No, Nothing to See Here, Move Along IMF
Next on our Euro-tour is the IMF, which has really made life hard for the finance ministers of the EU. From the FT:
International Monetary Fund staff have provoked a fierce dispute with eurozone authorities by circulating estimates showing serious damage to European banks’ balance sheets from their holdings of troubled eurozone sovereign debt.
The analysis, which was discussed by the IMF’s executive board in Washington on Wednesday, has been strongly rebutted by the European Central Bank and eurozone governments, which say it is partial and misleading.
...
Although the IMF analysis may be revised, two officials said one estimate showed that marking sovereign bonds to market would reduce European banks’ tangible common equity – the core measure of their capital base – by about €200bn ($287bn), a drop of 10-12 per cent. The impact could be increased substantially, perhaps doubled, by the knock-on effects of European banks holding assets in other banks.
The ECB and eurozone governments have rejected such estimates.
Elena Salgado, Spanish finance minister, told the Financial Times on Wednesday that the fund was mistaken in looking only at potential losses without also taking account of holdings of German Bunds, which have risen in price.
“The IMF vision is biased,” she said. “They only see the bad part of the debate.”
Last Friday at the Jackson Hole conference the Fund's new managing director Christine Legarde, most recently finance minister in France, said the EU was in a "dangerous new phase" and called for "urgent recapitalization" of European banks, and this report yesterday put data behind her comments. She had roiled the EU last weekend and this report's leakage -- not due out for a few weeks more -- indicates the Fund is not going away. They have gone so far as to put her remarks on the front page of their website.
Europe is having none of it:
"Our analysis of the situation hasn't changed, it is in fact shared by the member states. We did have an in-depth discussion when the results of the stress tests for banks were presented and this our diagnosis and there is no reason to change it now," European Commission spokesman Amadeu Altafaj told a regular briefing.
The bank stress tests did not factor in the impact of a significant drop in the value of sovereign debt.
It's S.O.P. in Europe to deny and shout that nothing's wrong up to the moment they announce a new policy that fixes a major problem. We don't know all of what is causing the IMF to think capital is draining away, but we know from Kash Manori that there has been a real drop in deposits in ALL European economies, not just the PIIGS.
...the big euro-zone countries all have a large domestic base of depositors that has continued to deposit a portion of their earnings into their own banks, so alarm bells have not yet been sounded. But the fall in deposits by MFIs indicates that international money managers are nervous about keeping their money in European banks. And if their nervousness begins to spread to households and non-financial corporations (the way that it clearly has in Ireland and Greece, for example), this hidden slow-motion bank run will suddenly become very visible, and very dangerous.
I find Kash's numbers simply stunning. Money is hemorrhaging from European banks to banks outside of the region. The only way the banks are staying afloat is that investors are going to the sidelines from the financial markets and keeping their liquidity in deposits. How much longer before German and French citizens decide the banks aren't all that safe either?
Meanwhile today in Europe bad manufacturing news for Germany and unlovely gold and dollar prices is moving money into Swiss francs. And tomorrow is Employment Report Day in the US, which will be felt in Europe too. The canary the EU brought down to this coal mine is wheezing.
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Comments :
Feb '11
Re: No, Nothing to See Here, Move Along IMF
Could you explain why the common currency creates a common concern about sovereign debt? I realize that the inability to devalue makes things hard for the PIIGS, but why would it raise borrowing costs for France, Germany, etc. The official currency of Ecuador is the U.S. dollar--but I don't see anyone losing sleep over their economy. Closer to home, we've had major municipal defaults (and could eventually see some state defaults) without bail outs.
What's different about the Eurozone?
Jul '10
Re: No, Nothing to See Here, Move Along IMF
Globalization has brought us a market of currencies. A nation's citizens no longer have to be sitting ducks to predatory fiscal governance.
Sep '10
Re: No, Nothing to See Here, Move Along IMF
I have read various reports that indicate total world debt (private and public) increase 800% from 2000-2007. A lot of this was collateralized by questionable housing loans and almost as questionable business properties. Only a small part of this debt has been written off. Egan/Jones a small rating agency says most European banks are still levered 40:1. Wilbur Ross refused to make any positive statements about European Bank capital levels except for the Bank or Ireland which he claims has written its bad debt off. Considering the amount of debt accumulated I can’t help but think there is a lot more pain to go through before we arrive at a bottom. We may yet be looking at a down turn that will make 2007-08 seem mild.
Re: No, Nothing to See Here, Move Along IMF
Think of Germany as now co-signing for loans Greece wants to take out. Clearly Greece is more leveraged, but to the extent you think they might not pay off the debt, so too is Germany. As this expands with more periphery countries borrowing through the EFSF, Germany ends up being asked for a higher interest rate. There is no such facility through which Ecuador has the US co-signing its debt.
Sep '10
Re: No, Nothing to See Here, Move Along IMF
If the German public decides their banks aren't safe, that's the worst-case event for the Euro. A run on German banks would cause a major collapse. The US will feel effects from that too, I'm sure.
Feb '11
Re: No, Nothing to See Here, Move Along IMF
King Banaian
Think of Germany as now co-signing for loans Greece wants to take out. Clearly Greece is more leveraged, but to the extent you think they might not pay off the debt, so too is Germany. As this expands with more periphery countries borrowing through the EFSF, Germany ends up being asked for a higher interest rate. There is no such facility through which Ecuador has the US co-signing its debt. · Sep 1 at 8:23pm
So once they start bailing out, they can't stop?
May '10
Re: No, Nothing to See Here, Move Along IMF
Over the years I have found the IMF to be as helpful to and really interested in their patient's health as Dr. Kavorkian. Call me jaded but I automatically wondered if the stance had something to do with Sarko's heavy involvement with the bailouts.
In any event, they got this one right...............even if, like the S&P downgrade, it is something everyone already knows. As the Vanity Fair piece illustrates, the Germans have already evaluated their gold reserves. Amazing how the European elite continue to lie to their citizens.
Feb '11
Re: No, Nothing to See Here, Move Along IMF
This is pretty frightening. But the real question is: what should be done? How can Americans protect themselves against this?
Jun '11
Re: No, Nothing to See Here, Move Along IMF
Whatever is going to happen might just accelerate here - yields on the 5 and 10 year Treasuries are trying to take out the 2008 lows.
Flight to quality......or maybe flight to "relative" quality.
This will be a great test for our equity markets and may produce a great opportunity to get long the S&P once it shakes out.
May you live in interesting times.
May '10
Re: No, Nothing to See Here, Move Along IMF
It seems to me that the US strategy for writing down debt has been to slow roll it- not because anyone is really denying it, but because you have to slip that stuff out bit by bit to prevent the hot water you are dumping in from heating up the lake and killing all the fish. Thus you pour in a few gallons at a time, diluting the heat. Takes a lot longer, and you are sluggish as you spend time pouring instead of doing more productive stuff, but if you are patient you get there eventually.
Trouble comes when someone keeps pouring super-heated water into the other end of the water tank faster than you can pour it out safely.
May '10
Re: No, Nothing to See Here, Move Along IMF
Well said Duane. Corporations and households have begun the "slipping the stuff out" process, hence the high unemployment and low economic growth. The government however has decided to offset their balance sheet ordering by spending way more than they take in, creating vast new entitlements and regulatory regimes and refusing to make obviously needed reforms to the tax code and existing entitlements.
If the Europeans were treating the problem as an economic/fiscal/financial issue, the solutions, while painful, would be straightforward. Unfortunately, they look at it as a political problem, which makes a reasonable outcome more difficult.
May '10
Re: No, Nothing to See Here, Move Along IMF
Those that follow these conversations would be interested in reading Martin Wolf at the Financial Times. He has a great article on how the current depression is going to be the longest in over a century for the UK.
I just finished turning around a trucking company in the UK, that has a very broad customer base covering lots of different industries. Our operating assumption, proven to be true so far, is that existing customer base will continue to shrink in volume and growth would come almost exclusively from new business wins. This article reinforces that we were not an isolated case.
King, I suspect that one could change UK to US + a few numbers and have an accurate story.
May '10
Re: No, Nothing to See Here, Move Along IMF
King, UBS London issued a report Sept. 6 on the costs associated with leaving the Euro. While depressing, I learned a lot from it. I can't link to it here but if you have a problem finding it, e-mail me at sdm9650@aol.com & I will forward to you.