This is the week for action on resolving the European bank crisis (not really a sovereign debt crisis), the WSJ headline blares. The deadline is October 23, as was written. This time a week from now, it’s said, we will have a comprehensive solution coming out of a meeting of European leaders, and this unpleasantness will be behind us.
That optimism lasted about three hours today, before Germany started backtracking.
Germany said European Union leaders won’t provide the complete fix to the euro-area debt crisis that global policy makers are pushing for at an Oct. 23 summit.
German Chancellor Angela Merkel has made it clear that “dreams that are taking hold again now that with this package everything will be solved and everything will be over on Monday won’t be able to be fulfilled,” Steffen Seibert, Merkel’s chief spokesman, said at a briefing in Berlin today. The search for an end to the crisis “surely extends well into next year.”
Group of 20 finance ministers and central bankers concluded weekend talks in Paris endorsing parts of Europe’s emerging plan to avoid a Greek default, bolster banks and curb contagion. Providing a week to act, they set the Oct. 23 meeting of European leaders in Brussels as the deadline.
On the summit agenda is how any recapitalization of Europe’s banks “might be carried out in a coordinated way” and how to make the European Financial Stability Facility, the EU’s rescue fund for indebted states, as effective as possible, Seibert said. The leaders will also discuss aid for Greece and ways to tighten economic and financial policy, he said.
European stocks dropped on Merkel’s deflating comments.
The issues are enormous, and suffused with crosscutting political coalitions as well as competing interests among stakeholders. One key component involves forcing Greek creditors to take a bigger haircut on Greek debt, in what amounts to a partial default. European leaders want the haircut to be as high as 50%. Needless to say, the banks that own much of the debt don’t want that.
Another component is a demand for higher capital from the banks affected by the Greek default. Some of that would come from national governments and perhaps the newly bolstered European bailout fund, the EFSF. But some would have to come from forcing the lenders to add to their own capital reserves. Needless to say, the banks don’t want that.
The governments that would be on the hook for bailouts of either the banks or the sovereigns (with the money going to the banks) would be committing unpopular actions with their populations. In addition, the countries being bailed out would probably need to impose more austerity on their populations in return, also an unpopular move.
And nobody really knows how growth in the Eurozone can possibly result from all of this, outside of some hand-waving. Further, since the EFSF probably has to be four times as large as it is now to guard against the Greek default becoming a contagion, and it was hard enough just getting to the current level, there’s no real understanding of how to get there from here, outside of using some crazy CDO-like scheme that is ridiculously dangerous.
Other than that, I’m sure they’ll solve this by Sunday.
More here.




17 Comments

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If Germany starts calling this the Blitzkrieg Plan, you know there’s a problem.
“magic solution” is the appropriate phrase
maybe obama can send europe the ponies we didn’t get
he sure isn’t getting our money this time
There must be a military solution.
If any of these plans don’t include nationalizing banks and firing the current management, all will fail again in another 3 to 5 years, and they will be back to the taxpayer for more money.
Read Michael Lewis’ “Boomerang”.
The mess is bigger than most people think.
Again kicking this can of worms down the road will not stop the global recession. Banks and investors can take a haircut or continue struggling. They want a bailout by European taxpayers. 2008 they got a bailout by the our federal reserve of $17 trillion. So who is taking the losses?
Globalization is working out so well as is the Euro for the member states, Gah
i’ll put lewis’ book in my amazon cart
the european banking system is on the verge of collapse and it appears that the obligations are so tangled n one knows who owes whom what
just like the u.s. in 2008
as i see it there is only one possible “solution”: europe must do what the u.s. did and take taxpayer money to bail out the euro-banks
only problem is the nations of europe can’t do it bc a nascent rebellion is already underway and the people of europe will not allow their money to be stolen as ours was
i agree totally: europe is a time bomb that is about to detonate
Always has been before.
Oh, I know. I’ll turn on the TV & watch cnbc. They’ll have the soln.
Big change at FDL. No longer need end snark tags, since almost every comment is a snark.
Now that is the ultimate “jobs” program and road to prosperity.
If only Greece had less olive oil and instead had crude oil that we “needed to secure”.
(optional snark tag ……… /s )
Oh I thought they would have Soma.
By the way -
The mortgage settlement will not die !! :-)
http://online.wsj.com/article/SB10001424052970204346104576637513972299854.html
“The proposal was raised in a meeting last week between government negotiators and giant lenders as part of an effort to settle allegations of questionable foreclosure practices. Discussions are still fluid and any final outcome is uncertain. Talks between government officials and the banks are expected to continue this week.”
So the 20% of the mortgages not in MBS’s but held by banks would get principal reductions if the borrower could then afford the home and the reduction resulted in a loan equal to current market or slightly more, with a rate for a refinance of 4%.
Wish they would be clearer on the refi – will all loans, including those in MBS’s or owned by F & F, be offered the 4%?
In any case the assertion is that California just wanted more done for the 2 million homes under water in that state – so this refi is tossed in to sweeten the bank get out of jail deal.
Eu is making a permanent ban on naked CDS on sovereign debt as being reported by Reuters, Financial Times and Zero Hedge.
The zero Hedge guy seems to think this is a very bad thing for reasons that I don’t quite comprehend, although trying to.
Maybe others here can help out? I am against naked CDS and naked shorts just on principle as being a no-value added device for gamers to speculate on outcomes without “skin in the game” as to the real value or worth of the underlying asset.
I think they came into existence when the rivers of money had no place to flow so they had to build artificial ponds and lakes and reservoirs for that money. Too much money tied up in private hands looking to just increase it without reference to what it’s end use will be. That money would be better if it were FORCED into the general economy – force those mf’s to build roads, factories, homes, stores, etc. and EMPLOY people.
No need for help, since IMHO you are exactly correct. And FWIW, I work in financial services. Your “rivers of money” line is spot on as well, since the hedge fundies can’t charge 20% of gains and a flat 2% fee for the boring ol’ 8% to 10% returns the rest the rest of us hope to average.
No, to charge those outrageous fees and make obscene amounts of money quickly they had to do what they did- create crap out of thin air. This is what follows when way too many Masters of the Universe leave Wharton and MIT and head to Wall Street.
Add in money hungry politicians who, for the most part, take thousand dollar contributions in exchange for millions in benefits while having no idea what these greedy bastards are up to until 700 billion dollars is needed one weekend in 2008, and you get what we now got – a most effed up economy and political system.
Thanks. I still can’t figure what the Zero Hedge guy dislikes so much. I have learned more about economics from that site and naked capitalism and here than I have from everyone else combined over the years
It is crap out of thin air. If it’s toxic for sovereign debt, why isn’t it toxic for all debt?
Once a person understands what a derivative is, and then also figures out how leverage amplifies the toxicity, then they understand that the entire world economy is a house of cards. I can see no good end or unwind except to let the speculators crash and forget about the taxpayers of the world bailing them out.
I’d suggest a less cataclysmic way of ridding ourselves of this toxicity:
First, since sunlight is the best disinfectant move all existing derivative trades to exchanges. Then, as contracts expire do not allow them to be renewed, unless the buyer or seller has a vested interest in the underlying security (no “naked” ownership).
This would allow for a more orderly unraveling of this mess with a minimum of disruption to an already fragile US economy.