Based on what has been reported, Europe is apparently going to set up a super TARP with 1.5 trillion euros. The funds are going to be spent to ring-fence Ireland, Greece and Portugal debt and to recapitalize the European banks.
As always, the critical question is: where did the figure come from?
Apparently European banks were not as well capitalized as the recent stress tests suggested.
However, the idea that the European banks that passed the stress tests need a significant capital injection:
- Completely discredits the national bank regulators and anyone else involved in the stress tests. Who would trust anything they have to say now?
- Says that the size of the equity injections are a reflection of "Kentucky Windage" - make believe. After all, it is one thing to represent that the banks need to raise a few billion euros of additional capital, it is entirely another to say that the banks actually need upwards of a trillion euros of additional capital.
- Clearly, this will not restore confidence in the markets. Remember, in a leveraged financial system there is never enough equity in the face of fears of contagion from a meltdown of sovereign debt and real estate debt. The situation can be much worse than is being presented - if in doubt, look at the Irish experience.