BNP Paribas SA and Societe Generale SA, France’s two largest banks, are trimming about 300 billion euros ($405 billion) off their balance sheets as Europe’s deepening debt crisis threatens to make them too big to save. At the end of March, French financial firms had $672 billion in public and private debt in Greece, Portugal, Ireland, Italy and Spain, according to Basel, Switzerland-based Bank for International Settlements. That’s the biggest exposure to the euro-area’s troubled countries and almost a third more than German lenders. The four largest French banks have 5.9 trillion euros in total assets, including loans and bond holdings, or about three times France’s gross domestic product. “The banks are entering a slimming cure, which is forced by the sovereign crisis,” said Jerome Forneris, who helps manage $10 billion, including the two French lenders, at Banque Martin Maurel in Marseille, France. Rather than tap the market for capital, BNP Paribas and Societe Generale are seeking to free up a combined 10 billion euros through asset cuts and disposals. Paris-based BNP Paribas plans to cut $82 billion of corporate- and investment-banking assets, while Societe Generale may exit businesses such as aircraft and real-estate finance in the U.S.

The incompetent and ill prepared EU Commissioner = EU economy commissioner Olli Rehn

EU economy commissioner Olli Rehn (the incompetent commissioner ) said a team which represents the troika of the Commission, the European Central Bank and the IMF – would “provide technical support to the Greek authorities”. The previous team was pulled out of Athens earlier this month because of a lack of progress by the Greek government in reducing its deficit. Mr Rehn on Sunday praised Greece’s new cuts, saying they would “go a long way to meeting the fiscal targets” for 2010 and 2011. “Greece needs to meet the agreed fiscal targets and implement the agreed structural reforms to fulfil the conditionality and ensure funding from its partners,” he said.Philipp Roesler, Germany’s economy minister, said an “orderly default” for Greece could no longer be ruled out and branded the country’s deficit-reduction measures “insufficient”. The warning is likely to spook financial markets further and comes despite Greece yesterday announcing a fresh €2bn (£1.7bn) of budget cuts and the introduction of a country-wide real estate tax. Evangelos Venizelos, the finance minister, said the cuts and tax measure were necessary to allow Greece to meet obligations demanded by the European Union and IMF in exchange for bail-out funds. Writing in the Die Welt newspaper, Mr Roesler said: “To stabilise the euro, we must not take anything off the table in the short run. That includes as a worst-case scenario an orderly default for Greece if the necessary instruments for it are available.” He said such a default would mean “re-establishing the affected state’s ability to function, perhaps with a temporary restriction of its sovereign rights”. ..."perhaps with a temporary restriction of its sovereign rights" Temporary? I don't think so, this is the real agenda of the Eurocrats for all EU members.

Stocks sank, while the euro touched a ten-year low versus the yen and a six-month low against the dollar, as concern grew about Greece’s debt crisis. European bank and sovereign credit risk reached all-time highs as 10-year Treasury yields slid to a record. Oil fell 2 percent. The MSCI All-Country World Index retreated 2.9 percent and the Standard & Poor’s 500 Index slipped 2.7 percent to 1,154.23 at the 4 p.m. close in New York, wiping out a weekly gain. The euro sank as much as 2.1 percent to 105.3 yen and fell 1.8 percent to $1.3627 before trimming losses. Ten-year Treasury yields slid as low as 1.89 percent. Credit-default swaps signaled a more than 90 percent probability Greece will default. Stocks extended losses as three German officials said Chancellor Angela Merkel’s government is preparing plans to shore up banks in the event that Greece defaults. The European Central Bank said Juergen Stark resigned from the executive board, suggesting policy makers are divided over how to fight the debt crisis. U.S. President Barack Obama called on Congress last night to pass a $447 billion plan to boost employment after jobs growth stalled last month. “There’s that nagging thought that we can continue to have a downward spiral in Europe,” James Dunigan, chief investment officer in Philadelphia for PNC Wealth Management, said in a telephone interview. The firm oversees $109 billion

The US Federal Housing Finance Agency (FHFA), which is overseeing the remains of failed mortgage giants Fannie Mae and Freddie Mac, is reportedly planning to argue that America's biggest banks failed to check the health of mortgages before they sold them on to investors. The collapse of hundreds of thousands of sub-prime mortgages triggered the 2008 credit crisis and the collapse of Fannie and Freddie. The New York Times said the FHFA is expected to file the lawsuit against the banks, including Bank of America, JP Morgan, Goldman Sachs and Deutsche Bank, as early as Friday. The agency, which is seeking billions of dollars in compensation, claims the banks failed to notice that borrowers were taking on mortgages that they could not afford. The FHFA lawsuit, which follows a subpoena issued to the banks last year, demands that the banks pay compensation to cover some of the $30bn (£18.5bn) Fannie and Freddie lost on mortgage-backed securities. Most of Fannie and Freddie's losses were borne by US taxpayers after the government was forced to step in and bailout the pair to the tune of $141bn. It follows a similar $900m lawsuit filed against Swiss bank UBS in July. At the time UBS said it would "vigorously" defend all charges brought against it. In total the FHFA issued 64 subpoenas to the issuers and servicers of mortgage-backed securities last year. Last week the agency's director, Edward DeMarco, who declined to discuss the pending lawsuit, said there were "more to come". The banks declined to comment to the New York Times.

The International Accounting Standards Board has said European banks may have inflated their balance sheets and profit and loss accounts by not taking full writedowns on distressed Greek debt ---In a highly unusual intervention, the IASB on Tuesday published a letter from chairman Hans Hoogervorst to the European Securities and Markets Authority saying that some banks were using models to mark down the value of Greek assets, where market valuations existed. When accounting for trading assets, banks are required under International Accounting Standard 39 to use arm's-length values taken from actual transaction prices to value the assets on their books. Where trading is very illiquid and market valuations cannot be obtained, they can then use valuation models using internal estimates of value. "There have been indications in the market that some European companies are applying the accounting requirements for fair value measurement and impairment losses in a way that seems to differ from the objective of [accounting standards]. This is evident particularly in their accounting for distressed sovereign debt, including Greek government bonds. Those indications have now been confirmed by recently published financial reports, which show inconsistent application across Europe. This is a matter of great concern to us," Hoogervorst said in the letter. The letter does not name the banks concerned, but the Financial Times said it related to the accounting of BNP Paribas and CNP Assurances. Both took 21% writedowns on Greek debt, much smaller than the hits suffered by other banks, including RBS, which took a 51% writedown. "It appears that some companies are not following IAS 39 when determining whether the Greek government bonds are impaired. They are using the assessed impact on the present value of future cash flows arising from the proposed restructure of those bonds, rather than using the amount reflected by current market prices as required," the IASB letter said.

Switzerland's central bank announced further measures to weaken the franc, but failed to take the anticipated step of pegging the franc to the euro to discourage safe-haven investors. The Swiss National Bank (SNB) said it would further boost liquidity by expanding "sight deposits" – overnight deposits by banks to help liquidity – to Sfr 200 bn (£152bn) from Sfr 120 bn and was prepared to take more action if necessary. The measures saw the euro strengthen initially, past Sfr1.15 for the first time this month. But once it became clear that the bank had stopped short of radical action, heavy buying of the franc resumed. Over the past 18 months the franc has risen 25pc against the euro, squeezing Switzerland's vital export market. Almost 50pc of Swiss products, from cheese to pharmaceuticals, are exported. Tourism has also been hit by the currency swing as the price of goods has soared. Clive Lennox, head of foreign exchange trading at Clear Currency, said: "The supposedly neutral Swiss are causing some amount of trouble. The SNB shied away from its threat to peg the Swiss franc to the euro, boosting the safe-haven currency. Investors initially wound down their speculative short franc positions as protection against eurozone sovereign debt and global growth concerns."

Otmar Issing, the European Central Bank's former chief economist, told German TV a move to eurobonds would impoverish Germany and subvert the Bundestag. "That would be catastrophic. I cannot understand how any German politician agree to this," he said. Germany's constitutional court has yet to rule on the legality of EMU's bail-out machinery and is likely to pay close attention to his warnings that the drift of EU policy is to concentrate budgetary powers in the hands of EU officials outside democratic control. Professor Wilhelm Hankel from Frankfurt University said a eurobond is camouflage for fiscal union. "That is forbidden under EU law and the German constitution. Everybody in parliament realises we are very near to the Rubicon and that if they say yes to eurobonds they cannot stop the march to a transfer union." Mrs Merkel's spokesman played down hopes of a breakthrough at Tuesday's meeting, denying reports that eurobonds are on the agenda. The meeting will focus on tougher rules for delinquents. Wolfgang Schäuble, Germany's finance minister, is sticking to the script that the EU's accord in July provides all the tools needed to tackle the crisis. "I'm ruling out eurobonds for as long as member states pursue their own financial policies and we need differing interest rates as a way to provide incentives and sanctions, in order to enforce fiscal solidity. Without this solidity, the foundations for a common currency don't exist," he told Der Spiegel. However, events are moving at lightning speed and markets fear the €440bn bail-out fund (EFSF) is too small to cope with dual strains in Italy and Spain. The crisis has now escalated to a new and dangerous level as concerns over a global double-dip recession put the spotlight on the debt dynamics of France. The French economy stood still in the second quarter and EFSF costs may see the country to lose its AAA rating. The simmering revolt in the Bundestag makes it almost impossible for Mrs Merkel to offer real concessions at Tuesday's emergency summit with French president Nicolas Sarkozy. "We are categorical that the FDP-group will not vote for eurobonds. Everybody must understand that there is no working majority for this," said Frank Schäffler, the finance spokesman for the Free Democrats (FDP).

BERLIN—Barely 12 hours after a reluctant European Central Bank breathed new life into the euro project, German politics dashed hopes that Europe would soon receive a bigger bulwark against a spreading government-debt crisis. A spokesman for German Chancellor Angela Merkel, Christoph Steegmans, removed hopes of a more robust European Financial Stability Facility, saying the fund will stay as agreed at a July 21 European Union summit. "The EFSF will remain what it is, and keep the volume it had before July 21," Mr. Steegmans said at a regular government press conference. The ECB Sunday made a landmark decision to expand its bond-buying program to include Italian and Spanish government debt, a step aimed at stopping a market sell-off that threatened to send their borrowing costs to unsustainable peaks. The ECB hesitated last week to take such a step, which greatly expands its role as an underwriter of government finances. But it was deemed critical to buy time until an improved bailout fund, the EFSF, could be ratified and implemented before October. The changes to the EFSF mandate would allow the fund to buy government bonds in the secondary market. The European Commission has asked for a massive increase in the EFSF's current lending capacity of €440 billion ($628.23 billion) guaranteed by euro-zone governments. Market watchers said a new volume of up to €1.5 trillion or more might be needed to reassure investors that the fund can offset government solvency threats. The euro promptly lost much of the ground gained from the overnight ECB announcement as investors responded to German opposition to a massive build-up in the euro-zone's defenses against debt contagion.

Italian households and businesses are sitting of the biggest stockpiles of private cash in Europe. There are three reasons for this. The huge Italian black market means that many transactions go unrecorded. The arrival of the euro means that unrecorded transactions have spread into the rest of Europe and especially eastern Europe. The peculiar nature of Italy's economy. Not only does it have a massive agricultural sector and enormous tourist industry, but it also has a vast industrial base in the north made up substantially of small firms who intertrade. It is the intertrading, much of it unrecorded, between all these enterprises, industrial, agricultural and touristic, both at home and abroad, which generates stockpiles of private cash.
Add to that the high Italian savings ratio and you have the biggest deposits of private cash in Europe, all denomitaed in euros so it keeps its value. The Italian govt on the other, hand, takes all the nation's debt upon itself. Bereft of potential tax receipts, it issues more and more bonds to fund its activities. Now these bonds are being supported by Italy's eurozone partners in order to protect the euro.
Effectively Italy's public debt is being paid off by foreigners, while the Italians get to keep their mountains of private money.

Eurozone - Remedy won't be available soon - Faced with the prospect of the Eurozone crisis spreading to Spain, Italy and Cyprus, "Eurozone governments are accelerating efforts to bolster their €440bn rescue fund", reports the Financial Times. On July 21, "they agreed to equip the EFSF with the ability to repurchase the bonds of stricken governments on open markets, provide them with short-term lines of credit and cash to help recapitalise ailing banks." With Spanish and Italian risk premiums on the rise, "the ability to repurchase Spanish or Italian bonds at distressed prices would be one way to help stabilise the markets". "Yet European diplomats and officials acknowledged that it would be weeks – and possibly months – before the EFSF’s new powers could be put to use", notes the FT, reporting that officials of the Eurozone are accelerating their work to produce a draft document. The final text would then have to "be signed by the 17 Eurozone governments, and then undergo a ratification process that includes parliamentary approval in most of those countries."

Personally, I don’t trust the banks to even get their hair cut to the extent they’re promising. They remain the spivs and dissemblers they’ve always been – and bank accounting is the most surreal (as in open to every trick in the book) of any business with which I’ve ever worked. To count obviously bad debts as assets is, let’s face it, a truly Swiftian idea. So probably, S&P is right to be saying Greece won’t make it. I mean that in the sense that it will be proved right with little or no risk to its reputation. For a commonsense "southerner" like me, it’s glaringly obvious Greece will default: it won’t make the asset sales targets it needs, and it won’t make the growth targets either.The ratings agencies agree with The Slog – not a position I’m that happy with, because on the whole they’re just as mad as the lenders and borrowers they monitor. However, there is no point in shooting the messenger, and one or two players in this mess are in touch with reality: German Finance Minister Wolfgang Schäuble admitted yesterday, in a circular to his Christian Democratic Party colleagues, that ‘the euro-zone debt crisis isn’t over, and that more discipline is needed’. Er ist eine gute Eier, Herr Schäuble. The Treasury had to pay sharply higher rates to sell off €8bn in bonds including 4.80pc on bonds due in 2014 that had last sold for 3.68pc, and 5.77 percent on bonds due in 2021 compared with 4.94pc before. Italy's benchmark FTSE MIB index fell as much as 2pc, while the difference between the rate of return on Italian and German 10-year sovereign bonds - a key measure of the financial risks as perceived by investors - rose to near-record highs of around 330 basis points. The euro also fell by a cent against the dollar to $1.4269 and by 0.7cents against sterling to £0.8745. Investors are concerned that the Italian economy, suffering from high public debt, low growth and growing infighting in the government could follow Greece, Ireland and Portugal into a debt spiral that has thrown the eurozone into crisis. Tensions on the Italian bond market went down after a second bailout for Greece was agreed at a summit in Brussels last week but have returned on concerns over the details of the Greek rescue plan and US debt fears...I say..through away the phony currency - euro!!

Ratings agency Moody's has cut Greece's debt rating by three notches to Ca on Monday, leaving it just one notch above what is considered default, and said the chance of a default is now "virtually 100%". The ratings agency warned that last week's bailout package agreed by eurozone leaders will make it easier for Greece to reduce its debt, but the country still faced medium-term solvency challenges and there were significant risks in implementing the required reforms. "The announced EU programme implies that the probability of a distressed exchange, and hence a default, on Greek government bonds is virtually 100%," the agency said. "[Greece's] stock of debt will still be well in excess of 100% of GDP for many years and it will still face very significant implementation risks to fiscal and economic reform," it added. The ratings agency is wary that the eurozone bailout package sets a negative precedent for investors. "The support package sets a precedent for future restructurings should the finances of another euro area sovereign become as problematic as those of Greece," Moody's said. According to the ratings agency, obligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.

The outlook is developing.

Standard & Poor's and Fitch have already downgraded Greece to CCC, one notch above Moody's.

Europe's new banking regulator warned that an escalation in the eurozone crisis could pose "significant" challenges even as it announced only eight banks out of 90 had failed an annual check of their financial strength. A further 16 banks were also deemed to be in a potential danger zone as they only just passed the tests, which looked at the impact on banks' capital cushions of a deterioration in the economy and house prices. However, the tests failed to consider what may happen to banks if a major European country – such as Greece – defaulted on its debt, promoting many analysts to argue the hurdles were set too low. As the results of the tests were announced by the European Banking Authority (EBA), European Union president Herman Van Rompuy called the leaders of the 17 members of the eurozone to a summit next Thursday to thrash out the much anticipated second bailout for Greece. Anxiety about Greece continues to put the eurozone under severe stress and Andrea Enria, chairman of the EBA, described current market conditions as "under severe strain" as he said: "Further deterioration in the sovereign debt crisis might raise serious challenges." All Britain's banks – bailed out Royal Bank of Scotland and Lloyds Banking Group as well as Barclays and HSBC – passed though they suffered a 25% reduction in their capital cushion during the adverse scenarios imposed upon them by the Europe's banking authorities. Only Greek banks suffered a larger fall – of 40% – demonstrating the wide range of exposures of Britain's banks.