The running of the bears

Spanish Banks Said to Be Set for Downgrade by Moody’s Today (Update 1)

Moody’s Investors Service is set to downgrade the credit ratings of Spanish banks later today, said two people with knowledge of the situation.

Fitch Calls For Capital Increase As Run On Spanish Banks Continues

Fitch ratings has called for a huge increase in capital reserves at the world’s biggest banks today as the markets reel from the run on Spain’s banks. The agency recommended banks across the world raise a total of $556 billion an increase of 23 percent over what the banks are currently holding.

Fitch made the recommendations on 29 of the world’s systemically important banks. That list includes Goldman Sachs Group, HSBC Holdings plc, Mizuho Financial Group Inc., Bank of America Corp., Societe General S.A., and JPMorgan Chase & Co. Banco Santander S.A., a Spanish banking giant, is among the list of the most important 29 banks. It is not at as much risk from the current run on deposits in the country but suffers from the aura of the crisis.

The increase in the amount of money banks have to hold and simply sit on meant the firms will not be able to earn money on those reserves and will reduce profitability. The other option is leaving the institutions open to failure. It is this tradeoff that will dominate the institutions for the next several years.

After, and in the midst of, such a unique and deep financial crisis it is probable that regulators will swing too far toward stability leaving less room for growth and innovation. It may be some years before a correct balance is restored to the sector but it seems inevitable that right now government interference is going to grow.

State rescue may be beginning of end for Spain's Bankia

Spain's government plans to clean up, downsize and sell Bankia within three years, but the strategy could be short-lived as the bank's capital gap may be larger than the 15 billion euros ($19.1 billion) so far identified, government and financial sources say.

"The bank faces two options," said a financial source with direct knowledge of the bank's situation. "First, to be wound down. Second, to be wound down. The question is how small it will be at the end."

Bankia, Spain's fourth-biggest lender with more than 10 percent of bank deposits, said its clients can be absolutely calm over the deposits they hold, while Spain's Economy Secretary said there had not been an exit of deposit funds.

The government which nationalized Bankia last week after months of uncertainty over its capacity to weather the financial storm.

Finally, the government is under intense public pressure to reduce the taxpayers' bill by selling the more than 5.4 billion euros worth of stakes the bank holds in major Spanish companies such as Iberdrola and Mapfre.

The Socialist opposition said last week it would back the Bankia takeover on condition public funds would be recovered at some point. Yet public anger at the banks is rising after seven other lenders had to be bailed out by the state at a time when education and health spending are being cut.

The lender's auditor Deloitte identified several gaps in Bankia's accounts and it is still not clear whether its rescue will cost the government more than the 15 billion euros it initially planned to inject.

A senior government source last week estimated the size of the state intervention at up to 10 billion euros.

That would come on top of the conversion of a 4.47 billion euros loan into shares, which will give the state 45 percent of Bankia, with an option to take another 3 percent, and 100 percent of its parent company Banco Financiero y de Ahorros (BFA).

Loaded with bad loans from a decade-long real estate boom, the bank needs to raise about 1.3 billion euros by June to comply with stringent European Banking Authority capital rules.

It also needs to find at least 6 billion euros by the end of the year to comply with two financial reforms presented by Spain's centre-right government in February and last week.

Greeks pull cash out of banks as confidence wanes

Greeks withdrew more than $900 million Monday and another $600 million Tuesday, according to the Greek Central Bank. While deposits have been steadily leaving banks since the start of the country's debt problems in 2009, this week's outpouring of cash reflects a new level of panic, analysts say.

Meanwhile, in Spain, the newspaper El Mundo said customers have withdrawn more than €1 billion ($1.27 billion) since the state took over Bankia, the country's fourth-largest lender, a week ago. Bankia insisted its depositors' money was safe, and the government denied there was a run on the bank.

Of banks and bailing wire

File this under financial wizardry, of the sovereign kind, with a European flair.

Is the European Union bailing out Greece?

Euro zone approves 12bn euros bailout for Greece

Euro zone finance ministers have approved a 12 billion euro installment of Greece’s bailout, but signaled that the nation must expect significant losses of sovereignty and jobs.

Ministers in the Euro-group gave the go-ahead for the fifth tranche of Greece’s 110-billion-euro financial rescue agreed last year, and said details of a second aid package for Athens would be finalized by mid-September.

But within hours of Saturday’s decision, Eurogroup chairman, Jean-Claude Juncker, warned Greeks that help from the EU and Inter-national Monetary Fund (IMF) would have unpleasant consequences.

Sounds a bit like it, but it depends, to some significant extent, on how you define "bail-out". And definition is everything in A Europe of judges.

EU: No-bailout rule III

In the Treaty establishing a Constitution for Europe the provisions on economic policy were located in Part III ‘The policies and functioning of the Union’, Title III ‘Internal policies and action’, Chapter II ‘Economic and monetary policy’, Section 1 ‘Economic policy’.

The ‘no-bailout’ clause is found in Article III-183, OJ 16.12.2004 C 310/78:

Article III-183 Constitution

1. The Union shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of any Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project.

'No Bailout' Clause? The EU's Greek Rescue Problems

European Policy Centre CEO Hans Martens is referring to the 'No Bailout' clause in the European treaty. Article 103 says that: the Union shall not be liable for or assume the commitments of central governments.

This article was specially written to leave ensure no EU country would be saved by the EU if it doesn't respect the Union's economic rules. And that's precisely the case in Greece.

On the other hand, if the European leaders are really willing to aid Greece, they can simply ignore the first clause and go with article 122, which states: when a member-state 'is in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control, the Council [of national governments], on a proposal from the Commission, may grant, under certain conditions, Union financial assistance to the member-state concerned.

ECB's Stark rejects EU guarantees for Greek debt

A senior European Central Bank policymaker rejected the idea of a Greek debt solution involving EU guarantees on Wednesday, and said Greece would face economic collapse if it restructured its debt.

Asked about a scenario under which banks exchanged their Greek bonds for new paper backed by guarantees from EU states - an approach that would be similar to that used in Latin America in the 1980s - Juergen Stark said: "This instrument is disqualified."

"It would break the ban on support - the no bail-out clause in article 125 of the EU Treaty," Stark, a member of the ECB's Executive Board, told German newspaper Die Zeit in an interview.

The U.S.A. and Europe Are Reaching the End of the Line

Because of the sins of the € Commission, the European Central Bank (ECB), and the governments, which have repeatedly violated the no-bailout clause of the European Union's Maastricht Treaty with their so-called rescue packages, plus the ECB's acquisition of toxic government bonds, a situation has now arisen in which the ECB could become technically bankrupt overnight.

UPDATE 1-Finland demands bailout guarantees, bank participation

Finland's new finance minister said on Tuesday that the Nordic country will demand guarantees if it participates in any new euro area bailouts and that it wants private investors to bear more of the burden.

"We want to limit Finland's responsibilities. The new government has taken a tougher stance than the previous government regarding crisis countries' aid packages," Jutta Urpilainen said in a television interview with public broadcaster YLE.

She said the guarantees could be in the form of shares in a company managing the debt-laden state's property.

UPDATE 1-S&P warning adds default threat to Greece's bailout woes

Greece would likely be in default if it follows a debt rollover plan pushed by French banks, S&P warned on Monday, deepening the pain of a bailout that one European official said will cost Athens sovereignty and jobs.

Derivatives industry body ISDA said before the French proposal was released in late June that a voluntary agreement to roll over Greek debt would "typically" not trigger payments on credit default swaps.

European politicians and bankers had expressed confidence last week that the French proposal would not trigger a default, but ratings agency Standard & Poor's said it would involve losses to debt holders, most likely earning Greece a "selective default" rating. S&P cut Greece's sovereign rating to "CCC" last month, from "B", on a view that any restructuring of the country's massive debt load would count as an effective default.

Greece crisis: German lenders 'join rollover plan'

German lenders and insurers have agreed to participate in a plan to continue lending to Greece, according to German finance minister Wolfgang Schaeuble.

He was speaking after a private meeting of the country's main banks.

Mr Schaeuble said German institutions would contribute 3.2bn euros ($4.6bn, £2.9bn) to the plan, details of which have yet to be finalised.

It comes after French banks agreed to relend about half of Greek debts they own coming due by 2014.

Deutsche, Germany's biggest lender, was expected to contribute less than 1bn euros to the plan, according to reports in Germany.

Commerzbank , Germany's second-biggest lender, is likely to contribute far less than 1bn euros, the reports said.

The French plan is designed to make Greece's debtload more manageable in a way that would not be deemed a formal default.

If the deal is classified as a default by ratings agencies or credit derivatives traders, it could force European banks to recognise billions of euros in losses in Greek debts that they currently hold, putting their own solvency at risk.

A couple of years ago, ECB warns Germany against EU bail-out

The European Central Bank gave a thinly veiled warning to the German government on Friday not to violate the European Union’s “no bail-out” clause, which prevents members of the eurozone from supporting other members that are facing rising public debt.

Jürgen Stark, ECB executive board member, told Spiegel magazine in an interview released on Friday that the clause was an “important basis for the functioning of the monetary union”.

The warning follows reports that Germany was considering ways to help members of the eurozone that are facing fast-rising refinancing costs as investor fears rise about deteriorating public finances.

The “no bail-out” clause of the EU treaties prohibits countries from becoming “liable for” or assuming “the commitments” of other governments and is regarded by the ECB as an important weapon for ensuring fiscal discipline.

Asked about the issue on Friday, Frank-Walter Steinmeier, foreign minister, said; “A process is now starting to consider to what extent support via the eurozone and the economically strong countries of the eurozone can happen.”

Fast forward back to the present, German court considers challenge to EU bail-outs

Germany's Constitutional Court is hearing a challenge to the country's participation in bail-outs of Greece, the Republic of Ireland and Portugal.

A Berlin professor argues that the process violates constitutional provisions and should be blocked.

Germany's finance minister rejected the claim, saying all rescue packages had been made on solid legal ground. Experts say the court is unlikely to block Germany's participation in the eurozone bail-outs altogether.

German court hears case against bail-outs

The signs are still that the case is unlikely to cause serious problems for Berlin – the court last year declined to issue an injunction to prevent financial transfers to Greece. Judges signalled they were sceptical that an infringement of EU law would fall under their competence. However, as one government official remarked: “The court is always good for surprises.”

A decision is expected in September or October.

Fail, don't bail, Greece: German Parliamentary leader

U.S. Stocks Drop on Europe Debt Concern, China Factory Slowdown

Volker Kauder, the parliamentary head of Chancellor Angela Merkel’s Christian Democratic Union, called for the possible “orderly insolvency” of European states as “consequences” follow from the Greek crisis. The European Commission must be able to better examine the finances of member states to avoid the kind of ballooning budget deficit witnessed in Greece, Kauder told reporters in Berlin today.

Euro down the drain, caught in a Greece trap

Moody's Lowers Greece Ratings On Nation's Continued Woes

Moody's Investors Service lowered its ratings on Greece, and warned further downgrades were possible, as the ratings agency noted significant risk that debt may only stabilize at a higher and more costly level than previously estimated.

Following the news, the euro dropped to an 11-month low, as fresh worries over Greece's fiscal position led investors to flee riskier assets for the safety of the dollar.

Greece activates aid plan

Greece on Friday triggered an emergency aid plan to draw cash from other countries that use the euro and the International Monetary Fund and ease a debt crisis that has weighed on the shared currency.

The package has enough money to keep Greece from defaulting on its massive debts any time soon. But Greece faces years of painful cutbacks, and its long-term finances -- as well as whether its troubles will infect other indebted EU members and further harm the euro currency -- are still being questioned.

Read more: http://www.miamiherald.com/2010/04/24/1595578/greece-activates-aid-plan.html#ixzz0m05wls4S

Euro Recovers From Lows On Greek Aid Request

The euro rebounded sharply off a one-year low Friday after Greece formally asked for a financial aid package and euro- zone lynchpin Germany said it was prepared to help.

But with uncertainties still enveloping the aid process for Greece and debt issues casting a shadow over other euro-zone countries, the common currency is likely to come under renewed pressure. Structural issues--such as low-growth prospects and profligate spending--could lead to further declines in the euro.

Greek workers strike, warn of social explosion

Nurses, teachers, tax officials and dockers stopped work during the 24-hour strike, which paralyzed public services, while EU and IMF officials met in Athens for talks that could lead to a financial bailout for Greece.

"People are asking for blood," said ALCO pollster Costas Panagopoulos. "They need someone to be punished for what is happening. They want the government to put all those who did not pay their taxes in prison."

Greek sailors to strike over market liberalisation

Greek seamen on Thursday called a strike next week after the government said it would lift restrictions on foreign cruise ships in a first step towards liberalising the country's labour market.