Markets remind Deutsche's Ackermann of 2008 right down to banks needing another bailout

Bloomberg ran an article on a Euroforum speech given by Deutsche Bank AG's Chief Executive Officer Josef Ackermann.  In the speech, he observed that the markets remind him of 2008.  This is not surprising given that the solvency crisis which began in 2007 is still with us and the issue of which banks are solvent and which are not has re-emerged.

Just like 2008, the banks need a bailout because "some" banks cannot afford the losses from restructuring debt.  In 2008, we were talking toxic securities.  In 2011, we are talking sovereign debt.

Having determined that some banks cannot afford the losses on a specific asset type, the next concern is contagion.  If those banks that cannot afford the loss were forced to realize the loss, this would spread problems throughout the European banking system.

This blog has repeatedly observed that there is a big difference between disclosing and realizing losses.  The former involves reporting to all market participants the information they need to assess the risk of investing.  The latter involves accounting.

Since mark-to-market was suspended at the beginning of the solvency crisis, when banks would account for the losses on the sovereign debt is no longer linked to disclosure.

“The ‘new normal’ is characterized by volatility and uncertainty -- not only in respect to market developments, but also in consideration of the future of the financial branch,” Ackermann said today at a conference in Frankfurt organized by Euroforum. “All this reminds one of the fall of 2008, even though the European banking sector is significantly better capitalized and less dependent on short-term liquidity.” 

It is the lack of disclosure that creates uncertainty and volatility in the financial branch.

If the European banking sector is so much better capitalized, then why is disclosing and realizing the losses on sovereign securities a problem?  Either the banks are adequately capitalized or they are not.

The collapse of Lehman Brothers Holdings Inc. in September of 2008 froze credit markets and forced taxpayer-funded bailouts of banks from Washington and London to Berlin. 

Concern Europe’s sovereign debt crisis is worsening and global economic growth is slowing wiped about 5 trillion euros ($7 trillion) from stock values since the end of July, with banks leading the slide, Ackermann said.... 

Many European banks “obviously” wouldn’t be able to shoulder writedowns on sovereign debt held in their banking books based on market values, Ackermann said today. Therefore European governments agreed to financial aid measures for countries, and forcing banks to boost their capital would undermine the credibility of existing support measures, he said.... 

Since there are now significant restrictions on the ability of governments to access funds for another bailout, there is a certain logic to requiring banks to pay for their own bailout by boosting capital.

If there were disclosure, market participants would know which banks were adequately capitalized and which were not as well as how much capital the European banking system needs to raise to shoulder the write-downs on sovereign debt.

DZ Bank AG Chief Executive Officer Wolfgang Kirsch, speaking at the same conference, said European politicians need to agree on a solution for the sovereign debt crisis to avoid a repeat of the events of 2008. “Otherwise we will enter a very difficult market situation,” Kirsch said.

Disclosure and not austerity is the simple solution.

It is only after market participants know the facts that a plan for writing-down the sovereign debt and recapitalizing banks can be determined and confidence restored to the financial markets.