Geithner puts the evil eye on big American banks
The Federal Reserve has ordered all the largest US banks to test their loan portfolios and trading books against a severe recession and a European market shock. The most severe point of the test will assume a 13% unemployment rate, and a staggering 8% decline in U.S. gross domestic product.
31 US banks have been asked as part of their 2012 capital review to project revenues, losses and capital positions all the way to the end of 2013, using four different scenarios. Two of these will be provided by the Fed, and two by the bank concerned. A Washington source told The Slog tonight, “It seems to me the Fed is expecting the very worst. It’s also being quite smart in looking at what the bank thinks. From this I guess they hope to judge just how in touch with reality each firm is”.
But within this context, six firms – Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo – will also be tested on “additional stresses related to the ongoing situation in Europe.”
So then, just how justified is the US Fed in insisting on all this?
Well, the terrifying thing about the eurozone States at the moment is that, within the last three months, breathing spaces of weeks have become days – and now, in the aftermath of the Spanish elections, hours. America’s governing class is right to be worried: big smelly stuff is heading their way.
Spain’s borrowing costs have doubled in 36 hours and are now more expensive than those of Greece. Whatever politicians or technocrats do now is likely to be drowned by the clamour for action. As bond yields in the region climbed, the cost of insuring European government debt against default using credit-default swaps shot up to record levels: default insurance on French, Belgian and Spanish debt leapt above record closing levels by today’s close.
Meanwhile, The EU warned today that unless Greek political leaders give written pledges to back agreed reforms, an €8 billion loan payment won’t be given. The country would run out of money in about 20 days if that came to pass. The refusal of New Democracy leader Antonis Samaras to sign the pledge, which he fears voters will see as giving up a promise to renegotiate Greece’s bailout loans if he comes to power, is what lies behind the threat.
And it gets worse: it is debatable how much longer Germany can be seen as a refuge of stability and security. In reality, German government finances are not nearly in as good shape as Das MerkeSchäuble would have us believe. The way that certain important indices are developing suggests that Germany may not retain its position as a role model in the long term. Government debt as a percentage of GDP is already at more than 80 percent, which compared to other European Union countries is by no means exemplary, but in fact average at best.
When it comes to their debt-to-GDP ratios, even ailing countries like Spain are in better shape, with numbers significantly lower than 80%. Critics, irritated by Merkel’s and Schäuble’s overly confident rhetoric, are beginning to find fault with Europe’s self-proclaimed model country. “I think that the level of German debt is troubling,” says Luxembourg Prime Minister Jean-Claude Juncker, whose country has a debt-to-GDP ratio of just 20%. Luxembourg is, mind you, a small transistor set somewhere south of Switzerland.
As The Slog predicted, German hubris is getting up the noses of those whose cooperation it needs very badly. We are now looking at a eurozone in which France resents German leadership, the ClubMeds resent Germany’s patronising remarks about its budget management skills, and the UK feels insulted by some pretty offensive CDU anti-Sterling spin of late.
Bond and lending market focus is rapidly moving from one ailing country to another, but it would be foolish to see these folks as mindlessly marauding wolves. They’re mindless alright, but they’re not so much marauding as testing the water to see if a genuine debt guarantor is going to emerge.
There are but three possible guarantors: Berlin, the ECB in Frankfurt, or both. As each week the cost and risk grow higher, the German Government and Mario Draghi dig their heels in deeper. And as they do so, each member State in turn suffers undeservedly from incessant pressure in the midst of seemingly infinite uncertainty.
It’s a Mexican standoff. And we all know where all things Mexican tend to wind up.
Thanks to Louise Armitstead at the Maily Telegraph for pointing out this amazing graphic on eurodebt.
Note in particular the Belgian leadership in this sector…under the leadership of the great, fiscally pious Japanese poet Her Man Van Romp.
The Slog 