Europe - Economic Data & News 01 (May 08 - Oct 08)

[financecaptain]

Will European Banks and ist financial system be next ? Fortis has already announced its plan to be merged.

European banks

While Rome burns
Sep 25th 2008
From The Economist print editionAre European banks insulated from the panic in America?

AMERICAN plans to buy up assets that are clogging the financial system lack detail but no one doubts that a massive government intervention is coming. In Europe jittery investors have no such reassurance. European governments have yet to respond publicly to calls from Hank Paulson, the treasury secretary, to follow his lead. They look set to keep faith with the approach that they have used to handle the crisis so far—staving off liquidity worries by allowing banks to use facilities at central banks to swap their assets in exchange for ready cash.

That makes many watchers nervous. The crisis in America has dramatically grown from one of liquidity to one of solvency as well. Lehman Brothers had access to the Federal Reserve’s discount window, after all, but still went under. The burning question now is whether banks have enough capital. On some measures, European banks look pretty well capitalised. The average tier-one ratio, which measures capital based on the riskiness of bank assets, stood at 8% in the first half of the year. That looks solid enough, if you assume that banks have a good handle on risk.

Sceptics on that point prefer to look at European banks’ leverage ratios, which measure the amount of capital banks hold relative to total assets. By some estimates, Deutsche Bank, Barclays and UBS have leverage ratios of 1.2%, 2.4% and 2.1% respectively, which would make broker-dealers weep with fear. Get the risk calculations wrong (it can happen) and the cushion of capital looks horribly thin.

There is plenty of scope for further hits. European vulnerability to insurers of structured credit became clearer with the rescue of American International Group, an insurer that wrote more than $300 billion of protection on assets held by banks in Europe and America. The monoline bond insurers still have lots of potential to cause trouble. Many worry that even now, big losses are yet to be declared. “Lift up the bonnet of a bank in Germany, say, and you often find a steaming wreck inside,” says one bank boss. Reports that KfW, a state-owned bank in Germany, merrily transferred €300m ($426m) to Lehman in a failed swap deal on the day it went bust will not calm nerves.

America’s bail-out plan could even accelerate the pace of write-downs on structured credit if it sets a price below today’s European valuations for nasty assets. And if the price is at or above current marks, which seems likelier, the plan risks creating a nasty dividing-line between European banks that have access to the facility because they have enough American business, and those banks that do not. Behemoths like Barclays, Deutsche and UBS may reasonably expect to find some shelter under Mr Paulson’s tarpaulin. That is far less likely for an institution such as Fortis, a large Belgo-Dutch bank which saw its shares plunge this week.

Strains on capital will also intensify if European economies stall more severely than expected. The rates of deterioration in certain markets are striking. Bank of Ireland issued a starkly gloomy trading statement on September 17th, forecasting rising loan losses and cutting its dividend by half. In Spain the poorly diversified savings banks are warning that non-performing loans could rise sixfold from their levels in mid-2007. In Denmark the central bank felt obliged to bail out a small lender on September 22nd.

Funding pressures are tightening the vice. Lending between banks remains stifled, and demand for central-bank liquidity is consequently extremely high. The European Central Bank’s auction of three-month loans on September 24th was more than three times oversubscribed.

What is more, about $1.4 trillion of bank debt falls due in Europe this year and next, just as bondholders have received their first big blow of the crisis thanks to Lehman’s demise. Worries about how HBOS, a British bank, would roll over its wholesale obligations forced it into the arms of Lloyds TSB on September 17th. Other banks, notably in Spain, Iceland and Scandinavia, are even more dependent on the wholesale markets. The ECB plans to impose stricter conditions on its lending in February but that will be difficult while confidence remains low. Mr Paulson may yet have some imitators across the pond.

[kennynah]

Europe Round Up - Eurozone, UK Manufacturing Contracts Sharply
10/1/2008 10:44 AM ET

Eurozone

A final report from the Markit Economics showed that the Eurozone manufacturing purchasing managers' index, or PMI, fell to a seven-year low of 45 in September from 47.6 in August. The index was also down from the flash estimate of 45.3. Economists had expected the PMI reading to match the preliminary estimate. A PMI reading above 50 indicates expansion in the sector, while below 50 suggests contraction.

The Eurostat reported that the Eurozone jobless rate rose to 7.5% in August from July's 7.4%. The jobless rate for July was upwardly revised from the initial 7.3%. In August, the number of unemployed in the Eurozone rose by 90,000 from July and by 272,000 from August 2007. There were 11.596 million unemployed in Eurozone in August.

[winston]

European banks may write down US$28.4b euros

European banks including Deutsche Bank, Germany's biggest bank, and Barclays may write down as much as 28.4 billion euros (HK$314.10 billion) in the second half, according to analysts at JPMorgan Chase.

"This would bring total writedowns to an estimated 116.1 billion euros, implying 24 percent of total writedowns remain,'' analysts led by Kian Abouhossein in London wrote in a note to clients.

Lenders such as UBS, the world-biggest wealth manager, and Lloyds TSB Group will add to writedowns as the value of US commercial mortgage-backed securities, real estate and loans used for buyouts deteriorates, Abouhossein said.

London- based Barclays, the UK's second-biggest bank, may add 3.7 billion euros of losses through the end of the year, he said.

BLOOMBERG

[winston]

European powers to meet Saturday on finance crisis

Europe's four biggest economic powers -- France, Britain, Germany and Italy -- will meet on Saturday in Paris for talks on the global financial crisis, Eurogroup head Jean-Claude Juncker said.

Juncker, who is Luxembourg's finance minister and chairman of the committee of eurozone finance ministers, told Europe 1 radio that the four would meet as European members of the G8 group of industrialized nations.

AGENCE FRANCE-PRESSE

[kennynah]

yet another excuse for nice lunches, dinners and lap dances....

[LenaHuat]

It's quicksand all over Europe The more the EU governments struggle to act in concert; more banks lose their balance and drown Europe is engulfed in nerve-wrecking fear and there is no leader of stature to deliver msg of confidence. This is going to be a long-lasting nightmare.

[iam802]

I got a feeling that Europe will be worse than US and recovery will be a bit slower.

No hard evidence to support this. Just gut feel that it is always more difficult to manage this economic block with different members at different development stages.

[financecaptain]

I think there are 2 conflicting views :-

(1) Europe will eventually recover faster because it allows market to adjust faster. Why US's economic numbers are not worse than Europe is because it was decisive in lowering its interest rate sharply; but the effect is delaying the negative impact and the eventual recovery. In addition, US$ was severely weakened helping the US and negatively impact the European exports.

(2) Europe will eventually recover slower because it does not have better economists or economic policy than the US. It underestimated the current crisis's impact on its economy. Structurally, it is also less competitive than the US.

My feeling is a bit of both will happen. This is because Europe economies are not trully integrated although many countries share the common currencies and central bank. UK and Spain will fare the worse because of its huge real estate burden. The others like Germany may not suffer as much (although several of its its banks are in deep trouble as well). Whichever which recovers earlier, tremendous opportunities now for private equity firms and industrial investors to seriously look for good buys in these 2 continents. Maybe better than Asia although it is a growth zone. Warrant Buffer has already indicated his interest in Europe.

[HengHeng]

i sense a potential uprising of socialism in a different form but still socialism or some hilter sure come out during this times.

[kennynah]

sure or not....dont scare me leh....got hitler some more...one Li c**t You in my lifetime is enuf...hahahaha...