So Which Eurozone Banks Will Bite the Bullet Next?

Wednesday, October 01, 2008

The panicky climate in the Eurozone's financial sector has got a grade scarier on Wednesday, once first news about a proposed €300 billion bailout package for banks here drafted by French president Nicolas Sarkozy hit the news wires and immediately created a rift between France and Germany, which opposes the plan sternly.
According to a report by Bloomberg,
French Finance Minister Christine Lagarde told the German newspaper Handelsblatt today that a "rescue package'' was needed to help "smaller'' European Union states "threatened with a banking failure.'' Germany immediately opposed the proposal, with finance ministry spokesman Torsten Albig saying his government "doesn't support the plan.''
The conflict between the two biggest euro-region economies undermined efforts to build a consensus European response to the financial crisis as a recession looms. Other fissures have emerged, when Ireland's decision to guarantee bank deposits and debts prompted criticism by British bankers today that it "distorted competition.''
Fallout from the crisis that drove Lehman Brothers Holdings Inc. into bankruptcy hit Europe this week, with France, Belgium, Luxembourg and the U.K. rescuing four lenders and Italian Prime Minister Silvio Berlusconi today pledging to prevent losses for depositors.
Sarkozy had said a day earlier he was looking for a concerted response to the currently rapidly worsening banking crisis that has brought two major European banks, Fortis and Dexia, on the brink of bankruptcy before governments bailed them out earlier this week.
The ongoing liquidity crunch in the Eurozone's financial industry becomes difficult to explain in the light of repeated assurances by the European Central Bank who has announced more or less limitless special refinancing operations to alleviate the crisis.
Not that is had helped so far. The Libor is now eight standard deviations from its earlier levels. Euribor transactions are reported to actually only happen 2 full points above the official Euribor rate which is already almost a point above the ECB's leading interest rate.
Systemic Crisis
This is not a problem of one, ten or 20 Eurozone about to go bust. This is a systemic crisis where central banks cannot have any other goal than to stabilize the sector. It is to be doubted that anybody can find a pain free way out of this mess that has now reached the shores of the old continent.
Central banks are at pain to avoid the insolvency of all banks as this would set a domino effect into motion that could turn into a Eurozone Tsunami.
The basket of bad apples gets fuller with every new day. The seize-up in Eurozone credit markets will soon reach customers as there is a tendency to optimize loan portfolios the brute way: Keep the good ones and strangle everybody else.
An important psychological factor comes into play too. The vast majority of bank employees has never been through tough times. European countries can look back on low but steady growth rates in the past five decades where inflation was never a concern except for a short period around 1980.
The central banks appear to be far behind the curve. Once the market sets its own rates based on its risk expectations central banks are in danger to lose control over the short maturity range, their only tool.
It is even worse for companies. Overly cautious banks will not accept loans with a spread of less than 500 basis points to comparable government yields.
While US credit markets may get a short boost from the revised bailout package proposed by Treasury Secretary Hank Paulson this may overshadow the dramatic downslide of Eurozone banks.
It is safe to forecast that the wave of insolvency will spread to Spain, Portugal, Greece and Italy within a few weeks. Sharply rising inflation in Eastern Europe coupled with slowing growth rates may put some banks there in high danger of going bust any day too.
It cannot be said often enough to take the developments in Europe seriously. Eurozone growth may have come to a halt in Q3 2008 while money supply still grows around 10% p.a. The continent has a serious inflation problem while sliding into recession. Don't look for a safe haven here. The banking crisis, already raving in the UK and Belgium, will spread like a highly contagious disease.


Wikinvest Wire