Ahead of the G20 summit scheduled for November EU ministers and policy makers will come under increasing pressure to create and ultimately ratify an agreement in relation to the direction and shape the overall Eurozone rescue package will take.
Simon Maughan, head of sales and distribution at MF Global Ltd. in London, said in a Bloomberg Television interview yesterday:
A blanket recapitalization of banks, in some cases, over- capitalising those banks, would be the only thing that’s going to restore confidence at this juncture
Speculation that EU leaders will finally agree a comprehensive recapitalization plan has boosted the Bloomberg Europe Banks and Financial Services Index by nine percent over the past two days. The euro looks set for its first five-day gain versus the dollar in three weeks. Bank stocks have dropped circa 30 percent this year as investors became concerned that financial firms will have to write down their holdings of Greek, Italian, Spanish and Portuguese government bonds.
Policy makers are wrestling with the concept of how to leverage the EFSF (stability fund) to as much as €1 trillion. the obvious solution would be for the facility to operate like a bank and borrow from the ECB, using bonds it purchases as collateral. However, Jean-Claude Trichet, president of the central bank in his parting speech, said yesterday that leverage wasn’t “appropriate.”
Banks, independent of any sovereign rescue fund, would need to raise about 148 billion euros in the event of a 60 percent write down on their holdings of Greek debt, 40 percent for Portugal and Ireland and 20 percent for Italy and Spain, Kian Abouhossein, a JPMorgan Chase & Co. analyst, wrote in a note to clients on Sept. 26. Deutsche Bank AG, Germany’s biggest lender, would need 9.7 billion euros more capital, Commerzbank AG 5.1 billion euros and France’s Societe Generale SA 6 billion euros, Abouhossein said.
What is becoming increasingly clear is that a coherent policy must be in place before the G20 meeting. Allowing Greece to default and how to manage the fallout, are questions that have been avoided for more than a year. It costs $6 million plus a year to insure $10 million of Greek securities for five years, with credit-insurance prices pointing to a 91 percent chance of default. As the German chancellor and French president prepare to meet in two days for their eighth summit in 20 months, Merkel has stated her belief that Europe must have contingency plans for the default that investors see as a sure thing. Sarkozy, whose French banks have the most to lose, is unwilling to allow Greece to default.
Unlike most other European nations France is currently experiencing a political lean to the right partly as a consequence of the continual prevarication. The far right National Front in France, headed by Marine Le Pen, scored 16 percent in an early October Ipsos voting intention poll, behind Socialist challenger Francois Hollande at 32 percent and Sarkozy at 21 percent. In 2002, her father beat Socialist candidate Lionel Jospin with just 16.86 percent of the first-round votes. Sarkozy’s biggest fear is that Le Pen could knock him out in the first round of the two-round vote.
UK bank’s have come under intense scrutiny by Moody’s, this morning came the announcement that several bank’s have had their ratings cut. The timing and largesse of the latest round of QE will raise suspicions mentioned in our latest Between The Lines note that, (ignoring the sophistry by the UK govt mandarins), this latest round of QE was in fact a very well timed intervention preparation for further bank rescues. Moody’s Investors Service have cut the senior debt and deposit ratings of 12 U.K. financial institutions, concluding the government would be less likely to provide support for them if they became financially troubled.
Lloyds TSB Bank Plc, Santander UK Plc and Co-Operative Bank Plc had their ratings lowered one step by Moody’s, while RBS Plc and Nationwide Building Society were cut two levels. Seven smaller building societies were cut from one to five levels, the rating company said in a statement today. Clydesdale Bank was confirmed at A2, with a negative outlook.
“Announcements made, as well as actions already taken by U.K. authorities, have significantly reduced the predictability of support over the medium to long term,” Moody’s said in the statement.
Asian markets have enjoyed a two – three day rally, the Nikkei closed up 0.98% and the Hang Seng closed up 3.11%. The Australian index, the ASX 200, made considerable gains closing up 2.29% but remaining 11.26% down year on year. In European markets the STOXX is currently up 0.51%, the FTSE is flat, the CAC is up 0.42% and the DAX up 0.31%. The daily SPX future index is currently down 0.3%. Brent Circe is down $103 a barrel and gold is up $2 an ounce. Sterling has bounced back after yesterday’s sell off due to the latest round of QE being announced. Versus the dollar It is now ahead of where it was pre yesterday’s announcement and has enjoyed a similar recovery versus the Swissy, yen and the euro. Similarly the euro has made gains versus the dollar, yen and the Swissy. The dollar has fallen versus all the majors (including the Aussie dollar) with the exception of yen.
There is a raft of economic data releases to be mindful at 13:30 gmt including the latest NFP figures.
13:30 US – Change in Non-farm Payrolls Sept
13:30 US – Unemployment Rate Sept
13:30 US – Average Hourly Earnings Sept
13:30 US – Average Weekly Hours September
15:00 US – Wholesale Inventories August
20:00 US – Consumer Credit August
A Bloomberg survey of analysts yielded a median estimate of 59,000 jobs to be added from a previous estimate of no change prior. The median figure from a Bloomberg survey of analysts was a rate of 9.1% unemployment, unchanged from last month’s figure. Economists surveyed by Bloomberg yielded a median forecast of 0.2% month on month from -0.1% for an hourly earnings increase. The year on year figure predicted was 3.7% from 3.6% previously.