Saturday, December 10, 2011

Liam Halligan and the Telegraph call for disclosure rather than more 'sticking plaster' solutions

In his weekly Telegraph column, Liam Halligan once again makes the case for why detailed disclosure is needed to end the solvency crisis that began on August 9, 2007.

He assets that the Eurozone leaders are deluded if they think the most recent 'sticking plaster' treaty can solve the solvency crisis.

This Brussels summit was an unseemly combination of law-bending and posturing. The coup de grace, for me, was the quiet agreement to drop any requirement for private sector holders of dodgy eurozone sovereign debts to incur losses. So much for moral hazard. 
Dropping the requirement to 'incur losses' does not mean that the losses have gone away.  This is the same problem with extend and pretend.  The losses are still there lingering on bank balance sheets.

Since everyone knows that the banks are holding losses, the question then becomes, how big are these hidden losses.  Said another way, who is solvent and who is insolvent.

When no-one knows who is solvent and who is insolvent, the following solvency driven liquidity symptoms emerge.
The fundamental problem remains that Europe’s banks remain locked-out of traditional funding markets, leaving them reliant on the ECB – which, in turn, is now increasingly reliant on covertly printed money and whatever the Chinese and others will ultimately chip-in. 
Faced with a funding freeze, banks are shrinking their balance sheets and strangling growth by refusing to lend, a problem the ECB’s “special measures” will do nothing to address. 
The use of the ECB’s emergency lending facility rose last Wednesday to €9.4bn, the highest daily total since early March, pointing to deep-seated banking sector distress. 
Such distress relates, above all, to a lack of trust. 
Eurozone banks can’t raise cash, and won’t even lend to each other, due to crippling fears of counter-party risk, given that many continue to hide massive liabilities in so-called “special purpose vehicles”. Lawmakers, after all, still lack the courage to force them to fully disclose their losses. 
This lack of disclosure is the nub of the sub-prime problem. Nobody wants to hear it, but it’s true. 
Please re-reading the previous bolded text as your humble blogger has been making this point since the beginning of the credit crisis.
Last week’s “stress tests” suggested Europe’s banks have a deficit of €115bn, up from €106bn in October. But these government-run tests lack credibility. The first round cleared some big Irish banks, which then went bust. A subsequent round gave Belgium’s Dexia a clean bill of health, just weeks before it imploded. And now the European authorities want the markets to believe this latest exercise in high-stakes financial spin. 
No one knows who is solvent. 
The drip-drip of stress test information causes more problems than it solves. 
So stand-behind retail depositors, impose “full disclosure” and let the cards fall, forcing our bombed-out banks to consolidate. 
This really is the only solution – in the US, the UK and the eurozone. But the eurozone’s failure to grasp it will be far more explosive, given the pressures being created by this absurd monetary experiment.
FDR and his administration showed that this solution worked to break the back of the Great Depression (see here).

To date, we have tried everything else.  It is time to require banks to disclose on an on-going basis their current asset, liability and off-balance sheet exposure details.

No comments: