Friday, June 15, 2012

Grexit: G20 to the rescue again

Open Europe reports on Twitter today that the President of the European Council has apparently called for a video conference of the G20 countries, to be held in approximately 3 hours time. The topic will undoubtedly be support for a new infusion of cash into the global economy ahead of Greek elections on Sunday, as suggested by Daily Forex. Support for austerity is low, but support for leaving the euro is also low, meaning that the Grexit, if it comes, will be messy.

The G20 talks point to an expectation that the Greek election will leave the rest of Europe with an enormous problem. The key players in those talks will have to be the main central banks, which have rescued the situation before. And they will have to again if the politicians in Greece and the rest of Europe can't agree.

And now we wait.

Thursday, June 14, 2012

Greek elections and capital flight

Greece is bleeding out in advance of Sunday's elections, and is in danger of dying on the operating table. And it is the Greeks who are making this happen, not the EU or the international community. News reports are that Greeks have been withdrawing an average of 800 million euros per day from the country's banks. Greek companies are doing the same. An attempt to make Greeks pay tax or have their power shut off has failed, money to pay for electricity production is running out, and Greek companies can no longer get lines of credit that are vital to the import-export business, or insurance to cover imports. The result is that imported items are disappearing from the shelves.

There is now nothing the EU or the international community can do but wait for Sunday's election results. The current behaviour of the Greeks does not yet support the idea that another infusion will be productive. Greek voters may want to stay in the euro for reasons of national pride, but membership in this euro zone, with its globally peculiar emphasis on orthodoxy and restraint, comes with responsibilities that they will either articulate a willingness to accept on Sunday.

Or not.

Saturday, June 9, 2012

Bankia, Spain and the Euro Zone

Bankia in Spain has become the next institution to require a bailout in the euro zone, and as is now a familiar pattern, Bankia has been declared too big to fail. 40 billion are needed immediately, and 80 billion eventually. The IMF has already suggested that the money simply has to be spent, and reassured markets that a bailout will be coming. European finance ministers meet next. This is the last in a series of moves to use the money reserved for public bailouts for private institutions.

What Bankia does, beyond costing the EU a great deal of money, is call into question the quality of stress testing at the European Banking Authority. as the EBA says itself, the information is provided by the banks themselves:

"We have to remind you that this is a bottom up exercise, conducted by the banks in most cases using their own internal models. The estimates of risk parameters by banks are sometimes very diverse, also for exposures in the same portfolio and against counterparties in the same country. Although the EBA took action to achieve greater consistency and more rigorous estimates. More work on this issue is needed in the future."

Although the last round of stress testing revealed a high concentration of undercapitalisation at Spanish banks, Bankia was not considered one of the banks worthy of regular review (which you would expect of  banks that are too big to fail). The banks reviewed can be seen at the end of the EBA's last stress test review for 2011.