TARP for Europe?

September 15th, 2011
in Background, econ_news

euro-Europe Econintersect:  Stock markets rallied Wednesday on the news that the European Commission might possibly issue euro bonds to provide additional funds to shore up sovereign debt burdens that are threatening default.  Then some mentions of the possibility of a European TARP (like the U.S. Troubled Asset Relief Program) kept the easy money optimism flowing until shortly before markets closed in New York.  It seems that markets were all pumped up at the prospect that tax payers might be brought to the table to pay for banking and sovereign debt intransigence of the continent.

Follow up:

The trigger to the big day for stocks was a statement from European Commission president Jose Manuel Barroso, as reported by City A.M.:

Barroso pledged that the Commission would soon publish a long-promised study on introducing euro-area bonds, seen as a potential solution to the debt crisis.

“Today I want to confirm that the commission will soon present options for the introduction of eurobonds. Some of these could be implemented within the terms of the current treaty, and others would require treaty change,” he told European lawmakers today.

In what might be called a wishful thinking piling on, there were also renewed calls for European governments to create a tax payer funded capital infusion for European banks a la U.S. TARP:

  • Gregory Peel has a lengthy article in FN Arena that argues for a European TARP.
  • Zero Hedge’s Tyler Durden has an article at Business Insider that presents a report by Jeffries chief market strategist David Zervos.  Zervos says European banks are “dead men walking’ and cannot survive without a TARP-like action.  Not that U.S. banks are all that strong financially, but Zervos calculates that European banks need an increase in equity market capital of $149 billion just to get down to average leverage of U.S. banks, which he calculates is presently 22.1x.
  • JPMorganChase star bank analyst Kian Abouhossein supports a European TARP. (Financial News)

Way back on August 31 in Jacksn Hole, IMF head Christine Lagarde called for recapitalization of European banks.  Her pronouncement was not well received by banking interests and defensive government ministers, to say the least.  Here is an excerpt from The Wall Street Journal:

Christine Lagarde is getting pounded for pointing out what everyone knows but few in Europe care to admit—that bank lending to debtor nations is the primary source of Europe's systemic-risk problem.   In remarks at this weekend's Jackson Hole confab for central bankers, the International Monetary Fund chief and former French Finance Minister said Europe's banks "need urgent recapitalization," adding that "they must be strong enough to withstand the risks of sovereigns and weak growth."

Robert Zoellick, the head of the World Bank, said Wednesday the world had entered a new economic danger zone and that Europe, Japan and the United States all need to make hard decisions to avoid dragging down the global economy.  He is quoted in the Huffington Post:

"Unless Europe, Japan, and the United States can also face up to responsibilities they will drag down not only themselves but the global economy," World Bank President Robert Zoellick said in a speech at George Washington University.

"They have procrastinated for too long on taking the difficult decisions, narrowing what choices are now left to a painful few," he said, according to a prepared text of his remarks, which come ahead of meetings of the World Bank and International Monetary Fund next week.

And at least one voice expressed doubt Wednesday about Euro bonds.  From Reuters:

"Euro bonds are only realistic at one minute to midnight before the whole system collapses," said Gary Jenkins, head of fixed income at Evolution Securities.
"They may be the quick and easy solution but the politicians, based on voter feedback, have very little interest."

Analysts also pointed to a German court ruling which has made it all but impossible for Germany to sign up to such an initiative.

The relief shown by stock markets appears to have been grasps at the positive straws that were blowing in the wind.  We will see which way the wind blows tomorrow.

Sources:  City A.M., F N Arena, Business Insider, Financial News, The Wall Street Journal, The Huffington Post and Reuters

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