The cat is out of the bag. Eurozone leaders, in various states of denial about the need for their banks to raise more capital, now have to face some hard facts, courtesy of the International Monetary Fund. The sovereign debt risk to European banks has risen since the start of 2010 by about €200bn, with a total spillover effect of €300bn, estimates the Fund. These are staggering figures. They are not, it should be said (and as the IMF emphasises), the size of the black hole in the collective balance sheets of European banks, since there's a very significant difference between a risk and an estimated loss. All the same, €200bn, or €300bn, has to be prepared for. The IMF's analysis explains why the funding climate for many European banks has become icy. When huge losses are guaranteed, but their precise size and location is unknown, the rational response is to play safe by reining in lines of credit. And when everybody wants to retreat, the flow of money slows, thereby exaggerating the crisis by choking lending to economies. There really is only one remedy – get capital into the banks, raise the buffers and generate confidence that losses, however large they turn out to be, can be absorbed. Now that the IMF itself is recommending recapitalisation of the European banking system, there is a greater chance it might happen. That's the good news. The bad news is that there is no guarantee that the eurozone leaders will act in time to prevent an avoidable crisis turning into a catastrophe. Many flew into a funk when the IMF's new managing director, Christine Lagarde, emphasised the need for recapitalisations a few weeks ago. Some screeching U-turns are required.
Access Investments-Building Awareness - European Union-ROMANIA
Thursday, September 22, 2011
The cat is out of the bag. Eurozone leaders, in various states of denial about the need for their banks to raise more capital, now have to face some hard facts, courtesy of the International Monetary Fund. The sovereign debt risk to European banks has risen since the start of 2010 by about €200bn, with a total spillover effect of €300bn, estimates the Fund. These are staggering figures. They are not, it should be said (and as the IMF emphasises), the size of the black hole in the collective balance sheets of European banks, since there's a very significant difference between a risk and an estimated loss. All the same, €200bn, or €300bn, has to be prepared for. The IMF's analysis explains why the funding climate for many European banks has become icy. When huge losses are guaranteed, but their precise size and location is unknown, the rational response is to play safe by reining in lines of credit. And when everybody wants to retreat, the flow of money slows, thereby exaggerating the crisis by choking lending to economies. There really is only one remedy – get capital into the banks, raise the buffers and generate confidence that losses, however large they turn out to be, can be absorbed. Now that the IMF itself is recommending recapitalisation of the European banking system, there is a greater chance it might happen. That's the good news. The bad news is that there is no guarantee that the eurozone leaders will act in time to prevent an avoidable crisis turning into a catastrophe. Many flew into a funk when the IMF's new managing director, Christine Lagarde, emphasised the need for recapitalisations a few weeks ago. Some screeching U-turns are required.
Subscribe to:
Post Comments (Atom)
4 comments:
It is extraordinary that the Greek crisis, where the risk of sudden default is rising as Greeks face a more severe version of austerity, has been allowed to run without a back-up plan to support the eurozone banking system. The pretence that the system is safe must now end. The "political stage" of the crisis, as the IMF terms it, is the most dangerous.
A PUBLIC transport and taxi strike led to traffic chaos in Athens today as a stoppage by air traffic controllers forced airlines to cancel or reschedule flights.
A series of strikes to hit out at more austerity measures came after the country was hit by another round of tax increases and pension cuts.
The moves are part of the government's bid to keep international bailout payments coming and calm global market fears that Greece will default.
Today, which is officially World Carfree Day, saw gridlocked traffic all over Athens as citizens tried to get to work and school with all forms of public transport, including the metro, buses, trams, trains and taxis on strike.
Air traffic controllers will walk off the job for three hours in the afternoon.
- INDEPENDENT.IE REPORTERS
France July Leading Economic Indicators: Summary
The index of leading French economic indicators fell in July, according to the Conference Board.
The index, a gauge of the economy’s likely performance over the next three to six months, fell 0.2 percent in July, following a gain of 0.6 percent in June.
Following is a table compiled from the leading economic indicators as released by the Conference Board, a business research group in New York:
================================================================================
July June May April March Feb.
2011 2011 2011 2011 2011 2011
================================================================================
Leading index 115.0 115.2 114.5 114.8 114.4 113.2
Monthly change -0.2% 0.6% -0.3% 0.3% 1.1% 0.6%
Diffusion index 35.7 50.0 21.4 71.4 71.4 71.4
--------------------------------------------------------------------------------
================================================================================
July June May April March Feb.
2011 2011 2011 2011 2011 2011
================================================================================
Coincident index 105.2 105.1 105.0 104.8 105.0 105.2
Monthly change 0.1% 0.1% 0.2% -0.2% -0.2% 0.3%
Diffusion index 75.0 75.0 75.0 37.5 25.0 100.0
================================================================================
NOTE: Leading Index and Coincident Index 2004=100.
All figures are seasonally adjusted except yield spread, stock prices,
industrial orders, production expectations and the deflator ratio.
The sum of net contributions may not equal the overall change in the
index due to rounding.
SOURCE: The Conference Board
The eurozone's private economy is shrinking for the first time since the depths of the last recession, sparking warnings that the region's economic recovery is over.
Gloomy economic data released on Thursday showed that the eurozone's manufacturing and services sectors both contracted this month.
Analysts said this piles pressure on the European Central Bank to step in to stop the economy worsening, at a time when Europe's debt crisis is threatening the world economy.
"The recovery has finished, we are now contracting," said Chris Williamson, chief economist at Markit, which published the data.
Flash PMI surveys showed that eurozone service industries are shrinking for the first time in two years, while manufacturing output hit a two-year low. The Markit eurozone services survey, which gauges business activity at firms from banks to restaurants, slumped to 49.1 this month from August's 51.5. This is the first time since August 2009 that the services index has fallen below the 50 mark that separates growth from contraction.
The composite PMI, which combines the services and manufacturing data, fell to 49.2, its first contraction since July 2009, from 50.7 last month. Factory output contracted for the second month running, with the manufacturing PMI dropping to 48.4.
Williamson warned that the forward-looking indicators within the PMI surveys suggest that things will deteriorate further in the coming months.
"It's not just the periphery problems spilling over to the core. There is a wider malaise in the global economy which is hurting."
The PMI data helped to drive down share prices across Europe, with the FTSE 100 plunging 4.25% or 226 points to 5062 in morning trading.
Howard Archer of IHS Global Insight said it was "a very bad day for the eurozone economy".
The escalating debt crisis – which started in Greece, soon spread to Ireland and Portugal and is now threatening to engulf Italy and Spain – and the turmoil in global markets have also depressed confidence and stymied growth.
"Today's flash eurozone PMI figures make grim reading and raise the spectre a renewed economic downturn in the 17-country region. The current [composite] index level indicates that the eurozone recovery has ground to a complete halt," said eurozone economist Martin van Vliet, of ING.
"The figures reinforce our suspicion that the eurozone economy as a whole might contract slightly in the second half of this year. At the same time, with ongoing fiscal austerity and political leaders still way behind the curve in terms of resolving the debt crisis we cannot dismiss the risk of a full-blown recession. This data will amplify pressure on the ECB to come to the rescue and use the remaining scope for monetary stimulus."
The ECB has been criticised for raising interest rates earlier this year, and some economists believe it may have to execute a U-turn.
"Pressure is mounting on the ECB to quickly reverse its recent monetary policy tightening cycle rather than just halting it, with a near-term interest rate cut," said Archer.
In the US, the Federal Reserve launched a bold $400bn (£258bn) bond-buying plan on Wednesday while the Bank of England made clear that it would pump billions of pounds into the economy before Christmas to ward off a double dip recession.
Post a Comment