europe banking crisis

Short Sellers Banned in France, Italy, Ireland, Spain

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Who rules the markets? Not short sellers says France, Spain, Italy and Belgium. They just banned short sales wreaking havoc on their markets, for some banks. Echos of 2008 now abound. In particular, short sellers are focused in on Société Générale, which dropped 20%, betting it might implode.

France, Spain, Italy and Belgium will impose bans on short-selling from today to stabilize markets after European banks including Societe Generale SA hit their lowest level since the credit crisis.

While short-selling can be a valid trading strategy, when used in combination with spreading false market rumors this is clearly abusive. -- European Securities and Markets Authority

Perhaps the short selling ban impending move had much more to do with today's stock market pop up than erroneous claims that a little tick down in initial unemployment claims caused a 423 point Dow increase.

Zerohedge, cynically notes the ban on some banks can be easily circumvents through options puts and calls.

August 26 just went supernova, as this is the day the short selling ban expires, the BEA reports the second, sub 1% GDP revision, and Bernanke presents his 2011 Jackson Hole keynote speech.

European Banks Fail Stress Test

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Eight banks out of 90 failed the European Stress Tests, five in Spain, two in Greece and one in Austria. Sixteen banks are close to failing, defined as below the 5% capital ratios for the next two years. Another German bank would have failed, but they refused to disclose their data.

Banks were allowed to cheat and raise capital months before the actual test:

For the 2011 exercise, the EBA allowed specific capital increases in the first four months of 2011 to be considered in the results. Banks were therefore incentivised to strengthen their capital positions ahead of the stress test.

In spite of raising €50 billion in 2011 before the tests, 8 banks failed anyway with 16 being damn close to failing. Without the raising of additional capital cheat, 20 banks would have failed. The test involved a lowering by 4% of GDP, but no exposure to sovereign default. From the EBA press release:

A Credit Rating Downgrade for France?

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Bloomberg is reporting Moody's will downgrade France:

France risks losing its top AAA grade as Europe’s debt crisis prompts a wave of downgrades that threatens to engulf the region’s highest-rated borrowers, with Belgium also facing a possible cut, analysts and investors said.

Ireland earlier was downgraded 5 credit rating levels to Baa1.

Bail-Out-O-Matic

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dimeomatic
Yes folks, it's Bail-Out-O-Matic The European Union has created a permanent bail out fund:

Despite deep differences over how to contain their continuing debt crisis, European Union leaders agreed Thursday to create a permanent support fund for the euro after 2013 — something they hope will be a first step to calming the markets.

Leaders did agree, however, on the creation of a bailout mechanism that would operate after 2013, when the mandate of the current fund expires.

Yet even here, vital questions on the size and scope of the fund were left until the spring.

The new body, known as the European Stability Mechanism, will take over in 2013 from the existing 440 billion euro, or $582 billion, bailout fund.

Bondholders could be asked to shoulder some losses in future debt crises on a case-by-case basis.

To set up this facility, the European Union will have to revise its governing treaty, but it plans to do so in such as way as to avoid requiring referendums in any of the 27 member countries, all of which will have to ratify the revision.

AFP has more details:

Changes to the Lisbon Treaty were demanded by Germany to enable a temporary, trillion-dollar rescue fund to be turned into a permanent umbrella that will allow governments who fall on hard times to seek and obtain help from currency partners.

European Bank Stress Tests - Banks Didn't Tell the Whole Truth

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What a surprise. It seems when Europe ran it's bank stress tests, they only didn't report a few billion here and there.

Market Watch:

Europe's highly touted stress tests of major banks earlier this summer understated holdings of potentially risky government debt, The Wall Street Journal reported Tuesday.

Wall Street Journal:

An examination of the banks’ disclosures indicates that some banks didn’t provide as comprehensive a picture of their government-debt holdings as regulators claimed. Some banks excluded certain bonds, and many reduced the sums to account for “short” positions they held — facts that neither regulators nor most banks disclosed when the test results were published in late July.

Because of the limited nature of most banks’ disclosures, it is impossible to gauge the number of banks that excluded portions of their sovereign portfolios from their disclosures, or the overall effect of that practice.

The original Wall Street Journal article here, requires a subscription.

European Bank Stress Test Results

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The European Bank Stress Tests are in. These are the results from 91 EU banks, which are 65% of the sector.

The aggregate Tier 1 ratio, used as a common measure of banks’ resilience to shocks, under the adverse scenario would decrease from 10.3% in 2009 to 9.2% by the end of 2011 (compared to the regulatory minimum of 4% and to the threshold of 6% set up for this exercise). The aggregate results depend partly on the continued reliance on government support for currently 38 institutions in the exercise.

The aggregate Tier 1 ratio incorporates approximately 197bn € of government capital
support provided until 1 July 2010, which represents 1.2 percentage point of the
aggregate Tier 1 ratio.

As a result of the adverse scenario after a sovereign shock, 7 banks would see their
Tier 1 capital ratios fall below 6%.

The threshold of 6% is used as a benchmark solely for the purpose of this stress test
exercise. This threshold should by no means be interpreted as a regulatory minimum.
All banks that are supervised in the EU need to have at least a regulatory minimum of
4% Tier 1 capital.

The Wall Street Journal lists the banks who failed:

Spanish banks staring down the barrel of insolvency

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Last week a source reported that Spain was effectively cut off from the capital markets. This would put Spain in the same boat that Greece currently resides.
But was the report true? Today's news virtually confirms it.

Spanish banks have been lobbying the European Central Bank to act to ease the systemic fallout from the expiry of a €442bn ($542bn) funding programme this week, accusing the central bank of “absurd” behaviour in not renewing the scheme.
On Thursday, the clock runs out on the ECB financing programme – the largest amount ever lent in a single liquidity operation by the central bank – under the terms of the one-year special liquidity facility launched last summer.
One senior bank executive said: “Any central bank has to have the obligation to supply liquidity. But this is not the policy of the ECB. We are fighting them every day on this. It’s absurd.”
Banks across the eurozone, but in Spain in particular, have found it hard in recent weeks to secure liquid funding in the commercial markets, with inter-bank funding virtually non-existent.
“The system is just not working,” agrees Simon Samuels, banks analyst at Barclays Capital in London. “We’re approaching the third year of liquidity support and still the market cannot survive unaided.”

This story contains two nuggets of information:

Euro Zone skating the edge of a debt crisis

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Unless things start improving soon, 2010 might end up being the beginning of the end for the Euro.

The European Commission warns that public finances in half of the 16 euro-zone nations are at high risk of becoming unsustainable.
Governments will spend the next year and beyond balancing the urgent need to fix public-sector debt and deficits -- without imperiling what appears to be a feeble economic recovery.
Greece and Spain saw their ratings downgraded. Ireland and Portugal have been warned they could be next. Even broader downgrades threaten if other European governments don't shape up.
Fitch warns in a December report that particularly the U.K. (which isn't in the euro zone) and Spain and France (which are) risk being downgraded if they don't articulate more-credible fiscal-consolidation programs during the coming year given the pace of fiscal deterioration....