Financial Times 22 November 2011:
In the longer term lending markets, Europe’s banks have largely been unable to raise new senior unsecured debt, the bread and butter of their funding, in recent months as investors fret over the effects of the eurozone crisis.
Since the beginning of July, the region’s banks have sold a collective €11bn of senior unsecured debt according to Société Générale data. That compares to €121bn raised year to date, and about €150bn raised annually in 2009 and 2010. In the longer term lending markets, Europe’s banks have largely been unable to raise new senior unsecured debt, the bread and butter of their funding, in recent months as investors fret over the effects of the eurozone crisis.Since the beginning of July, the region’s banks have sold a collective €11bn of senior unsecured debt according to Société Générale data. That compares to €121bn raised year to date, and about €150bn raised annually in 2009 and 2010.

As the European policy elite prepares for their normal practice of taking August off — because, after all, nothing big ever happens in August or September that you’d need to be ready for — there are conflicting messages about whether this is actually a good idea.  First, a nice quote via a Reuters story arguing that it helped when everyone decamped from their offices last year:

“Last summer, the crisis cooled partly because euro zone politicians went to the beaches and stopped contradicting each other in public every day,” one senior EU official involved in the Greek rescue negotiations said. “That moment can’t come soon enough this year.”

On the other hand, we’re coming up on the 1 year anniversary of the disastrous absence of Official Ireland from its desk (on what was actually a July-September inclusive getaway for the then-government), a problem later noted by outgoing ECB board member Lorenzo Bini Smaghi

Whereas [PM Brian] Cowen and his ministers had responded swiftly during 2009 as fiscal conditions worsened, Bini Smaghi says there was no comparable action to reassure markets when the heat came on last year. Ireland was listing from the summer, its position worsening all the time as investors took fright.

“Markets waited and waited and since they saw no policy reactions they started to lose confidence in the course of the summer. Remember there was a downgrade – in August – but there was no policy reaction, no announcement that a tough budget was in preparation and no announcement of the measures. The loss of confidence also affected the banking system and this created a spiral which led to the crisis and in the end the request for financial assistance.”

Splitting the difference between these positions is currency strategist Stephen Jen –

With signs of anxiety resurfacing late Friday — a rally by Spanish bonds fizzled at the market’s close — the idea that investors would wait patiently for two months for Europe’s leaders to provide the fine print on their grand proposal was met with disbelief in some quarters.  “I would suggest that if the eurocrats want to go on vacation that they bring their cellphones,” added Mr. Jen.

Back when Nicolas Sarkozy was popular, one of his catchy slogans for reaching target voters was “the France that wakes up early.”  Could we get a similar chic in Brussels, Frankfurt, and the national capitals around “the Europe that works during August?”

It’s useful to compare and contrast the terms of the Greece debt restructuring as outlined by the Institute of International Finance and the Dubai World debt restructuring of last year.  In both cases there is a mix of options for the new debt with varying coupon structures and levels of government guarantee.  The Greece case is a little more blunt about the discounted nature of the new debt, but there are enough options so that outright haircuts to principal can be avoided if a creditor so wishes — the impact is being achieved in net present value terms.

Thus there is a sense in which Dubai and its bailout partner Abu Dhabi were ahead of the EU curve.  This is despite considerable differences in circumstances: Dubai was restructuring corporate debt of state owned companies that were perceived as having a government guarantee but in fact did not, whereas Greece is restructuring sovereign debt.  The government of Dubai succeeded in walling off its own sovereign debt burden from its kinda-sorta-maybe legacy guaranteed liabilities — Ireland, take note — and was even able to issue new sovereign debt this year, without a credit rating!

Also in Dubai, the commercial banks grumbled but ultimately took the offer.  Which brings up another issue.  When the government of Dubai needed to restructure debt to commercial banks, it brought in restructuring specialists who came up with the offer to the commercial banks.  When the EU needed to restructure the Greek debt owed to commercial banks, they brought in, er, the commercial banks.  There must be synergy in having poacher and gamekeeper as the same person.

One of the interesting things upon 1st quick read of the European Banking Authority stress tests is the way it downplays the sovereign debt issue:

The data from the sample of 90 banks (Dec. 2010) shows the aggregate exposure-at-default (EAD) Greek sovereign debt outstanding at EUR98.2 bn. Sixty-seven percent of Greek sovereign debt (and 69% of the much smaller Greek interbank position) is in fact held by domestic banks (about 20% refers to loans which are mostly guaranteed by sovereign). The aggregate EAD exposure is EUR52.7 bn for Ireland (61% held domestically) and EUR43.2 bn (63% held domestically) for Portugal. Importantly, EAD exposures are different from similar exposures reported on a gross basis in the disclosure templates …

Given the distribution of the exposures described above, the direct first-order impact, even under harsh scenarios, would primarily be on the home-banks of countries experiencing the most severe widening of credit spreads. In such cases the capital shortfall should be easily covered with credible back stop mechanisms such as the support packages already issued or being defined for Ireland, Portugal and Greece. In this context these countries have announced capital enhancement measures requiring banks to hold capital to a higher level than that used for the EBA’s EU wide stress test. Additional capital strengthening measures have been, and will be, announced to ensure this.

In other words, most of the Greece, Ireland, and Portugal debt is held by domestic banks which is good news for the other EU banks that might otherwise be feared to be sitting on this stuff and thus should be bad news for the domestic banks of these strained sovereigns — but since they are already under official lending programs, these can be tapped to ensure that the domestic banks (and their lenders) don’t lose money.

Leave aside the concern that Exposure at Default is a technical measure that allows some netting of exposures that might not happen as smoothly in practice as on a balance sheet.  Think about the claim that since sovereign debt is domestic, losses can be handled as long as there is an official lending program in place.  Doesn’t that invite attention on countries with lots of domestically held debt, but no program?

We hope to have more when the individual bank results are revealed.  Note also the filename of the EBA document — it includes a “v6″ at the end.  That’s a lot of meetings!

A quote from a Wall Street Journal article about the standoff over how soon Lorenzo Bini Smaghi should resign from the ECB board:

“Our understanding is that Mr. Bini Smaghi wants to know where he would work next if he were to voluntarily resign from the ECB,” one French official said.

 Mischievous suggestion: Greek trades unions should send a letter to the IMF, ECB, and European Commission saying that “our understanding is that our members want to know where they would work next if they are to voluntarily accept cuts in their current positions.”  Anyway, it’s good to know that the minds of our European Council betters are on the big issues.