Monday 5 September 2011

Barrosso and the Euro groupthink news out today, Europe is saved after all. The unelected President of the European Commission has decreed that all is well in Europe - here are some top quotes:

"We don't anticipate a recession in Europe.
"The latest forecast by the European Commission shows there will be growth, modest growth it is true."
Mr Barroso added: "I want to be very clear here - the European Union and euro are strong and resilient.

"We are doing all it takes, from tackling the underlying budget problems, to strengthening the governance of the eurozone, from tighter financial regulation to improving our overall preparedness."

What is more disturbing for the Eurozone members is that Jean Claude Trichet, President of the ECB, has also said over the weekend that the ECB cannot replace Governments and so may soon have to end it bond buying programme. Spanish and Italian yields on their debts have increased above 5% for the first time since the EC began illegally (according to Germany's President) buying their bonds last month.

Worse still is that the new IMF head, Christine Lagarde was the one who caused the above statement to be made when she openly questioned the need to recapitalise European banks due to the ongoing crisis and likely need for credit writedowns.

Perhaps the most important thing for me to read into this is the clear demonstration of Groupthink within the European Commission and member states. Lagarde was a paid up member until recently but now free, sings with the other side freely. As for Trichet, now about to retire and having been shafted by the German president, he also seems to be moving away from the Party line; it is very dangerous for a Groupthink team to start having numerous high profile dissenters as this often leads to the collapse of the Group.

With so little consensus it is no wonder the  markets are falling. A key element is how strong the Northern banks maybe to withstand any future losses. Tracy Alloway has provided that data in the chart which shows the amount of debt funding and recapitalisation that is currently being achieved by the Eurozone banks, its zero in 2011.


Anonymous said...

US, the EU and the ECB should have got together before the Euro was created and agreed an enforceable treaty which would have applied to all countries entering the Euro, with strict enforcement, and buget control. It is very hard to to try and fix calamities after they have happened, also only countries with stable currencies should have been allowed to join the Euro then the dodgy ones could then have found their own level before joining. US it sounds as if it is not a good time to buy RBS, HBOS, HSBC don't know if you have seen this link

Old BE said...

I'm not sure what this graph is telling us: is it that banks are not lending that this is a "bad thing" or that people aren't borrowing and that this is a "bad thing"?

Or might it be a neutral or even good thing?

CityUnslicker said...

Anon - I think shorting financials is the only option at the moment.

BE - What the graph is saying is that banks cannot access the market for funding, which means they cannot recapitalise and in effect are shut out of the market. They have debt they need to roll over as part of their normal funding needs - so this is bad news in a big way as:

a) They cant access the market to obtain funds so should there be a need for more funds in a crisis they are screwed
b) they are going ot hav to hoard funds and not lend - on a big scale this induces recession as supply is constrained.

QE in Europe would fix this in the short term.

Timbo614 said...

I read that article this morning and I thought the only (relevant to my thinking) part of note was:

"improving our overall preparedness"

For what?

Anonymous said...

CU, QE in Europe would fix this in the short term.

And this is a good thing??