs of the Italian and Spanish government and banks.
The European banking sector’s problems are being exacerbated by a wave of asset sales as lenders look to dramatically shrink their balance sheets. UBS estimates eurozone banks could sell off between €3.7 trillion and €4.5 trillion of assets in the next three years.
– EU summit: This emergency plan is great news – if you’re a bank (Guardian, , Dec. 8, 2011):
Let’s get this clear. If you’re a eurozone bank that finds itself a few euros short, you can now go to the European Central Bank and tap a ready supply of cash at an attractive rate. That’s how Mario Draghi’s emergency measures will work: banks can access funds for three years and can do so by offering collateral of lower quality than ever – we’re not quite in the realm of lunch tokens, but loans to small- and medium-sized businesses are acceptable.
If, on the other hand, you’re a eurozone government short of a few cheap euros, don’t look to the ECB. Draghi signalled that the bank is not minded to buy government IOUs, even if member states agree at today’s summit to march towards closer fiscal union. That’s not the ECB’s job and comments last week about “other measures” had been over-interpreted. Moreover, Draghi sees legal headaches if member states try to shovel funds to the IMF to allow that body to set up a vehicle to lend to eurozone governments. Such a manoeuvre would not be in the spirit of past treaties.
Draghi’s stance – bend over backwards to help banks while ignoring the flames in the sovereign bond market – looks perverse. The problem is that the ECB is not allowed by its constitution to buy sovereign debt (or, at least, only in small quantities to support monetary policy). Them’s the rules. And Draghi is sticking to them. Yesterday’s press conference amounted to a firm booting of the ball back into the politicians’ court. The bond market, which has spent the past week speculating about when Draghi would bend the rules and intervene, was appalled.
“At this rate, the future of the euro area may fall through the cracks between institutional rigidities of the ECB on the one hand and petty EU policies on the other,” said Sony Kapoor, managing director of the Re-Define think-tank.
That’s clearly a risk since the European Financial Stability Facility, with guarantees from member states of only €440bn, looks hopelessly under-resourced as a bond-buyer capable of lowering borrowing costs for Spain and Italy. Other sources of capital, such as the IMF, look uncertain. The ECB’s position seems to be: sorry, but there’s nothing we can do except ensure that the banking system stays intact.
Thus the stage is set for high drama at the summit.
Germany has firm ideas about the shape of a new treaty that would impose budget discipline on the supposed “sinners” in the club. Even if Angela Merkel succeeds, huge question marks will remain over how the eurozone laggards with big budget deficits are supposed to finance themselves as they enter a period of probable recession. If the ECB is not prepared to play, on Monday morning we may be hearing that familiar refrain from the market: where’s the bazooka? Standard & Poor’s threatened downgrades of eurozone credit ratings would probably follow soon afterwards. And so the stakes would get higher still. Get ready for the next make-or-break summit.