Tuesday, December 20, 2011

European governments go to great lengths to disguise bank 'bailouts'

The Wall Street Journal ran an interesting article on all the different ways the European governments continue to prop up their banks.

Regular readers know that policymakers and financial regulators cling tightly to the religious belief, it must be a religious belief because there is no supporting empirical evidence, that banks must have positive book equity if they are going to be able to make loans to support the economy.

The result of this religious belief is numerous programs disguised so they are not called bank bailouts.

And why do the banks need these bailouts that are not called bailouts?  Because they are sitting on a mountain of hidden losses.

The choice by the policymakers and financial regulators to allow these banks to continue to hide their losses is the same choice made by Japanese policymakers and financial regulators.  The result of this choice has been the same in the US and in Europe as it was in Japan.

The result was to lock the real economy into decades of low to no growth.  A truly bad choice.
Governments in Europe are tying themselves in knots to prop up their banks, desperate to blunt the cost and embarrassment of a fresh wave of taxpayer-funded bailouts.
In Italy, for example, the government is encouraging banks to buy public properties that the banks then can use to borrow money. 
As part of a broader deficit-reduction program in Portugal, the government essentially is borrowing money from bank pension funds and could use some of the funds to help state-owned companies repay bank loans. 
Governments in Germany and Spain also are using unorthodox measures to support their ailing banks. 
The unusual moves come as euro-zone countries are under growing pressure to reel in soaring borrowing costs by showing investors in government bonds that their budgets are under control. 
In addition, bank bailouts are politically toxic, especially for governments that have sought to reassure markets about the health of their banking systems.
Here is where the religious belief comes in with its focus on the 'health' of the banks.

Market participants do not care about the health of the banking system.  Market participants only care that the implied 100% deposit and unsecured debt guarantee will payout in the event that a bank is closed.
Some economists say such moves aren't an adequate substitute for a broader rescue package that would include recapitalizing the lenders and helping them issue new debt. 
"Most of these backdoor-type schemes seem to be limited in size and don't address the broader problem," said Jacques Cailloux, chief European economist at Royal Bank of Scotland. 
In some ways, the recent efforts are emblematic of what critics view as Europe's piecemeal crisis-fighting measures. 
In the past few years, individual governments in countries like Ireland, Germany and Spain have recapitalized their banks. The European Central Bank this week is making it easier for banks to borrow emergency funds, by offering three-year loans and accepting a wider range of collateral. 
But there has been widespread resistance to adopting sweeping measures aimed at banks' deep underlying problems. Some of the recent European plans resemble the supplemental measures adopted by the U.S. at the height of its financial crisis....
All of these measures would not be needed if the governments simply required the banks to disclose on an on-going basis their current asset, liability and off-balance sheet exposure details.  Market discipline would force the banks to work through their troubled exposures.

There would be no need to recapitalize the banks as they could do so over the next several years through retained earnings.  This eliminates the strain on the government to fund the banks.

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