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Wary Investors Start To Shun European Banks

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http://www.nytimes.com/2011/09/13/business/global/investors-reducing-exposure-to-french-banks.html?_r=1&ref=business

When a $225 million loan to BNP Paribas comes due Thursday at Legg Mason’s Western Asset management unit, managers at its money market funds will be exercising caution. Instead of renewing the loan as they would have as recently as two months ago, they are looking to park investors’ money elsewhere, avoiding BNP and other Continental banks in favor of institutions in Scandinavia, Canada and Britain.

Even as European investors race to abandon shares in French banks, on this side of the Atlantic, banks, brokerages and other American financial institutions are quietly reducing their exposure too, turning down requests for fresh loans from the euro currency region and seeking alternative investments.

Anyone know if the Fed swap lines are being accessed yet?

Looks like the next banking crisis is coming to a head with the French leading the charge to bankruptcy.

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http://www.bloomberg.com/news/2011-09-13/europe-getting-close-to-banking-crisis-pimco-s-el-erian-says.html

Pacific Investment Management Co.’s Mohamed A. El-Erian said organizations such as the International Monetary Fund need to act now with European banks being at risk of being engulfed in the region’s sovereign debt crisis.

“We’re getting close to a full-blown banking crisis in Europe,” El-Erian, Pimco’s chief executive officer and co-chief investment officer, said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt.

BNP Paribas SA, France’s biggest lender, was forced to deny an opinion piece in The Wall Street Journal today that cited an unidentified official as saying the bank could no longer borrow in dollars. French banks are in the spotlight because of their holdings of bonds issued by the euro region’s most-indebted nations, topping the list of Greek creditors with $56.7 billion in overall exposure, according to a June report by the Bank for International Settlements.

So will it be Sept or Oct when we see a collapse or will the political elite manage to buy another 12 months?

Time for this yet?

popcorn.jpg

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http://blogs.telegraph.co.uk/finance/jeremywarner/100011929/europes-banks-are-starring-into-the-abyss/

Where now for European banks? Sir Howard Davies, former chairman of Britain's Financial Services Authority, said on BBC Radio's Today programme on Tuesday morning that he thought the French government was only days away from having to recapitalise the country's banking system for a second time. It's hard to disagree.

The panic seems to have been temporarily stemmed by a statement from BNP Paribas to the effect that it wasn't having the problems widely reported of finding dollar funding. There was also an emphatic denial of discussions over state intervention. But no-one is kidding themselves. Italy had to pay the highest spread since joining the euro to sell its bonds on Tuesday. There are growing fears over whether Europe's largest borrower can stay the course.

http://www.telegraph.co.uk/finance/financialcrisis/8720479/Debt-crisis-live.html

The French banks had another stressful day today, but all's well that ends well.

This week their share prices have been wildly fluctuating as rumours did the rounds that they were having trouble securing funding. Societe Generale has lost a huge 60pc of its value since July.

But today they bounced back.

Societe Generale ended up 14.96pc, and BNP Paribas closed 7.2pc higher after denying that it was unable to borrow US dollars.

Excellent plenty of people it seems believe what the banks say or there are plenty of mugs out there who think they have got a bargain.

Still at least we aren't heading towards the abyss....

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http://www.bbc.co.uk/news/business-14896685

In this Gallic financial malaise, the originator of the virus is probably the banks - in that they are massively exposed to financially challenged eurozone states, especially Greece, Spain and Italy. And French banks did not raise capital as a protection against losses after the great crash of 2008 to the degree that US and UK banks did (in part because, as I've noted before, they regarded that crash as an Anglo-American mess, in which they were relatively innocent victims).

But with almost no one, except eurozone government heads, saying that Greece can avoid a fairly imminent default, French banks are likely to be weakened by substantial losses. To give some idea of what is at stake, the respective exposures to government and commercial Greek debt of BPCE, Societe Generale, BNP Paribas and Credit Agricole are 3bn euros, 9.2bn euros, 14bn euros and 28bn euros, according to figures they supplied to the European Banking Authority as part of the recent stress tests.

It is relevant to include the commercial exposure, because the Greek economy is contracting very sharply - and it is difficult to see how lenders to the Greek private sector can avoid significant pain.

More of Peston at the link.

Looks like the French banks will be the weak link.

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I like to invest in hated sectors and am therefore currently a buyer of banks through XS7R which is an ETF with a spread of european (including UK) banks.

I did think it was crazy when people were buying banks 6 months ago when the risks were exactly the same in my mind as they are now.

I actually hope the fear hits more extreme levels as I would like to pick up the banks on the uber cheap.

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I like to invest in hated sectors and am therefore currently a buyer of banks through XS7R which is an ETF with a spread of european (including UK) banks.

I did think it was crazy when people were buying banks 6 months ago when the risks were exactly the same in my mind as they are now.

I actually hope the fear hits more extreme levels as I would like to pick up the banks on the uber cheap.

Do you not fear that one of these days the rebound will be a bull trap and you will lose it all?

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http://www.zerohedge.com/news/jefferies-describes-endgame-europe-finished

The most scathing report describing in exquisite detail the coming financial apocalypse in Europe comes not from some fringe blogger or soundbite striving politician, but from perpetual bulge bracket wannabe, Jefferies and specifically its chief market strategist David Zervos. "The bottom line is that it looks like a Lehman like event is about to be unleashed on Europe WITHOUT an effective TARP like structure fully in place. Now maybe, just maybe, they can do what the US did and build one on the fly - wiping out a few institutions and then using an expanded EFSF/Eurobond structure to prevent systemic collapse. But politically that is increasingly feeling like a long shot. Rather it looks like we will get 17 TARPs - one for each country. That is going to require a US style socialization of each banking system - with many WAMUs, Wachovias, AIGs and IndyMacs along the way. The road map for Europe is still 2008 in the US, with the end game a country by country socialization of their commercial banks. The fact is that the Germans are NOT going to pay for pan European structure to recap French and Italian banks - even though it is probably a more cost effective solution for both the German banks and taxpayers....Expect a massive policy response in Europe and a move towards financial market nationlaization that will make the US experience look like a walk in the park. " Must read for anyone who wants a glimpse of the endgame. Oh, good luck China. You'll need it.

Full report at the link.

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http://www.zerohedge.com/news/fed-swap-line-tapped-again-eurobank-funding-concerns-surge-after-two-banks-borrow-dollars-ecb

About a month ago, European USD funding concerns came to the fore with a bang after one bank had borrowed $500 million dollars from the ECB in a 7 day operation, indicating that, as had been documented before and after courtesy of a rise in Libor that has yet to see a down day in the last 40, dollar funding is becoming a threshold factor (for at least one bank). Well, today we learn that 3M USD Libor, which just rose yet again to 0.349% from 0.347% (with perpetual outlier Credit Agricole finally caught up by the little Swiss bank that could CSFB, see below) has become a prohibitive funding mechanism yet again, after the ECB just announced that following 3 weeks of quiet, not one but two banks were "forced" to borrow $575 million from the ECB (the most since June 2010) which in turn had to resort to using the Fed's swap line - expect to see the appropriate number in the FRBNY's swap line ledger with the ECB and the Fed's H.4.1 next Thursday when this data is updated on the US side. Basically despite the market rallying on news that the Moody's downgrade of French banks was "better than expected" the truth is that the situation continues to get step wise worse.

In answer to my original question it appears that the Fed is being accessed by 2 banks.

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http://www.bloomberg.com/news/2011-09-14/to-save-euro-turn-to-mutual-fund-banks-commentary-by-laurence-kotlikoff.html

Cans of Soup

The ECB might step in and “protect” deposits. But if people kept withdrawing money, this, too, would require printing trillions of euros, which the public would cart off from banks they don’t trust. Then, with their money in unsafe keeping, consumers would try to buy something real: cars, cans of soup, you name it. They would turn the euro into a hot potato, producing hyperinflation. Consequently, those who didn’t run on the banks would retain secure claims to worthless pieces of colored paper.

Sovereign defaults are only the proximate cause of this euro-killing nightmare. The real culprit is bank leverage. If the lenders had no debt, sovereign defaults would reduce the value of their equity, but wouldn’t shut them down, thereby destroying the financial-intermediation system.

Non-leveraged banks are, effectively, mutual funds. If appropriately regulated, mutual funds don’t make promises they can’t keep and never go bankrupt. Yet they can readily handle all manner of financial intermediation as 10,000 of them in the U.S. make abundantly clear.

Not sure about the mutual funds comment here.

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It's his limited purpose banking idea, which I have a good degree of sympathy with.

You have full reserve 'savings' (custodial) accounts (mutual funds), which act like safety deposit boxes. The money just sits there safe until you withdraw it. The bank can't touch it for other investments/lending etc.

You then have other accounts (mutual funds), which can return a profit or a loss, depending on their performance. You have an equity share in the investment, rather than a promise to repay your investment in full. Therefore, you may get back less than you put in if it performs badly, as there is no promise to pay back in full.

The result is you have a safe place to store savings (which really would be savings, rather than investments as in FRB) and you have a risk bearing place to invest in, which may make a positive or negative return.

The banks themselves just become fund managers. No deposit guarantees are needed (other than against outright theft/damage of the cash in safe accounts). No risk can be socialised, as it is associated with each individual; the risk is spread far and wide over all investors.

TBH, I have no problem with FRB existing along side this, as long as they call a spade a spade. You do not deposit savings in an FRB, you give the bank credit. If you want to gamble with them repaying it, then fair enough, but it shouldn't be the job of the taxpayer or anyone else.

IMO, if there were no deposit guarantees, such a system (LPB) would probably spring forth on its own anyway, as people weighed up the risks. It would also allow competing currencies to work, as mutual funds could contain literally anything (including private sector currencies, gold/silver, Bitcoins etc).

EDIT: BTW, this bit is fun:

...

The ECB might step in and “protect” deposits. But if people kept withdrawing money, this, too, would require printing trillions of euros, which the public would cart off from banks they don’t trust. Then, with their money in unsafe keeping, consumers would try to buy something real: cars, cans of soup, you name it. They would turn the euro into a hot potato, producing hyperinflation. Consequently, those who didn’t run on the banks would retain secure claims to worthless pieces of colored paper.

...

I'm not sure if people understand this fully. It isn't the actual printing that causes the hyperinflation of prices. It's the panic to spend hyperinflated fiat money that causes the problem. The panic being the critical part. Once confidence evaporates, people don't want promises of fiat money... hell, they are unlikely to want fiat money at all. Then you get hyperinflation.

This is what the politicians and many academics don't understand. They think they can manage this thing by just doing key bailouts, speaking in easing tones etc, but if panic breaks out, the system is history; nothing they can say or do will matter as people will be saving themselves, rather than listening to the people that put them in the mess in the first place.

Edited by Traktion

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http://www.reuters.com/article/2011/09/14/us-bnpparibas-idUSTRE78D0SE20110914

BNP Paribas, the largest of France's embattled banks, is to sell 70 billion euros ($96 billion) of assets to shore up capital and cut funding needs, and perhaps stay the credit rating cut suffered by its main rivals.

BNP said its asset sales would reduce its balance sheet by around 10 percent and as part of the plan would cut its U.S. dollar funding needs by $60 billion by the end of 2012.

With concern over French banks' exposure to the euro zone debt crisis growing, Moody's Investors Service cut the credit ratings of rivals Societe Generale and Credit Agricole, but spared BNP, at least for now.

All gone Pete Tong for the French banks O_o

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http://ftalphaville.ft.com/blog/2011/09/14/677201/rise-of-the-pawn-swan/

US banks are exploiting the inability of European banks to fund themselves in dollars, charging much higher rates than normal – sometimes double that paid to money markets.

But they argue they are simply taking “conservative” steps to protect themselves.

Assets posted are subject to dramatic haircuts, meaning European banks can only generate cash equivalent to part of their full value.

“Repo markets have always been a source of funding, but the question has always been about whether the price points work for both parties,” said one US banker involved in such deals. “As the [money market] investor base started to shy away from some names, the foreign banks became more interested in getting deals done.”

Paris-based Societe Generale said that it had struck US dollar repo deals equivalent to €6bn against a portfolio of commercial mortgage-backed securities and collateralised loans with maturities longer than six months. US bankers say other banks have struck similar deals in recent weeks to generate cash.

There are two interesting points to pluck out here:

1) that US banks are charging ‘dramatic’ haircuts on what the European institutions in question describe (earlier in the article) as quality assets. Clearly a difference of opinion.

2) that such “quality” assets are now clearly limited with respect to how much they can be monetised, quite the contrast to Treasury debt, which can in some cases be monetised beyond its face value.

Interesting given Bernanke’s point about what made the Great Depression so great. As he has written:

A useful way to think of the 1930-33 debt crisis is as the progressive erosion of borrower’s collateral relative to debt burdens.

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Not to worry, it's contained

ECB Lends Dollars to European Banks

It's like 2008 again, except this time it's more defined. Back then, no bank trusted any bank for a while. Now non Euro banks and money market funds don't trust many Euro banks. Back then, £, Euro ,$ , Yen interbank spreads blew out all at the same time, now it's mainly in Euro.

Back then, the Fed opened FX swap lines to all other CB's and this provided the liquidity to replace that lost in the private funding market. Now, there is a defacto always open line from ECB, BOE and SNB to the FED, the two banks in question chose this route as it was short term 7 day funding and definitely cheaper than going to the private market. The interest cost is not the main concern though, it's the continual flow of the liquidity and the anonymity provided.

These taps will remain open and in size if needed, the FED had no problem lending 10's of trillions to basically any bank that asked for it during Lehmans.

They will stay open as long as they are needed, they have no choice if we're going to go through another 'credit lock' episode.

Edited by moneyscam

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Now non Euro banks and money market funds don't trust many Euro banks. Back then, £, Euro ,$ , Yen interbank spreads blew out all at the same time, now it's mainly in Euro.

It's not a trust issue.

It's a ratings issue.

The buy side (money market investors) cannot supply liquidity (at the crucial overnight to three month durations) to European banks - because in general their credit ratings are so poor that each fund's own charter forbids it.

This is why the ECB has openned up currency swap lines - they're effectively purchasing the default risk, and laundering default-possible risks into default-free risk.

Cue hilarity when the stress to the EFSF implodes that balance sheet.

No wonder the IMF are getting twitchy about seniority issues.

Edited by ParticleMan

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I'm not sure if people understand this fully. It isn't the actual printing that causes the hyperinflation of prices. It's the panic to spend hyperinflated fiat money that causes the problem. The panic being the critical part. Once confidence evaporates, people don't want promises of fiat money... hell, they are unlikely to want fiat money at all. Then you get hyperinflation.

This is what the politicians and many academics don't understand. They think they can manage this thing by just doing key bailouts, speaking in easing tones etc, but if panic breaks out, the system is history; nothing they can say or do will matter as people will be saving themselves, rather than listening to the people that put them in the mess in the first place.

That's an excellent point.

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It's like 2008 again, except this time it's more defined. Back then, no bank trusted any bank for a while. Now non Euro banks and money market funds don't trust many Euro banks. Back then, £, Euro ,$ , Yen interbank spreads blew out all at the same time, now it's mainly in Euro.

Back then, the Fed opened FX swap lines to all other CB's and this provided the liquidity to replace that lost in the private funding market. Now, there is a defacto always open line from ECB, BOE and SNB to the FED, the two banks in question chose this route as it was short term 7 day funding and definitely cheaper than going to the private market. The interest cost is not the main concern though, it's the continual flow of the liquidity and the anonymity provided.

These taps will remain open and in size if needed, the FED had no problem lending 10's of trillions to basically any bank that asked for it during Lehmans.

They will stay open as long as they are needed, they have no choice if we're going to go through another 'credit lock' episode.

What sort of collateral do the european banks have to offer to get these new USD loans?

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I'm not sure if people understand this fully. It isn't the actual printing that causes the hyperinflation of prices. It's the panic to spend hyperinflated fiat money that causes the problem. The panic being the critical part. Once confidence evaporates, people don't want promises of fiat money... hell, they are unlikely to want fiat money at all. Then you get hyperinflation.

So there doesn't look to be much of a worry about hyper inflation at the moment. The lesson I'm drawing from the hyper inflation episode in Weimar Germany was that the economy started buzzing again as everyone was spending. The problem I'm seeing in the UK is that demand is very subdued.

I'm not a tin foil hatter but my store cupboards are full, my savings are topped up, I've trimmed back on discretionary spending, reallocated my investments. Metaphorically I've battened down the hatches. And after all that preparation life goes on as before. Nothing much seems to have changed.

The sun still rises in the east, night turns to day, summer is turning to autumn. The financial crisis seems a total fiction. What has really changed apart from the numbers the score keepers use, and maybe their colour. If I'm living in a fools paradise what are the consequences I need to guard against?

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So there doesn't look to be much of a worry about hyper inflation at the moment. The lesson I'm drawing from the hyper inflation episode in Weimar Germany was that the economy started buzzing again as everyone was spending. The problem I'm seeing in the UK is that demand is very subdued.

I'm not a tin foil hatter but my store cupboards are full, my savings are topped up, I've trimmed back on discretionary spending, reallocated my investments. Metaphorically I've battened down the hatches. And after all that preparation life goes on as before. Nothing much seems to have changed.

The sun still rises in the east, night turns to day, summer is turning to autumn. The financial crisis seems a total fiction. What has really changed apart from the numbers the score keepers use, and maybe their colour. If I'm living in a fools paradise what are the consequences I need to guard against?

That what you thought were your savings and investments also turn out to be a total fiction.

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  • 330 Brexit, House prices and Summer 2020

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