British, Spanish and French financial and investing houses on Thursday advised clients to reign in their naive enthusiasm after European Commission president José Manuel Barroso said that the euro zone banks will be forced to increase core capital reserves.
The official proposal touches a nerve that has for more than a year now shaken markets, which doubt that most European banking institutions can absorb losses caused by the crisis in the on-going real state and the sovereign debt sectors. Yet, the lack of detail marred again the credibility of the promises of the European authorities, and research notes did not hold back impressions that Mr Barroso played well his hand of words but showed no cards to trust the latest gamble to extend the euro's life.
BNP Paribas had a headline for it:
“Disappointment after European Commission president J.M. Barroso’s intervention. Mr Barroso said the European Financial Stability Facility’s capabilities must be strengthened for the fund to become an actual resource, if the urgency arose, to recapitalise banks.”
But we were left without knowing if the EFSF will be ready by summer next year or by 2013, or whether the 5 per cent core capital rate imposed in the July stress test will be updated to a 9 per cent, according to some rumours.
In Spain, Nordkapp pointed out first reactions were optimistic. Too much. It added some bickering, too.
“Of course, investors have welcomed news about bank recapitalisation with joy for, at the end of the day, European banks do need recapitalisation to face the troubled state of the peripheral sovereign debt. Taking in account that Germany and France are the biggest holders of Europe’s peripheral sovereign debt, recapitalising their banks is a decision in the right direction.
“Nevertheless, we still don’t know from where the money to finance the bank recapitalisation will come or, indeed, the methodology that will have to be used.”
In fact, there’s a nasty twist in this. With France’s triple AAA risk grade in the edge of a c
ut by the agencies, efforts by its government to help French banks could lead to a lower qualification and higher credit costs. Nordkapp describes the process with a Spanish popular expression:
“If France puts substantial public money in its banks, it would amount to fill a hole by digging another one.”
Analysts at Nordkapp would prefer that banks find enough support among private investors instead of sending the bill to taxpayers, and hope for
“unconventional measures. Pumping up more sovereign debt to bailout banks will get us nowhere, and lower interest rates will not help improve credit conditions for the European periphery. In any case, we are being left waiting for a plan.”
Mr Barroso has hinted at a possible cancellation of the main European banks’ rights to distribute dividends or bonuses. That will please the European malcontents and critics in general with the way bailout capital is being managed.
There is a ‘but’, from Renta 4:
“We do not know yet the volume of capital that the sector needs; the European Banking Authorities must establish the minimum core tier 1 capital rate, and the scenario and hypothesis to be considered.
“Besides, the current situation doesn’t seem to be the right moment to demand further efforts from the banking sector. Only more transparency and a plausible recapitalisation plan may bring calm on the medium term.”
And this time, there is no British exception.
“We still have no specifics, but it seems that there is talk of a Tier 1 of 9% (we are not sure if this is Basel 2, 2.5 or 3),” says Barclays
“This is a 9% to be kept even after the haircuts on sovereign debt. French banks have said they prefer to reduce balance sheets than to increase capital stock, and it is very likely that the rest of the banking sector agrees. Obviously, this bank deleveraging would probably bring us into a recession.
“In our opinion, this bank recapitalisation is a mistake unless it comes hand in hand with a solution for the sovereign risk problem; no bank will be safe if sovereign risk is not first eliminated, and if it were eliminated, there would be no need to recapitalise banks.”