Bank Capital Rules to be Rethought?
Eager to avoid a contraction of the plentiful gobs of money from thin air that sit on European bank balance sheets, German and French officials have begun to talk about easing the tough new capital requirements for euro area banks – not even three months after they were decided upon. Let us consider here that the EBA's capital demands were already well on the light side of previous estimates. While the IMF still talked about a € 200 billion capital deficiency, with some private sector estimates as high as € 500 billion and even more, the EBA decided that only slightly over €100 billion were necessary, even if the risk in sovereign bond holdings was included in its estimates.
According to Reuters:
„France and Germany will call on Monday for a relaxation of global bank capital rules to prevent lending to the real economy being choked off, the Financial Times reported on Monday.
German finance minister Wolfgang Schauble and his French counterpart Francois Baroin will urge special treatment for banks that own insurance companies, according to a joint paper seen by the newspaper.
The pair will also urge important elements of the Basel III guidelines oncapital requirements to be watered down to mitigate any "negative effect" on growth, according to the article.
The FT said the paper calls for a three-year delay to the mandatory deadline to disclose leverage ratios, a measure of bank borrowing and risk.
"European institutions should agree on achieving the EU financial market regulation agenda while taking due consideration of its impact on the financing of the real economy," the draft proposal states.
The FT said the German-Franco move is likely to infuriate policymakers in London, who have been fighting hard to stop French-led attempt to dilaute the Basel III accord.
Banks across the world will have to follow Basel III accords for disclosing the size and quality of their capital safety buffers from 2013 to help reassure investors they are stable.“
We have previously remarked on how French regulators have helped their banks to extend and pretend and skirt tougher rules before. Essentially French regulators don't see their role as keeping the banks in check, but as working as their lobbyists on the international scene.
Aside from that, the number one reason for the crisis is precisely that credit and the money supply were expanded willy-nilly in the preceding boom. The tougher new capital rules would at least put a small brake on this.
It is erroneous to believe that what the economy needs to grow is more money from thin air. There is no scarcity of money. There is a scarcity of capital. No amount of money printing and credit expansion can create one iota of new capital – all that can be achieved by this activity is a period of illusory short term prosperity during which real capital is consumed. It makes us poorer, not richer.
Meanwhile, the has denied the reports regarding the plan to ease capital rules for banks, presumably after some critical voices were raised elsewhere. Our guess it that the 'rumor' was simply a trial balloon to see what the reaction would be.
„German Finance Minister Wolfgang Schaeuble denied Monday that Germany and France intended to ask for a relaxation of Basel III capital rules for banks.
Press reports had suggested the two countries intended to ask for looser global bank capital rules to prevent lending to the real economy being choked off, setting them at odds with the U.K.'s stricter approach to banks.
"No, it's wrong. What we're doing is trying to implement Basel III," Schaeuble said at a joint press conference with Francois Baroin, his French counterpart. "Basel III rules must be adopted."
Baroin used the same press conference to reiterate that France is absolutely committed to economic hara-kiri via the implementation of a financial transactions tax:
„Both ministers said they were in favor of a swift decision on the financial transaction tax, an issue that is being pushed in Europe as a top priority by French President Nicolas Sarkozy.
"We appeal to the Danish presidency to detail the rate and modalities," Baroin said, while Schaeuble said he would like to have "more political clarity" on the issue by the end of this quarter.
Baroin reiterated his country's determination to press ahead with the tax. "France will be the pioneer to demonstrate the technical feasibility of such a tax," he said.
Baroin had denied Sunday that the French government was mulling the re-introduction of a stock market tax, which had existed in France for over a century and was scrapped by then-minister Christine Lagarde in 2008. In addition to stocks trading, the new financial transaction tax would hit derivatives and bonds, but not sovereign notes.“
Nobody doubts the 'technical feasibility' of the tax. What is doubted is that it will achieve what its authors think it will achieve. It won't. It's a complete idiocy – it will lower, not increase, tax revenues and do irreparable economic harm in the process, as all these hare-brained schemes designed to manipulate markets do.
It is clear from the highlighted passage above that this is the true intent of the tax: by exempting government bonds from the tax, the insolvent and close-to-insolvency euro area sovereigns hope to attract funds to their debt paper that would normally be invested elsewhere. It won't succeed, and if it were to succeed, it would even be worse. Savings should not be invested in government bonds – investing in the debt of an entity that garners its revenues by coercion is immoral and harmful for the economy. It is far better to invest in productive activities that serve consumers.
Greek Debt Negotiations – From 'Hopes for a Deal' (yesterday) to 'Critical Setback' (today)
The eurogroup finance ministers have rejected the 'final offer' by the IIF. They want the coupon of the new Greek bonds to be lowered to 3.5% from the currently proposed 4%. As Reuters reports in an overview of the current situation:
„Euro zone finance ministers have rejected an offer made by private bondholders to help restructure Greece's debts, euro zone officials said on Monday, sending negotiators back to the drawing board and raising the threat of default.
At a meeting in Brussels to discuss Athens' debt problems, ministers said they could not accept a coupon of four percent on new longer-dated bonds expected to be issued to private bondholders in exchange for their existing Greek holdings.
Banks and other private institutions represented by the Institute of International Finance (IIF) want a 4.0 percent coupon on the new bonds, which will have a face value of half that of the bonds they replace, thereby cutting Athens' debts. Greece says the coupon must be closer to 3.5 percent.
"The ministers have sent the offer back for negotiations," one euro zone official with knowledge of the talks said, indicating that the ministers had effectively come down on the Greek government's side. "The ministers want a lower coupon than presented in the offer (from the IIF)," the official said.
The disagreement increases the risk that it may prove impossible to strike a voluntary restructuring deal between Greece's creditors and the Greek government – an outcome that would have severe repercussions for financial markets.
The aim of the restructuring is to reduce Greece's debts from around 160 percent of GDP to 120 percent of GDP by 2020, a level EU and IMF officials think will be more manageable for the growth-less Greek economy.
Negotiations over what's called 'private sector involvement' have been going on for nearly seven months without a concrete breakthrough. Failure to reach a deal by March, when Athens must repay 14.5 billion euros of maturing debt, could result in a disorderly default.
If the IIF's latest offer is indeed 'final', then it appears that a 'disorderly default' will become unavoidable. In fact this seems increasingly likely. Germany's finance minister Schäuble's comment on the 'finality' of the IIF offer however was:
„That happens in every bazaar." "You do not need to be impressed by that," he said. "At least I do not."
As Mish remarks today, a Greek default would not be the end of the world, as sovereign debt defaults have happened many times in history and evidently, the world has not ended. However, it will most likely mean the end of the recent advance in 'risk assets'.
Meanwhile, S&P has reminded everyone that the debt exchange deal, even if approved, would lead it to rate Greece as being in default.
In any case, a 'hard default' would teach an exceedingly valuable lesson to investors about the wisdom of investing in government bonds and relying on government's promises. It would in short be a salutary event in that sense. However, a return of Greece to the drachma would likely lead to , as all cross-border claims on Greek entities would become dubious.
The Fiscal Compact and the ESM
The same Reuters article linked above continues by letting us in on the most recent developments regarding the planned 'fiscal compact' and the ESM. A recent Financial Times report that Germany is open to increasing the lending capacity of the bailout vehicle by allowing the EFSF to continue alongside the ESM has now been officially denied:
„As well as assessing Greece's debt restructuring, euro zone ministers discussed efforts to enforce stricter budget rules for EU states via a "fiscal compact," and steps to finalize the structure of a permanent euro zone bailout fund, the European Stability Mechanism (ESM), due to start operating in July.
The ESM will have an effective lending capacity of 500 billion euros and replace the European Financial Stability Facility, a temporary fund that has so far been used to bail out Ireland and Portugal and will be used to provide part of a second, 130 billion euro package of aid to Greece. Germany has insisted that once the ESM is up and running, the combined potential outlay of the EFSF and ESM should not top 500 billion euros.
Italian Prime Minister Mario Monti and IMF chief Christine Lagarde have said the ceiling should be raised, possibly up to 1 trillion euros, so it has more than enough capacity to handle any problems in major economies such as Spain or Italy.
The Financial Times reported Monday that German Chancellor Angela Merkel was ready to see the ceiling of the combined firewall raised to 750 billion euros in exchange for agreement on tighter euro zone budget rules, but the report was immediately denied by her chief spokesman.
"It is not true. There is no such decision," Steffen Seibert told Reuters.“
Our Friend Toni a the Prudentinvestor site reports that the new ESM treaty has been 'pushed through in a fly-by-night move' without there even being a document of the new treaty available for people to inspect. This is indeed fishy, as apparently significant changes to the treaty have been made. Writes Toni:
„Europe's most important treaty on the European Stability Mechanism (ESM), which will lead the EU into a financial dictatorship, has been pushed through by EU finance ministers late Monday evening.
But the latest version of the ESM cannot be found on English and German EU websites. A link on consilium EU only leads to a 'file not found' message and the German EU website "Europa von A – Z" does not mention the ESM at all. This reminds one of the secrecy around the Federal Reserve Act, that was pushed through in 1912. Is the EU Commission now playing the same fishy game 100 years later?
Media reports from last midnight only said that the ESM treaty was agreed on by EU finance ministers and mentioned January 30 as the date when the treaty will be officially signed.
Significant changes have been made, a few media reported. The capital of the ESM will now be only €80 billion instead of the €700 billion proposed in the only available draft version from July 2011. The finance ministers also agreed to bring the ESM into existence one year earlier by July 2012, putting national governments under immense pressure to ratify the ESM treaty without sufficient public discussion.“
This latter point is of course decisive: the loss of democratic control over the eurocracy's antics has become a notable feature as the crisis rolls on. As mentioned previously, Romano Prodi already told us in late 2001 that one day a crisis would come that would make it possible to erect a new political dispensation. The dispensation he had in mind – although he didn't say so – was a centralized socialist superstate ruled from Brussels, to put not too fine a point on it.
Monti Hopes for Yield Cap
Meanwhile, once again underscoring the difference in viewpoints across the euro area, 'technocrat' Mario Monti in Italy remains a firm believer in the wonders of the ECB's printing press. He frequently stands out with remarks about increasing the ESM's capacity or allowing the ECB to intervene more forcefully. His latest remarks are about the possibility of artificially 'capping' Italy's government bond yields, something he is 'confident will happen'.
„Italian Prime Minister reiterated his hope that there will soon be policy steps to put a cap on the wide spreads between yields on euro periphery country bonds and those of the core euro zone states.
Speaking at the London School of Economics, Monti said doing one’s “homework” in terms of taking much-needed fiscal action in Italy’s case had not been enough to bring high yield spreads down.
“The sustainability of efforts … for us to get a solid budgetary consolidation and growth through the removal of structural constraints to growth is going to be very difficult in its sustainability through the months and the delivery of the expected results unless there is some return,” the prime minister said.
Monti said that this did not refer to “money from any particular member state” or any concessions. “We don’t want, don’t need concessions,” Monti said. What Italy needs is a “sufficiently effective governance of the euro zone that is able to eliminate the risk markets now associate with the euro zone, in terms of the much-observed spread between Italian Treasury bonds and the German bund”.
Despite the decisive action taken by Italy’s new technocratic administration, Monti noted that this had not produce results in terms of lower market interest rates.
“This is the living proof that if one does one’s own homework … that is not sufficient in the present policy environment for a country to be able to reap the benefits — not in terms of transfers from anywhere else — but in terms of lower interest rates”. “This has hugely negative political and economic consequences,” Monti said.
The current 7% borrowing rate on 10-year BTPs was not conducive to growth and showed the need for a better governance of the euro zone, Monti said. “This should not be confused in anyway with a transfer union,” Monti said.
But he said he is “rather optimistic now” that quiet progress is underway towards achieving this goal of putting a ceiling on rates for those states which are making efforts to sanitize their public finances.
“I see different pieces coming together which lead me to believe we will have some silent/quiet … coming together of different pieces without much triumphalistic declarations which might allow us to even breathe a bit”.
We are having a close relationship with the German government and the German chancellor,” he told the audience.
Tackled on whether the euro zone would make a foray into eurobonds as a solution to its present problems, Monti said he thought that “there will be a place for them structurally in the slightly longer term”.“
Either he knows something we don't, or he is just dreaming. However, this hint that there is a 'silent/quiet' coming together of different pieces' sure sounds like a credible threat. We take 'silent/quiet' as eurocracy code for 'avoiding democratic oversight'.
Is he dreaming or does he know something?
By now it has become widely accepted that the 'LTRO rally' has further to go. This is a marked change from the skepticism that was prevalent at the time of the LTRO announcement. See e.g, this recent article at Alphaville, presenting a comparison between the Fed's 'QE's effect on stocks with that of the LTRO to date. This fading skepticism is yet another bearish warning sign.
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