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Wednesday, October 12, 2011 12:46 PM

France will Not Use EFSF to Recapitalize Banks; Slovak Government Falls, EFSF to be Approved Anyway; Greek Haircuts of 30-50% Coming; EU Seeks Magic

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In what may be a worst of both worlds scenario, the Slovac government did fall but the EFSF will pass in a second vote later this month.

Everyone has finally admitted that the 21% haircuts taken so far on Greek bonds is insufficient. However, the talk now is of 30-50% haircuts, and that is still insufficient in my opinion.

In France, Valérie Pécresse, Minister of the Budget says the EFSF will not be used to recapitalize banks.

This trifecta of news was stock market friendly, at least for now, judging from the reaction. However, longer-term it solves nothing.

France Will Not Tap EFSF

The Wall Street Journal reports France Won't Tap Rescue Fund to Shore Up Banks

Speaking after the weekly cabinet meeting, Valerie Pecresse said once the expanded European Financial Stability Facility is approved, it "will be able to lend to certain countries that need to recapitalize their banking system, but France won't make use of the EFSF."

Private shareholders should contribute to the recapitalization of lenders, and the government will intervene only if necessary, Ms. Pecresse added. "If public funds are necessary, the French state stands ready to respond to a demand for public funds for the banks," she said.

French officials stress that a vehicle backed by France's sovereign guarantee and used to recapitalize the banks in 2008 is still active and legally operational. French banks have since reimbursed the funds.

Ms. Pecresse said France will be pushing for a common European plan for banks, and that a collective rule will be adopted at a later-than-planned euro-zone summit Oct. 23. "Europe must show its solidarity in the face of market nervousness and give itself a collective rule in terms of equity, of recapitalization and of soundness," she said. "The collective position will be adopted in Brussels in the framework of the European council."

The new standards, Ms. Pecresse said, will be drafted taking into account market tensions, and not necessarily Basel III standards, a set of rules approved last year that require banks to hold more and better quality capital in reserve as a buffer against market shocks.
Pécresse Translated

  • Europe will ignore Basel III if it's convenient (and it will be very convenient)

  • If French banks need to be recapitalized (and they will), look for taxpayers to be put at risk via a 2008 bailout mechanism still in effect

Slovak Government Falls

The Telegraph reports Slovakia rejects enhanced bail-out fund, government falls

Slovakia's lawmakers have rejected a revamp of the eurozone's European Financial Stability Facility (EFSF) rescue fund in a crunch vote that also toppled the country's centre-right government which had staked its future on the motion.

Only 55 of 124 lawmakers present in the room voted in favour, while nine were against and 60 did not vote, effectively blocking the fund and toppling the four-party coalition cabinet of Prime Minister Iveta Radicova.

The country's leaders said earlier they would try to pass the EFSF revamp in a repeated vote with support from the opposition, but no date has been fixed for that vote yet.

"What we are deciding on today is the good name of Slovakia, reliability, where it will belong... or if we exclude ourselves from the community of the successful," Prime Minister Iveta Radicova said ahead of the vote.

"I beg you, trust this government... the interests and reliability of Slovakia are the most valuable things I know, I have, I offer," she added, her voice trembling with emotion.

Richard Sulik, the rebel leader of the coalition's minority member, the Freedom and Solidarity Party, abstained from the vote. He told the parliament: "I'd rather be a pariah in Brussels than have to feel ashamed before my children, who would be deeper in debt should I back raising the volume of funding in the EFSF bail-out mechanism."
A tip of the hat to Richard Sulik for standing with principles instead of opting for more bailouts. Slovak is the first, but not the last government that will fail over these bailouts. The sad thing is, the vote will pass anyway.

Europe Eyes 30-50% Losses for Banks

Reuters reports Europe eyes bigger Greek losses for banks

Ahead of a make-or-break summit of European leaders on October 23 at which a comprehensive new Franco-German crisis plan is expected to be discussed, four euro zone officials told Reuters that a "haircut" of between 30 and 50 percent for Greece's private creditors was under consideration.

That is far more than the 21 percent loss they had asked banks, pension funds and other financial institutions to accept in July as part of a second rescue package for Athens.
Game Easy to Spot

This game is easy to spot. I called it long ago. Note the range 30 to 50. I figured 30-35% even though 60% or bigger losses are called for. The more blood the EU tries to get blood out of a turnip, the harder Greece will ultimately fall.

By setting expectations as high as 50%, then coming in below that (via fantasy projections as to when Greece will be back on its feet), EU officials are attempting to game market psychology.

Perhaps I am wrong and they will opt for 50%. We will know soon enough.

EU Seeks Magic Solution and Additional Powers

Bloomberg reports Barroso Seeks More Firepower
European Commission President Jose Barroso called for a reinforcement of crisis-hit banks, the payout of a sixth loan to Greece and a faster start for a permanent rescue fund to master Europe’s debt woes.

Barroso said Europe needs to get more out of the the 440 billion-euro rescue fund, set to obtain additional powers once Slovakia completes the 17-country ratification marathon.

Officials are working out how to scale up the financial clout without requiring another round of parliamentary approvals or tapping the ECB’s balance sheet. The central bank has ruled out granting the EFSF a banking license.

“The EFSF must be more than just a firewall,” Barroso said. “It should have real firepower. We should maximize its capacity.”

Barroso repeated a call for governments to set up the permanent fund, the European Stability Mechanism, by mid-2012, a year earlier than planned.
Message to Barroso and other EU clowns: The German supreme court already rejected a a permanent mechanism and it also rejected use of leverage. Even were that not the case, Slovak shows what happens to governments when they try to force things through.

German Chancellor Angela Merkel will fall, the Italian Prime Minister will fall, as will the Greek Prime Minister, and perhaps French president Nicolas Sarkozy falls.

What part of that do you fail to understand?

There is no magic bullet and the Eurozone will not survive intact.

Mike "Mish" Shedlock
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