So far, the statement released this afternoon US time out of a Euro summit amounts to an attempt at reassuring hand-waving but in fact was merely a restatement of the status quo. The group of European leaders did agree on a set of principles, but it remains an open question whether they will be able to act quickly or boldly enough in the fact of the mounting financial crisis.
And one principle was troublesome: that each country is on its own as far as its banks are concerned. Some banks, such as Deutschebank and UBS, are too big for their countries to save should they founder. Hypo was brought down by an Irish acquisition. The statement may have been crafted in part to keep pressure on German banks to support the Hypo rescue, and may be a practical necessity right now, since the public at large does not yet recognize the depth and extent of the risk in the EU, but it seems unwise to take a hard position on such a central issue.
From the Wall Street Journal:
European leaders pledged at a weekend summit to protect the continent’s banks from the spiraling global financial crisis. Their resolve is already being put to the test as two European banks required fresh rescues.
At an emergency meeting in Paris on Saturday, the leaders of France, Germany, U.K. and Italy said that, unlike in the U.S. where Lehman Brothers was allowed to file for bankruptcy, European governments would stand in to prevent any bank from failing…..
Yet, so far, proposals for unified anti-crisis rules — such as a mult-billion euro banking bailout fund — have been abandoned for fear they would be impossible to govern. Instead of concrete decisions, therefore, the four EU leaders decided on Saturday to a list of principles. Among them: though the leaders agreed that each country will be responsible for handling problems within its own banking system — including coming up with possible sanctions for the heads of any failed banks — they promised to keep each other informed of their actions.
They said they would jointly consider ways to amend some accounting standards — such as the mark-to-market rule — that have pushed several banks into uncontrolled, downward spirals.
From Bloomberg:
European leaders pledged to bail out their own nations’ banks while stopping short of a regional rescue effort to deal with the global credit crisis.
At a summit in Paris yesterday, leaders of France, Germany, Britain, Italy, Luxembourg, the European Central Bank and the European Commission agreed to ease accounting rules, seek tougher financial regulations and weaken enforcement of competition and budget laws.
“Each government will act according to its own methods and its own means but in a coordinated manner with the other European states,” French President Nicolas Sarkozy, who called the meeting, told reporters….
Europe “is still a dwarf compared to the U.S.” in terms of willingness to spend, said Laurence Boone, an economist at Barclays Capital in Paris. The statement on supporting banks “is not a progress. It’s the same as before the summit.”
Germany appears to be the stumbling block. Again from Bloomberg:
Hours before the summit, Dominique Strauss-Kahn, managing director of the International Monetary Fund, met Sarkozy to press the need for agreement. “Collective action is even more necessary in Europe than in the U.S. because Europe is more complex than the U.S.,” he told reporters. “Action must be taken quickly and in a concerted manner.”
German Chancellor Angela Merkel’s opposition underscored the hurdles to forging a unified front. “Each country must take its responsibilities at a national level,” she told a joint press conference after the summit.
The group agreed on coordinated policies on deposit guarantees and on having another summit soon to hash out fundamental reform. Bloomberg again:
Sarkozy said that “all actors” must be supervised, including rating firms and hedge funds. Executive-pay systems must also be reviewed, he said.
“We want a new world to come out of this,” Sarkozy said. “We want to set up the basis for a capitalism of entrepreneurs, not speculators.”
Anticipating increased spending, declining tax revenue, and government bank takeovers, they called for “greater flexibility” in the application of European Union competition and budget rules.
The last statement is an admission that the Stabilization Pact, which limits borrowings and fiscal deficits by EU members, is kaput.
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Money will flow to Japan.
Yen ‘unbeatable’ as carry-trade gets dropped
http://business.theage.com.au/bu…81006- 4ug5.html
“We are in a multi-year trend reversal,” said Paresh Upadhyaya, a senior vice president at Putnam Investment LLC in Boston who helps manage $US50 billion in currency assets. “We are going to see a global central bank easing cycle. The yen is the place to be in this environment of economic slowdown and heightened volatility.”
`The yen is a counter-cyclical currency,” said Richard Benson, who oversees $US14 billion of currency funds at Millennium Asset Management in London. “When the global economy looks bad, the yen should do well.”
“The carry trade is dead,” said Derek Halpenny, European head of global currency research at Bank of Tokyo-Mitsubishi in London. “The world is deleveraging.”
Now, that is changing. Implied volatility on major currencies rose to 16.69% on Sept. 17, the highest level since 1998, according to the JPMorgan G7 Volatility Index. The gauge of price swings touched 5.76% in June 2007, the lowest since the index’s inception in 1992.
Yen now accounts for 3.4% of global reserves, compared with 2.8% a year earlier, the lowest amount since at least 1999. The dollar is the world’s largest reserve currency at 62.5%, IMF figures show. Morgan Stanley strategists said in their Oct. 2 report that the yen may overtake the pound, which is No. 3 at 4.7%, in “coming quarters.”
To those english-speakers who want to follow financial/economic news on continental europe, what sources do you rely on? I know people here have criticized FT as biased. What do you prefer?
Since banks in the eurozone are regulated at the ‘nation’ level, interventions must proceed at that level if statutory integrity is to be maintained. Both politically and legally I suspect, this has to be the public statement of a ‘plan.’ What is important in Europe is what happens in private, and I suspect that these interventions will be undertaken ‘in consultations with the ECB,’ which may serve as a conduit for coordination. We’ll see.
The Stabilization pact was never more than an interim solution on the path to full integration; this has been the politically necessary approach with everything regarding unification in Europe. The problem with financials in the eurozone _isn’t_ the euro, pace yesterday’s seminar on that in comments here. The problem is that the Eurobond market is fragmented, and regulation is segregated. It sounds much as though the latter problem—regulatory segregation leading to regulatory arbitrage—is going too get fixed pronto, in which case this crisis will be of very considerable benefit to Europe as a whole. How to integrate the Eurobond market is a much thornier political issue, but here is a proposal: Eurobonds might best move to a two-tier structure, perhaps with different maturity dates and separate debt caps. The higher value bond might be issued with stiffer revenue guarantees, and in coordination with the ECB in some fashion, while the lesser ‘state bond,’ may have looser terms, higher yields, and more local applications, even though it would also be denominated in euros. The higher rated debt would become a vehicle for overseas money inflows, while the lower rated debt would be primarily for local purchase and trade in a secondary market. Really, that is what there is in the US, though we don’t call it that, but both the Federal government and the states issue bonds. The trick in Europe would be to closely cap the higher rated debt at the level of national issuance in relation to macroeconomic fundamentals and clear revenue.
But again, I think that this crisis will more likely promote financial integration and greater organization of the macroeconomy rather than provoke any ‘breakup.’ Breakup to where and what? Freeze in their own national castles?? With their regional economy already so integrated that economic cycles _do not stop at national signposts_ not to call them borders. Laggards who do not get on board with FULL financial integration and regulation can be given ‘sign or leave’ declarations. Does anyone think that the UK or Ireland or Denmark are going to leave in present conditions?? I would, in fact, really like to see them try. . . . They’ll sign. And Europe will be, on the day after, the real financial power they have the latent but still fragmentary wealth and main to be. Major changes in the global financial system do not tend to happen because someone or some group plans for them to happen; they more nearly occur because a set of sensible and situationally necessary structures are implemented, and the balance of capital flows re-order around the new reality in ways not fully anticipated. This will be such a situation. The US is the last country ready for such a changed environment: we’re still woofing across the Pacific when real change will grow itself across the Atlantic.
They will come around. Eventually they will realize that they are in an unprecedented crisis. I only hope they act before hell breaks loose.
This would work if the Treasury would do it:
Institutional Risk Analytics
More Bank for the Buck
http://us1.institutionalriskanalytics.com/pub/IRAMain.asp
The PR floating out of Germany that Hypo was brought down by an Irish acquisition strains credulity. Sounds like we are back to “the problem is confined to subprime loans.”
A couple of quick points:
Anonymous, the fact that implied volatilities are at record levels for the currencies is in no way probative of the directionality of the move of any one currency.
All the readings of these implieds means that it is turbulent as heck out there, up AND down. And again, these models that predict future values in those markets are based on Gaussian distributions. But we are seeing literally hundreds of events that are five standard deviations outside the norm, so all such valuation models really need to be taken with several grains of salt, at the very best. And there are different WAYS to calculate implieds as well, depending on how you weight the near-the-moneys.
By way of analogy, the VIX (which also measures implied volatility) is at or near record levels, but that is NOT intended to predict, per se, the directionality of the S&P 500. Recall that we have had some amazing short squeezes in the bourses, as well as steep downdrafts. Up and down BOTH.
Second, a small factoid may assist in understanding Merkel's plight.
Last week in Bavaria (as you might have guessed), the far left (as opposed to the centre left) made an exceptionally strong showing, shocking the German political establishment and threatening Merkel's Grand Coalition which she had cobbled together so carefully.
So she, like Sarkozy, will be under more and more pressure to reject "market-based" solutions as they try to keep pace with a resurgent European left.
Conceptually, this strong shift to the left at the grassroots level in Germany, France (and indeed throughout Europe) resembles the boost Obama has received from this catastrophe.
Matt Dubuque
mdubuque@yahoo.com
The far-left party (“Die Linke” – “The Left”) didn’t even make it into the Bavarian state parliament, they only got 4.3% of the votes.
That’s hardly a strong shift towards the left, especially since the biggest winners were the libertarians. The election result in Bavaria has nothing to do with the current economic woes and everything with local politics.
There has been a mild resurgence of the political left but we’re far from a political tectonic shift.
The fact is that most people in Germany probably feel like pawns in a global economy that cannot be influenced significantly by national governments. I doubt that many believe that voting for far-left parties would make a lick of a difference.
A lot of what has been perceived as “Euro glee” in the past couple of weeks was actually a sort of catharsic excerise.
People felt at the mercy of an anti-social Anglo-American socio-economic system, with smug Ivy League educated investment bank analysts telling Old Europe how to “fix” their economies the American way.
Now there is the feint hope that, once the smoke has cleared, there might be a window of opportunity to do things differently.
Global neo-liberal capitalism hasn’t delivered the goods it promised. Instead of an “ownership society” we got the “debt society”. Instead of an expanded middle class we got wage stagnation and a widening wealth gap between the top 20% and the rest. Instead of economic stability we got a system that wrought havoc upon traditional middle class career structures and introduced economic and social insecurity on a huge scale.
So yeah, people are sick of it but I don’t think they believe that voting for yeasterday’s failed ideologies will alleviate the problems.
The general acceptance of capitalist market economy may be threatened in the long term if things keep getting worse but at the moment it’s still a complete non-issue.
Relative to the U.S., Europe faces numerous challenges in dealing with the crisis. First there was the fact that most of the continent remained in denial longer than the U.S. Second, as as pointed out above, some banks are in countries that are too big to bail them out. Third, and obviously, each country has its own government and the EU is relatively weak. Fourth, the European Central Bank has an inflation-fighting mandate which prevents it from recession-fighting. Fifth, there are clear ideological differences, as pointed out by Sarkozy’s curious remarks.
That said, European countries do have a long history of working together, and it’s unfortunate they couldn’t come up with something better than rescuing banks on a case-by-case basis. The next opportunity for success (or failure) will be the G7 meetings: http://baselinescenario.com/2008/10/04/g7-at-the-bat/.
Let me see if I have this right. The very same Anglo-Saxon news organizations who for decades in op-ed after op-ed have been hysterical in their fears of a European “super-state” are now complaining that Europe is unable to act as a super-state. Chickens, roosting, whatever.
The motivation of this sudden change or heart is the Anglo-Saxon desire for Europe to match the US’s example and cut a check to its financial elite for hundreds of billions of coke-and-whore cash. Otherwise the fear is that the US’s elite will have to share their $700 billion stash with both their European and Asian peers.
The problem is that the European level of government has a tiny budget and no where near enough political legitimacy to transfer such a huge amount of wealth to Europe‘s financial elite.
In fact the Anglo-Saxon’s actually did have at least one pretty good point in their fear-mongering about a Fourth Reich in Brussels, which is that political decisions are best made at as local a level as possible. For banks that means the national level. For this is the level where real taxes are collected. In fact the national central banks are acting in a way similar to the regional Federal Reserve banks. The decision to either bail out a bank or let it fail is best left to the officials who will bear the brunt of this decision, not faceless bureaucrats in Brussels or Frankfurt.
That said there are policies that can and should be set on the European level. One de facto positive decision seems to be that banks will be bailed out by equity injections and not by blank checks as in the States. But one glaring deficiency is the lack of a proper deposit insurance regime. These rules should be set at the European level while being executed at the National level.
So if our favourite neo-Anglo-Saxon, the French Finance Minister and U Chi graduate Christine Lagarde wants to play Paulson, then let her go before the French taxpayers and ask for such privileges. Surely that would be preferable than allowing some star chamber European elite to make such an important decision? Right? Or am I lacking in my knowledge of Anglo-Saxon economic theory?
To add to the incoherent English-language press take on Europe, the same web publications that see imminent disaster because the EMU states ares not able to act quickly (so far disproven, I might add) also display near blanket opposition to the results of having acted with rapidity in the U.S. – the TARP. Euro pole vaulter fails to set world record, despite winning gold, whilst local boy sets new national record – finishing 15th in the same competition. Right…
The difficulties involved in effecting a transnational solution were made evident by the failure of E-On to take over Endesa and Sacyr, Eiffage, because of political pressures. On the other hand, the German utility was bribed into backing off with the sale to it of 10 bn of Endesa’s assets. Similarly, Sacyr backed off when French insitutional investors bought out its 33% stake at a premium to market.
There’s way too much attention paid to the EU structure and too little to the desire to make it work. Deals get made when necessary.
Agree completely with Kevin on the issue of deposit insurance. Gets rid of opportunities for arbitrage without treading much on sovereignty issues and it’s hard to imagine widespread popular opposition to a plan that would continue to guarantee deposits.
Ireland? We’ll send a bellhop up for your luggage. What was your room number again?
Charles,
I suggest you read Wolfgang Munchau in the FT today, who makes a very cogent case that the felicitous outcomes so far were based on relative good luck in who hit the wall. See the Comment section.
Yves,
There’s no point on agreeing or disagreeing on outcomes, because they have not happened yet, but Munchau is a perfect example of the British press setting the bar higher for the EU than for the locals. Leaving aside that euro bashing sells more papers in Britain than its opposite, there is a generally gross underestimation in the anglo press of the fundamental desire on the continent that the EU and its money succeed, although this is almost totally masked in normal times when squabbling over bullshit takes the fore.
Note that the impetus towards establishing an EMU bank stability fund is today coming from Berlusconi – the absolute most unlikely of sources imaginable. I’d been wondering what was behind his recent notable silence.
They will do what has to be done.