Euro crisis: “So we have two crises now.”
In the FT, Wolfgang Münchau gives his initial thoughts on the outcome of the EU summit. From the FT’s A-list [free subs may be required]
Thursday’s European Council meeting has demonstrated that a monetary union cannot co-exist with a group of permanent non-members in unified legal framework. The EU with its current treaties and institutions has proved to be an insufficiently flexible framework to run a monetary union and a disastrous framework for a monetary union in crisis.
These latest developments have reaffirmed my conviction that the only way to save the eurozone is to destroy the EU. But European governments may, of course, end up destroying both. All they did in the early hours of Friday morning was to create a new crisis without resolving the existing one.
And BBC Europe editor Gavin Hewitt’s take
In the long hours of a bitter Brussels night Europe changed.
A major step was taken towards closer integration. It was not as a result of popular demand by Europe’s people. It came about because Europe’s leaders believed their project had “never been in such danger”.
Last night most of Europe’s governments gave up a chunk of their sovereignty. In the future, tax and spending plans will be shown to European officials before national governments.
There will be automatic sanctions against those countries that overspend. A monetary union has moved towards being also a fiscal union.
At least, that’s the plan…
[Is it time to send for the Borg? - Ed] It may be too late…
Adds As ever, the Guardian is live-blogging the day’s events.
Topic: Economy, Government, Politics, Society and Culture
Region: EU, Ireland, Northern Ireland, UK
Reghulation by Brussels was being manipulated by Franch
I think Cynic’s gone on the sauce.
“Did you get those figures from the breeze or some reliable source ?” – Greenflag
Yes, very reliable – and linked above.
“Deutsche Bank
Leveraged 52:1 (16 August 2011) based on a Tangible Common Equity (TCE) to Total Asset measurement.
Tangible Common Equity is a better gauge of solvency than Tier 1 capital, particularly in the midst of a liquidity crisis. Tier 1 gives no sense of a bank’s ability to withstand a liquidity crunch as it includes market-sensitive instruments that are subject to liquidity and price declines risks. Tangible Common Equity is also a much better indicator of a bank’s ability to raise further funds in the market as it inversely relates to the rate of assets dilution implied in any rights issuance. (1), (2)
As TCE of €36.2bn is written against €1.85 trillion of assets, DB has just 1.96% cover in form of TCE against assets it holds – a writedown of just 2% on the asset values (cross the book) will wipe out the DB TCE cushion, rendering its current equity-holders de facto bust. Even excluding derivatives, MorningStar estimated DB leverage (TCE ratio 2.1%) at 47.6:1.
DE’s current leverage levels compare unfavorably against 44:1 TCE leveraging on Lehman Bros books at the time of collapse (ordinary leverage ratio in Lehman’s prior to collapse was 31:1) and makes DB the second most-leveraged bank in the euro area after Credit Agricole.
To bring DB closer to sustainable levels of TCE delveraging – 8-10% reading (note this is different from Tier 1 capital) will require it raising €110-150 billion in equity (depending on specifics of risk weighting ratios) or 3-4 times the current valuation of TCE or 3-4 times the current market value of the DB. Implied dilution for current equity holders under such scenario bears the risk of 75%- 80% loss on equity.
Note that 8-10% ratios are rather conservative, considering that in 2006-2009 TCEs for countries with banking sector crisis averaged (across top100 banks) TCEs of 11.5% to 15.3%. (3) Raising TCEs to the crisis-average levels of ca 13.4% will require equity raising of ca 5.7 times current market valuations or implied dilution of current equity by 85%.
To match TCE/Total Asset leverage ratio of the most leveraged US bank, JP Morgan chase (5.58%), DB would require €67 billion of additional equity or equity raising to the tune of 1.8 times current market cap.
DE’s current market capitalisation of €37 billion as of 2 September matches relatively closely tangible common equity of €36.2 billion. In previous weeks, DE market cap fell as low as €26 billion or 70% of TCE. A market capitalisation at or below TCE is a warning sign that the bank is in trouble and questions surround its solvency and stability.
Worse than that, per research from Espirito Santo, DB liquid assets as % of the short term (<1 year) funding in 2010 stood at 47%, well below global leaders Credit Suisse (82%), UBS (77%) and Barclays (59%). At the same time 2010 wholesale funding maturity requirement was 49% – in excess of the iquid assets cover. Again, Credit Suisse had 33% funding call against 82% cover.
DB is structurally important to Germany as its assets stand at around €1.85 trillion, close to 75% of Germany's 2010 GDP (€ 2.498 trillion).
DB exposure to Greek assets is €1.6 billion for the core Group components (sovereign debt only), of which €1.34 billion in Deutsche Postbank AG exposures. Under 70% haircut scenario across the entire DB Group, the total implied loss will be around 5% of TCE."
DC
No – my wireless keybaord has gone mad.
Though I may have had a mine pie too many yesterday
Alias,
I’m sure Dr Constantin Gurgidiev is a fairly reliable source and the word ‘tangible ‘adds a certain vigor to his numbers .The inference from his article that you quote above is that the IMF figures for ‘leverage ‘ rates are ‘unreliable ‘particularly in the midst of a liquidity crisis . He may be right or his ‘academic ‘tiff with the official IMF view will when all this is over be just another footnote in the currency wars ? .
Whether the leverage rate for DB is 52 or 32 matters little except to the ‘purists’ of monetary and banking rectitude .One wonders where all that rectitude was prior to Lehman’s or Northern Rock’s collapse ?
But back to the tangible . The EU has 10,000 tons in gold reserves . The UK has 300 tons .The USA has 8,000 tons. The Chinese have been building up their gold reserves these past several years . In the midst of current currency future uncertainty would you put your money in sterling ?
According to Max Keiser -Mr Cameron has committed economic suicide (perhaps an exaggeration? ) and in any event Cameron was forced to protect the City and it’s ‘fraudsters’
http://rt.com/news/keiser-cameron-eu-summit-471/.
And a nice quote from the Gurdgiev ‘true economics ‘site
.Nassim Nicholas Taleb was asked by BBC’s Jeremy Paxman whether the people taking to the streets in Athens is a Black Swan Event. He replied: “No. The real Black Swan Event is that people are not rioting against the banks in London and New York.”
Give them time . Occupy Wall St will be reborn in the spring . The 1% v 99% is now part of the political debate .
@Cynic2
I’m sure the mince pie was innocent -twas the brandy butter and rum sauce that did it .The general idea is that you spread the sauce over the mince pie and not dunk the pie into a bucket of sauce