Monday, December 12, 2011

Euro banking circular firing squad

Okay, so according to the European Banking Authority, European banks must raise 114 billion Euros of fresh capital in order to deal with the sovereign-debt crisis.

The funny part is that much of this capital “shortfall” is due to banks being forced to mark down European government debt (by European bank regulators no less). Since much of this new capital will probably eventually come in the form of government guarantees (such as the 5 billion euros bribe that it took for Sabadell to rescue CAM), this would drive down government debt even more, and then the banks have to mark down again, rinse and repeat.

The ECB was helpful enough to say:

“It’s important that banks raise their capital, but they should do it in a way that wouldn’t imply a reduction in lending,” European Central Bank President Mario Draghi said.“That’s not an easy task at this point of time.”

Not easy, ie impossible.

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