Oct. 7, 2011 (TSR) – The Eurozone crisis continues to spiral out of control while hapless politicians fail to put together a credible resolution plan.
The Franco-Belgian bank, Dexia, already bailed out when the US mortgage market crashed in late 2008, is in danger of becoming the first major European banking institution to fall since the sovereign debt crisis began 2010 after emergency boardroom talks.
According to the Wall Street Journal, Dexia has total assets, including derivatives of $689.5 billion and a leverage ratio of 74.5. By comparison, in mid 2008, prior to its collapse, Lehman Brothers reported a leverage ratio of 31.
Both the French and Belgian governments own stakes in Dexia following a €6bn bailout in the wake of the collapse of Lehman Brothers. Dexia is facing a €3bn write down of its loans to Greece, Italy, Portugal and Spain. This comes after making an eye-watering €4bn loss Q2. The bank requires €96bn of short term loans to finance its operations.
European leaders are struggling to arrange the financing to offer recapitalization to banks and conduct an orderly default of Greek bonds. Investors are increasingly worried that the sudden collapse of the Belgium based Dexia SA may mark the beginning of the deepening financial crisis. European Central Bank left its key rate at 1.5% and the Bank of England expanded its bond buying program. Banks gained on the talks of recapitalization plan and Dexia SA may face unwinding sooner than expected.
Dexia may need to resurrect their 2008 abandoned break-up plan, isolate their toxic assets, and sell or national the rest. If they do this move, it will likely lead to the disposal of the Luxembourg-based private bank and the asset management arm Turkish Denizbank, the wealth management businesses, the asset management businesses and Dexia’s joint venture with Royal Bank of Canada, raising billions of euros. French lender Dexma could emerge as the first casualty of the break-up as Dexia’s management is in advanced talks to sell it to French state bank CDC and Postal Bank. Dexma’s parent company Credit Local, which comprises all the toxic assets, will be isolated in a newly created “bad bank”.
IMF said Europe needs between 100 billion and 200 billion euros (86.3-172.6 billion pounds) to recapitalise its banks to win back investor confidence and should put in place a comprehensive plan across the continent.
The Belgian government, along with France, have agreed to rescue Dexia, but who will rescue Belgium and France? No banking sector in the world can sustain a generalized loss of confidence and we need to restore that confidence all over Europe.
The Belgian government is massively indebted with a debt/GPD ratio of almost 100%. The total assets of Dexia exceed Belgium’s gross domestic product of $469 billion by $221 billion. By comparison, the U.S. banking industry has total assets of $13.6 trillion dollars, slightly below the total GDP of the United States.
A further cause for alarm were remarks made by banking executives of both Paribas and Societé General who adamantly insisted that the situation was “under control” and “manageable”.
Christian Noyer, Bank of France Governor, echoed the nonchalance of bank executives by stating “I’m not at all worried…For French banks, they are very solid. Frankly, I’m much less worried about French banks than American banks…Our banks are in very good health.”
This is like a deja vú with Federal Reserve Chairman Ben Bernanke when he said just prior to the U.S. housing collapse and financial meltdown on May 17, 2007, “All that said, given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system. The vast majority of mortgages, including even subprime mortgages, continue to perform well.”
The European banking system is on the verge of full scale collapse and Europe’s sovereign states do not have the resources to fund a plan even if they had one. This banking and debt crisis is reaching the critical failure point, and we can expect major involvement by the U.S. Federal Reserve and a massive monetization of obligations that cannot be repaid.
Now they want to punish the Chinese currency, yuan, for their irresponsible behaviors.
There are undeniable facts in front of everyone’s faces, so why would anyone believe this public relations gibberish?
We cannot fix any of this if we don’t stop fixing things with band-aid solutions and lies.
It is pretty ugly right now. Europe needs surgery.
– Lady MJ Santos