The Guardian is announcing an agreement out of Europe that will involve bailing our their banks and enlarging the EFSF to $2T. The key points from the piece:
“This takes two forms. First, the main bailout fund, the European financial stability facility, will be given additional levers enabling it to offer first-loss guarantees for bondholders, be they private or public. Senior diplomats say this will deliver a fivefold increase in the fund’s firepower – giving it more than €2tn compared with the current €440bn lending capability. The EFSF will effectively become an insurer, thereby overcoming European Central Bank resistance to the idea of turning into a bank.
Second, Berlin and Paris have agreed that Europe’s banks should be recapitalised to meet the 9% capital ratio that the European Bank Authority is demanding following its re-examination of the exposure levels of between 60 to 70 “systemic” banks. The EBA has marked these exposures much closer to current market values.
It is said that the overall recapitalisation required will be closer to €100bn rather than the €200bn talked about by Christine Lagarde, IMF managing director, and others. French and German banks, senior sources said, can meet the new capital ratio target on their own without recourse to state funds, let alone the EFSF. Other countries’ banks, however, may need financial support from the state or the EFSF.”
So, we bailout the banks and avoid any sovereign defaults in the near-term, but we fail to resolve the actual cause of the crisis which is the currency crisis. This all remains bullish in the near-term, but it is not going to resolve the slowing growth issue in Europe and it is not going to fix the actual currency crisis. Further action will be required. What this does is remove the worst case scenario (for now) and buy more time for Europe to resolve the actual cause of this crisis. Unfortunately, I am not sure EMU leaders are interested in taking the necessary steps to resolve the trade imbalance issue. This means the core will continue to impose austerity on the periphery nations with the hope that this will somehow all resolve itself without restructurings or a move towards a fiscal union. In other words, it’s just a massive kick of the can (albeit a pretty strong one).
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.