Dexia bank, the bank with a global credit risk exposure of $700 billion (more than twice Greece’s total default ‘risk’ loss) is being watched closely for signs that Europe might be capable of decisive action to resolve its banking crisis. Dexia, who used short-term funding to finance long-term lending, experienced credit evaporating as the euro zone debt crisis worsened, the bank has considerable exposure to Greece.
Dexia, whose shares have been suspended since last Thursday after a confined and combined 42% fall, appears to have finally taken the necessary steps to become fully nationalised. Belgium has now received approval from France to buy up to 100 percent of Dexia SA’s Belgian retail arm as part of proposals to dismantle the French-Belgian lender. Belgium and France may agree to guarantee 60 percent and 40 percent of the refinancing of circa €120 billion of bonds and loans held by Dexia. Proceeds from the sale of Dexia’s profitable units will go to mitigate losses of Dexia’s remnants.
The mention of the next G20 meeting on November 3rd to be hosted by Sarkozy in Cannes, as a deadline for sorting many of the Eurozone’s ills, may have been uttered more by accident than design. In their eighth meeting in a relatively short spell France’s Sarkozy and Germany’s Merkel have once again had a “cordial meeting” after which (once again) the soothsaying appeared coherent but no details of the “package” have been announced. The group of 20 finance ministers meet in Paris Oct. 14-15 before a G-20 summit in Cannes in November.
“We’re not going into details today we’re looking to introduce an entire package,” Chancellor Angela Merkel.
The continual reticence may still have Greece’s imminent default at the heart of the issue. Greece is expected to run out of cash in early November. Inspectors from the European Commission, the IMF and the European Central Bank, the “troika”, are still assessing whether Athens has fulfilled the criteria for more aid. Agreement was supposed to be reached last week, similarly the ‘markets’ were told a week back that Greece only had eight days to survive, suspicions are now surely heightened that Greece will default once the bank’s have their contingency plans secured thereby limiting the damage.
“We are working closely with the troika which is currently in Greece and we expect them to present a sustainable solution for Greece that keeps it in the euro zone and also ensures the financial stability of the euro zone,” Merkel said.
If the two leaders can agree on a way forward, the experience of the past two years has shown that they could struggle to get the other 15 countries in the euro zone on board in a timely fashion and if reports are correct, that Slovakia refuses to ratify the expansion of the EFSF, this may throw the Eurozone into a tailspin as all 17 countries have to agree to agree, one defector kills the entire plan.
If the Eurozone is looking for help from the Middle East they could be left feeling very disappointed. Qatar are unlikely to come to the aid of the European banks’ and the area’s crisis according to reports from the main newswires. Barclays was rescued during the height of the 2008-2009 crisis with the Qatar sovereign wealth fund (QIA) making a profit of circa £600 ml on a combined £1.8 billion temporary investment. However, QIA has an exposure of circa $20 billion in private European countries’ companies and are unlikely to increase that level. Abu Dhabi’s SWFs could be similarly hampered given it had to step in to rescue Dubai’s property crash of 2010. Saudi has committed huge sums to a domestic social rebuilding programme in order to prevent social unrest from gathering pace so are equally unlikely to seek out bargain investments.
Looking towards the London session, as is customary at the start of trading over recent weeks, the global macro economic situation completely dominates the narrative ‘landscape’. Micro events such as data releases are being dwarfed by the importance of the continual crisis. The UK FTSE equity index future is currently down 0.3% and the SPX future is up 0.2%. Although a week is a long time in trading the markets will not have ‘forgotten’ that (rather conveniently) Italy’s and Spain’s credit ratings were downgraded late on Friday afternoon by Fitch Ratings.
The euro has weakened against the yen for a sixth straight week, matching the string of losses which finally ended in June 2010. The 17-nation currency fell versus most of its major counterparts amid increased speculation Greece will default, deepening the region’s debt crisis. Higher-yielding currencies, such as the Brazilian real and Mexican peso, rose as stocks advanced after reports showed employment in the USA economy rose more than forecast.