Will plans to recapitalise Europe’s banks to be put forward later today finally show that European Commission President Jose Manuel Barroso really has lost the plot? The sad answer to that is probably yes!
Later today ‘Mr President’ will set out plans for bank recapitalisation across the European Union that if our understanding is correct will force all banks to increase the level of capital in relation to risk no matter what their current position is. All banks, no matter whether they have questionable holdings of foreign government debt or not, will apparently be expected to raise the level of equity capital that they hold and they will apparently be given between six and nine months to achieve the objective set. They will not be told how to achieve this or how it should be funded. But should they fail ‘Mr President’ is expected to say that the punishment will be that the government of the country in which they happen to be domiciled will be forced to take a stake in the bank so that the refinancing objective can be achieved. This would in effect mean partial nationalisation and yet I understand there has been no prior detail provided let alone agreements between ‘Mr President’ and national governments for this to occur and neither have they been told how this might be funded. OK, we know the answer to that one don’t’ we, just print more money.
All agree that we need a healthy banking system if we are to manage our way out of this self induced mess of the Eurozone and European Union’s own making. Bully boy tactics of the European Commission President hardly go down well with me though as we take account that the vast majority of Europe’s banks do not actually need the kind of approach envisaged in this recapitalisation plan. Yes, we do also want a co-ordinated approach from Eurozone governments but we also need to accept that the same one size fits all approach that has along with failed budgetary disciplines brought about the present Eurozone crisis will not wash across all EU banks. Bank recapitalisation may well be necessary but it will be best achieved on a case by case basis.
What a pity that ‘Mr. President’ has failed to talk to the banks let alone the representative national organisations that watch over their interest. Had he done so they would have told him that a blanket approach to recapitalisation requirements was both unnecessary and unlikely to work! My guess is that they would also have politely informed him that while various banks will require additional protection in the form of additional new equity the majority most probably don’t.
Clearly rather than talking to those who know the more exact position of banks in relation to exposed risk Jose Manuel Barroso has taken views expressed by the German and French leaders following their summit meeting last weekend and translated this into policy on the back of an envelope. He will have noticed too that over the past week – principally because it relied far too much on wholesale funding rather than capital – that the Franco/Belgian bank Dexia ran out of options to raise further funds. I would like to believe that before announcing his plan ‘Mr President’ will have consulted with those members of the European Union and International Monetary Fund – the so called Troika – charged with auditing the Greek recovery programme but I doubt that he has. If so and from such discussions ‘Mr President’ would have had a better idea of the real state of Greek finances ahead of the next dollop of hard earned taxpayer cash that he intends to chuck into the morass that is currently Greece from the Eurozone areas hapless taxpayers whilst at the same time blaming it all on the banks.
Overnight former UK Chancellor of Exchequer Norman Lamont who famously and under much duress in 1992 forced interest rates to rise from an already ridiculous 10% to 15% in one single day as he attempted to halt a run on sterling before later that same day being forced to pull Britain out of the ERM (Europe’s chosen precursor to the euro) is reported to have called the current euro bail-out plan the biggest ‘ponzi’ [meaning defraud/scam] ever. Good on him if he did! Back to ‘Mr President’ and his ridiculous notions that all European banks should be treated as bad banks and thus forced to recapitalise at a presumably similar rate. In doing so let me say that ‘Mr. President’ is failing to observe the object lessons with regard to debt that Greece, Ireland and his own home nation of Portugal are supposed to have taught us over the past two years – countries and banks must live within their means. Does M. Barroso really believe that at a flick of a finger banks spread right across the European Union divide can at a flick of a finger in just six to nine months raise the ‘billions’ that would be necessary under his plan from thin air? Does he imagine that rich Middle East and Asian investors might pile in with their eyes closed as to how and when they might be able to get out? Does ‘Mr President’ really take markets as idiots and that they will not respond to any threat of nationalisation by choosing the avoid key and walking on the other side of the street? Does ‘Mr President’ really want a healthy banking system or does he perhaps see as the best way out of this crisis is that all banks would better be under state control? Does he not understand the abhorrence of risk?
Better by far that ‘Mr President’ that you might take the plan that you are intent announcing later today back to the drawing board. Rather than putting together further ill thought out and seemingly far-fetched one size fits all ideas that pay little respect that market views need to be harmonised with the political view when it comes to bank recapitalisation to think again. ‘Mr President’ must listen not only to what banks say but start listening to markets as well. The German and French leaders in the form of Angela Merkel and Nicholas Sarkozy may be well intentioned enough in what they believe is required but the stick without carrot approach will not wash with banks that have run their affairs in a fit and proper way. No one disagrees on the need to strengthen those banks that have for whatever reason been found wanting as they carry seemingly worthless Greek bonds or those of other highly indebted Eurozone nations whose state spending is out of control. The euro area is not that much short of a joke and the awful bit is that Norman Lamont is right. Back to today though and the situation for all of us is parlous enough without ‘Mr President’ attaching yet another stick to already troubled banks. The bottom line is that any approach to recapitalisation need must be achieved on a case by case as opposed to one size fits all approach.
Howard Wheeldon is the Senior Strategist at BGC Partners