Posted by WARREN MOSLER on May 26th, 2009
Completely agreed about the possibility of a bank blow up.
And it’s also possible the government plan blows up the government.
The eurozone is the region vulnerable to ratings downgrades- both banks and national governments.
Not the UK and US governments where spending is not revenue constrained.
The ECB can ‘save’ the eurozone but only by extending credit beyond that ‘permitted’ by the treaty which in some ways they have already done.
This warning comes from a financial regulator:
by Ambrose Evans-Pritchard
May 25 (Telegraph) — German debts set to blow ‘like a grenade’
Germany’s financial regulator BaFin has warned that the toxic debts of the country’s banks will blow up “like a grenade” unless they take advantage of the government’s bad bank plans to prepare for the next phase of the crisis.
German Chancellor Angela Merkel’s bad bank plan has been heavily criticised Photo: EPA
Jochen Sanio, BaFin’s president, said the danger is a series of “brutal” downgrades of mortgage securities by the rating agencies, which would eat into the depleted capital reserves of the banks and cause broader stress across the credit system. “We must make the banks immune against the changes in ratings,” he said.
The markets will “kill” banks that try to go it alone without state protection, warning that banks have â‚¬200bn (Â£176bn) of bad debts on their books. “We are pretty sure that within a month or two our banks will feel the full force of the sharpest recession ever on their credit portfolios,” he said, speaking after the release of BaFin’s annual report last week.
The International Monetary Fund (IMF) has called for a stress test for Europe’s banks along the lines to the US Treasury’s health screen, saying the region “urgently needs to weatherproof its institutions”.
The IMF said European institutions have written down less than 20pc of projected losses of $900bn (Â£566bn) by 2010. Euro area banks will have to raise a further $375bn in fresh capital, compared with $275bn for US banks. The Tier one capital ratio is 7.3pc in Europe, and 10.4pc in the US.
The German bad bank plan has been heavily criticised as an attempt to brush the problems under the carpet until after the elections in September. It allows banks to spread losses over 20 years in an off-balance sheet vehicle â€“ much like the “SIVs” that masked their extreme leverage in the first place â€“ and risks repeating the Japanese error of letting “zombie” banks limp on rather than purging the system.
The recession has hit Europe much harder than expected. German GDP has contracted by 6.9pc over the last year, and the eurozone as a whole has shrunk 4.6pc, although there are signs that the economy may be through the worst.
Germany’s IFO business confidence index rose to 84.2 in May, the highest since December, and German exports have started to rise again after a catastrophic fall of 16pc. But Carsten Brzeski from ING said it is too early to celebrate.