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Trust and naivety
Jul. 3rd, 2010 10:20 amAn interesting article in the FT this morning from John Gapper, writing about how the Europeans have copied from the Americans the idea of "getting the problems with the banks out into the open". As Gapper observed, when 19 of the largest banks in the US underwent such a stress test in May last year, 10 of them were found wanting, and they had to raise $75bn in capital. However, the move was good for the banks and for Tim Geithner. Basically it restored confidence that the largest banks in the US weren't going to go tits up tomorrow.
Now Europe has decided to follow suit. Initially it was unhappy with the idea, simply because, as a matter of principle, Europe hates making anything about a company's affairs public, even if it is listed, or (even more ironically) government-owned. However, given the sustained lack of confidence in Europe, hence, the eurozone, hence, the European politicians (that last bit being the most important part), it was accepted that "something must be done".
But, as Gapper also observes, for reasons that are not very mysterious, this is not doing the trick.
Three possible factors are mentioned:
1) The stress tests in the US might not have solved the problem at all, so if they didn't work for the US banks, why should they work for the European ones? What worked in the US was the massive fiscal stimulus. In other words, the stress tests could just have been a placebo.
2) The stress tests DID work in the US, but they won't work in Europe, because Europe's banks are, basically, fucked. The fundamental problem here is that, if the US banks found to be in trouble couldn't raise capital on the private markets (which they could -- see US fiscal stimulus, above), then they could have been rescued by the US government. However, if the stress tests find that 70 out of 100 banks in Europe are in trouble, and those banks can't raise capital on the private markets, then it's hard to see how governments can rescue them, since the cause of the problems at these banks are likely to be quite a lot of euro-denominated sovereign debt from those self-same governments - which is a bit like paying off someone you nipped a few years ago with a freshly-written IOU. The paper might be less ragged, but it's worth no more nor less than it was yesterday.
3) The third problem is that, while there was just the US investigating the US banks, in Europe we have a combination of national and supra-national regulators and rules. Since it's clearly in the interest of the central banks (and governments) of Spain and Italy to find out that their own banks are fine, honest, it can hardly be surprising that the markets are not treating the European stress testing with the confidence applied by their American peers. In a way it's a bit like "skin" poker sites vs standalone sites. While Pokerstars wants all of its players to lose slowly (thus maximising overall rake), skins want their own players to win and other skins' players to lose. This maximises the skin's own revenue, but reduces the overal revenue for the site. The individual regulators and governments in the eurozone are the same -- if all of their own banks get the green light, but those elsewhere that are in trouble do not, then the country that "bends the rules" benefits, even though the overall benefit is reduced.
There's an additional factor not mentioned by John Gapper. Americans are more innocent. They still tend to believe their leaders and their government. If the Fed undertakes a stress test of 19 banks and finds that 10 of them need to raise capital, then the markets don't immediately say "My God, that probably means that 19 of them need to raise capital".
In Europe, we are more cynical. If your starting point is never believing anything that a government says, then assurances by the government and their sock-puppet regulators that everything in the Italian/Spanish garden is rosy might not generate the sigh of relief that it would in the US.
Unfortunately, John Gapper doesn't provide a plan B. He just ends with "let's hope that plan A works". So what happens if the stress-testing fails to declare that 90% of the German Landesbanken and 90% of the Spanish cajas are effectively insolvent (which is my guess of the real situation)? The current macro-economic viewpoint seems to be "well, fucked if I know, but one thing is for sure; it won't be pleasant".
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Now Europe has decided to follow suit. Initially it was unhappy with the idea, simply because, as a matter of principle, Europe hates making anything about a company's affairs public, even if it is listed, or (even more ironically) government-owned. However, given the sustained lack of confidence in Europe, hence, the eurozone, hence, the European politicians (that last bit being the most important part), it was accepted that "something must be done".
But, as Gapper also observes, for reasons that are not very mysterious, this is not doing the trick.
Three possible factors are mentioned:
1) The stress tests in the US might not have solved the problem at all, so if they didn't work for the US banks, why should they work for the European ones? What worked in the US was the massive fiscal stimulus. In other words, the stress tests could just have been a placebo.
2) The stress tests DID work in the US, but they won't work in Europe, because Europe's banks are, basically, fucked. The fundamental problem here is that, if the US banks found to be in trouble couldn't raise capital on the private markets (which they could -- see US fiscal stimulus, above), then they could have been rescued by the US government. However, if the stress tests find that 70 out of 100 banks in Europe are in trouble, and those banks can't raise capital on the private markets, then it's hard to see how governments can rescue them, since the cause of the problems at these banks are likely to be quite a lot of euro-denominated sovereign debt from those self-same governments - which is a bit like paying off someone you nipped a few years ago with a freshly-written IOU. The paper might be less ragged, but it's worth no more nor less than it was yesterday.
3) The third problem is that, while there was just the US investigating the US banks, in Europe we have a combination of national and supra-national regulators and rules. Since it's clearly in the interest of the central banks (and governments) of Spain and Italy to find out that their own banks are fine, honest, it can hardly be surprising that the markets are not treating the European stress testing with the confidence applied by their American peers. In a way it's a bit like "skin" poker sites vs standalone sites. While Pokerstars wants all of its players to lose slowly (thus maximising overall rake), skins want their own players to win and other skins' players to lose. This maximises the skin's own revenue, but reduces the overal revenue for the site. The individual regulators and governments in the eurozone are the same -- if all of their own banks get the green light, but those elsewhere that are in trouble do not, then the country that "bends the rules" benefits, even though the overall benefit is reduced.
There's an additional factor not mentioned by John Gapper. Americans are more innocent. They still tend to believe their leaders and their government. If the Fed undertakes a stress test of 19 banks and finds that 10 of them need to raise capital, then the markets don't immediately say "My God, that probably means that 19 of them need to raise capital".
In Europe, we are more cynical. If your starting point is never believing anything that a government says, then assurances by the government and their sock-puppet regulators that everything in the Italian/Spanish garden is rosy might not generate the sigh of relief that it would in the US.
Unfortunately, John Gapper doesn't provide a plan B. He just ends with "let's hope that plan A works". So what happens if the stress-testing fails to declare that 90% of the German Landesbanken and 90% of the Spanish cajas are effectively insolvent (which is my guess of the real situation)? The current macro-economic viewpoint seems to be "well, fucked if I know, but one thing is for sure; it won't be pleasant".
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