EU KETTLE BOILS OVER BY $24 TRILLIONS OR 0VER 40% OF EU BANK BALANCES - DON'T BELIEVE IT!

This essay follows on from that of the third one below this.
This week just gone saw explosive estimates in a secret 17 page document seen by the press. A bail-out of the toxic assets held by European banks' could plunge the European Union into crisis, according to a confidential Brussels document. European Council meetings are immensely secure - it is very rare for key documents to be leaked. Our Contintental partners will be asking themselves whether UK oficials deliberately leaked the secret document? It says things like: “Estimates of total expected asset write-downs suggest that the budgetary costs – actual and contingent - of asset relief could be very large both in absolute terms and relative to GDP in member states,” as seen by The Daily Telegraph. I smell a rat - a con-job? And, "It is essential that government support through asset relief should not be on a scale that raises concern about over-indebtedness or financing problems.”
The "secret 17-page paper" was discussed, it is claimed, by finance ministers, including UK Chancellor Alistair Darling in brussels on Tuesday. National leaders and EU officials fear that a second bank bail-out in Europe will raise government borrowing at a time when investors - particularly those who lend money to European governments - have growing doubts over the ability of countries such as Spain, Greece, Portugal, Ireland, Italy and Britain to pay it back. I don't doubt some that is reasonable to state, but scarcely news or at all alarming, not until the numbers that The Telegraph reports were in the paper (later removed from the website?)
The Commission's figures, if that is what they are, are significant because of the role EU officials will play in devising rules to evaluate “toxic” bank assets by the end of this month when new moves to bail out banks will be discussed at an emergency EU summit. The EU is also very concerned by widening spreads on bonds sold by member state countries. In line with perceived default risk, and the weak performance of some EU economies compared to others, investors are demanding increasingly higher interest to lend to countries such as Italy instead of Germany or Greece instead of France. Ministers and officials fear that the process could herald a spiral that threatens the EU's wider, and Eurozone's narower, integrity. The secret paper supposedly says, "Such considerations are particularly important in the current context of widening budget deficits, rising public debt levels and challenges in sovereign bond issuance.” And the Teleraph says, Toxic debts of European banks risk overwhelming a number of EU governments and pose a “systemic” danger to the broader EU financial system.“ If I may digress for a moment - It is not inappropriate for an organisation such as the UN, IMF or in this case, the EU, set up to provide the economic cooperation needed to secure long term peace, to remind ourselves of why Versailles failed in 1919 after WW1. The two greatest economists of the age, J.M.Keynes and A.A.Young both resigned in protest, and Keynes wrote the best-seller "The Economic Consequences of the Peace." The argument was that seeking proportional reparations would prolong the economic mess that led to war and one could not predict what extremities people would go to to get out of their misfortunes. His advice was taken thorough account of after WW2 and the world experienced exceptional growth and rising prosperity. Of course, wars were not banished and enormous problems persisted. But, similarly again now, when G20 is in effect setting up a system for a new financial world order, both to get out of the crisis and then to create a sustainable world economy, great care has to be taken to ensure conditions are not created for future extreme crises much as WW1's Versailles led to WW2. There are already, in Europe and the USA and in many other parts of the world extreme assumptions of the total collapse of the financial system, of the EU, of the economies of China, Africa and so on. The secret 17-page paper appears in how it has been characterized by The Telegraph to fit that anxiety-bill.
It says that estimates of total expected asset write-downs suggest that the budgetary costs of asset relief could be very large both in absolute terms and relative to GDP in member states to the extent that the ability of the EU to survive is threatened! It supposes that for some member states, it may be the case that asset relief for banks is no longer an option, due to their existing budgetary constraints and/or the size of their banks’ balance sheet relative to GDP. Ireland, for example, where voters are still expected to vote against the new EU Constitution despite the fact that the main banks are all sucking on the liquidity teats of the ECB for survival. Yet, if the UK was to allow the Irish banks access to its liquidity window the cost would be a relatively trivial addition to the asetts for treasuries it is already doing for UK banks. Unfortunately in the Eurozone, only the ECB can issue short term roll-over treasury bills off-budget from a national debt point of view. The situation demonstrates a valuable monetary lever available to the UK that would be much less so had the UK joined the Euro system. The UK is also enjoying no deflation threat due to its exchange rate having fallen by about 30% and its persistent inflation (currently about 3%) is an additional help in paying down debts.
The extent of any risks to the EU banking system as a whole from an inadequate response in these member states needs to be considered, particularly in the case of cross-border banks. No country is named in the so-called 'secret paper', but obvious candidates might be Greece, Ireland, Luxembourg, Belgium, the Netherlands, Austria, Sweden, Spain, and UK, and non-EU member Switzerland, which have large banking sectors relative to GDP or have sold proportionately large amounts of asset-backed securities. EU banks hold balance sheet assets of €41.2 trillion (£36.9 trillion). But, it seems to me that the toxic assets are a market price problem, not yet a problem of low income, not credit risk defaults to the extent that these assets are not paying substantial yields. The problem is more that of accounting for the market price writedowns on banks' books - so take them off into the Bank of England or bad bank entities, leaving the real cash-flow problem being funding the banks' funding gaps between customer deposits and customer loans. This gap is well within the financial means of EU governments and the ECB. Brussels refused to comment on the paper, but it is clear that officials are concerned about default risk in the weaker states where interest spreads on government bonds are widening most. The IMF has questioned the lack of a proper 'lender of last resort' in the eurozone, although it is more so than the current G20 plan for the IMF's similar role globally. The European Central Bank (ECB) is, however, not allowed to bail out individual states. National goverments' 'central banks' within the Eurozone (Euro single currency) countries do not control national monetary levers given that treasury bills, repos etc. (open market liquidity operations) and central bank interest rate are an ECB responsibility. The concern about the ECB being less than a full central bank because it lacks a less than full political master, i.e. a less than full federal government, is an old saw that is unlikely to be resolved anytime soon. Therefore, the ECB is especially sensitive to how well it and the Euro financial system are seen to survive its first full recession test.
The IMF says C.European and UK banks have 75% as much exposure to US toxic debt as US banks, yet have been slower to book write-downs ($738bn in the US, $294bn in Europe, $260bn short?) Global banks have so far written down half of the $2,200bn losses estimated by the IMF. On top of this, EU banks have another $1,600bn depreciating asset exposure to Central and Eastern Europe, viewed by some as Europe’s sub-prime over-indebted poor. EU corporate debts are said to be 95% ratio to EU GDP compared to 73% ratio in the US, a mounting concern (as default rates reach 6.7% in the US, with S&P forecasting 23% by 2011 and the fear this may be repeated in Europe). But, these are default rates for speculative grades only and will only be experienced in the bottom 25% of corporate debts. The EU secret document also highlights the “real danger of a subsidy race between member states” if countries start to under-cut each other in the way they value toxic debts in their `bad bank’ rescue programmes. Whenever the word "race" appears in a communitaire economy context it means "race to the bottom". The fears is that of covert state aid, undermining the single 'fair' market integrity of the EU. Actually, it pays no country to seek to under-cut or outpace the others since the benefits leak out via the external account. Therefore, commonsense should dictate that all countries coordinate their economic recovery reflation measures at roughly the same pace, the same ratio proportions to GDP. But, no-one wants to risk going at the pace of the least fiscally Keynesian, except the least fiscally Keynesian, Germany and Austria!
An explosion of budget deficits and national debts ratios are also feared. The budget deficit will hit 12% of GDP in Ireland next year and almost 10% in Spain and UK, no doubt others too. Therefore the secret paper says, “It is essential that government support through asset relief should not be on a scale that raises concern about over-indebtedness or financing problems. Such considerations are particularly important in the current context of widening budget deficits, rising public debt levels and challenges in sovereign bond issuance.”
It is not surprising that European Union finance ministers looked ashen faced in Brussels on Tuesday and will do so again today in Berlin where EU leaders have agreed the agenda for their contributions to the London G20 conference and this turns on a global financial regulator authority - something many of us imagined existed in the BIS, bu is to be backed by the IMF in the role of a central authority with substantial funds. Last Tuesday's coffee & croissents or madelaines with confitures Anglaises breakfast meeting discussed how EU governments should deal with "toxic" banking assets that all accept triggered the economic crisis, but by Sunday, today, this has transmuted more towards regulatory supervision and transparency. The figures in the secret EU Ecofin Commission paper, are startling. The dodgy financial assets are estimated, according to The Daily Telegraph, to total £16.3 trillions (€15 trillions, $20 trillions) in banks across the EU. The "impaired assets" may amount to an astonishing 46% of EU banks' loan-assets, which is in reality wholly as improbable as it is astonishing. Who produced these estimates, digging a deep ditch for bankers, regulators and friends in government to stumble into.
The secret 17 page paper, according to The Daily Telegraph, warns that government attempts to buy up or underwrite this scale of assets could plunge the EU into a Union-threatening deep crisis. This is equivalent to saying that the EU and Eurozone are equivalent to Iceland or Ireland in having a banking sector dispoportionate to what the economy can afford? It is like saying we cannot afford our banking system, much as has been said for years by anti-welfare state ideologues, about social services, state health and education (typically all three added together being 60% of government spending budgets). The anti-welfare state economists were just as piss-poor at macro-economics as the the authors of the secret paper appear to be - in fact I am forced to seriously doubt its authenticity, maybe another Hitler's diaries scam?
The Telegraph says everyone is terrified that a second bank bailout will push up government borrowing at a time when bond markets have growing doubts over the ability of countries such as Spain, Greece, Portugal, Ireland, Italy and Britain, to service and repay their borrowings. This is so ludicrous, worst kind of scare-mongering, based on upticks in government bond spreads that reflect the cost of capital elsewhere more than genuine perceptions of government solvency! This is typical of interpretations invented when mathematically-minded, economically-ignorant, analysts are forced to explain a number! The 'secret document' says, "Estimates of total expected asset write-downs suggest that the budgetary costs - actual and contingent - of asset relief could be very large both in absolute terms and relative to GDP in member states." These adjectives are relative terms and have to be sized over time, over the credit and economic cycle. There are no known actual absolutes involved. War economies showed us that much; cost is a matter of spreading over time time against present emergency urgency. Spread yields are widening on bond markets as investors apparently judge it riskier to buy the debt of a country like Italy than the debt of another like Germany. The fact is that these securities are a seller's market and there is a juggling of perceptions going on to dissuade governments from appreciating this. Such juggling is a time-honoured tactic ahead of known large government bond issues.
In line with the risk, and the low performance of some EU economies compared to others, the markets have demand a higher premium on government bonds issued to raise the cash - so says the Telegraph and others. Well, when banks are forced to buy and hold more than the 50% they usually buy this time round an desperately need the 'gilt-edged' bonds to rectify their capital quality - governments need take no notice and need not cave in to discounting face values. As Sarkozy might say "nul points". The secret paper is fuelling this concern, "Such considerations are particularly important in the current context of widening budget deficits, rising public debt levels and challenges in sovereign bond issuance."
Reasons for doubting the report is that it had its numbers removed after first appearing on the Telegraph website. What began as a secret 17-page report circulating among European Union finance ministers warning EU governments that toxic assets still held by EU banks and investment firms could total a massive £16.3 trillions or $24.4 trillion, and that Commission officials estimated as "impaired assets" = 44% of total EU bank balance sheets, was later sanitised by removed the numbers calling them merely "massive". I suspect this figure of £16tn/$24tn is a funding gap figure (not toxic assets at all) and a transposition from the 40% funding gap of UK banks to EU banks. One reason for disbelieving the numbers, quite apart from their rediculous scale, is that last week numbers circulated in Wall Street estimated U.S. bank toxic assets at $9 trillions. Frankly, also rediculous. $2 trillions each (my calculations) is the realistic ballpark figure on both sides of the Atlantic, with $2.8tn booked as impaired credits by October 2008, according to the Bank of England. Writedowns by Nov 2008 were over $710bn by banks worldwide and capital raising was $760bn roughly both aligned by world-region distribition (ECB Stability Review). Deleveraging by Euro Area banks required is estimated at €560bn (3% of all assets, 9% of customer loans, €19tn), of which the ECB has mitigated so far by half by providing liquidity to banks. Euro Area bank funding gap is roughly €4.5 trillions. The ECB is perplexedly not brilliantly specific about this. The banks' funding gap of Central and Eastern Europe supplied by EU banks is about €1.2tn only, not insupportable. I reckon that the Telegraph's figure of £16.3tn for toxic assets is actually 16.3% ratio to all of Europe's gross banking assets that are European banks' funding gap, that portion of their liabilities that are interbank borrowings, €1tn for UK banks, €4.5tn for Euro Area banks, €1.2 tn for C&E Europe and others. This makes me even more convinced the Telegraph story as originally put out is some kind of anti-EU malevolent concoction?
I got back late from Berlin today with my head full of figures only to find that Number 10's website had the story in its least quantitiative version: "European leaders meeting in Berlin today, ahead of next months G20 Summit in London, have agreed to the need for fundamental changes in the world’s economic systems. At a joint press conference following the meeting the Prime Minister called for a “global new deal” to aid the recovery of the world economy and provide a set of principles for a sound future. The “grand bargain” would involve global economic and fiscal stimulus, global financial control mechanisms and be based on sound banking principles. It would require the strengthening of international financial institutions and help deliver a low carbon economy, he added. The PM said: “We are resolved that global problems need global solutions. And we will work together over these next few weeks to make sure that by our co-operation and our determination to act together we can not only inject the confidence that is necessary in the world economy but also build anew the economic activity that is necessary for the jobs, for the security that the people of the world want.”
"The Prime Minister will travel to the United States next week to discuss the world economy with President Obama. On 1 April world leaders will meet in London for the G20 Summit to continue the work begun in Washington last year."