From subprimes to Greek debt: from one crisis to another

Greek debt

In the wake of stress tests, the banking crisis no longer appears as a threat. Unfortunately for the world economy, and especially European, another arrives, that of the debt. And it comes much sooner than expected, as the global economy struggles to recover and fears of a double-dip recur.

But just three years after the height of the financial crisis, the wounds are not healed. Bank balance sheets have not cleared all the toxic assets inherited from the subprime period, nor have they reduced their exposure to debts that have become “rotten”, like that of Greece. “In a banking crisis, there are effects of inertia related to the actual content of balance sheets, it’s not just a question of activities and operating accounts”, said at the beginning of the week Rémi Legrand, a partner in the consulting firm Eurogroup and professor at Sciences Po. It takes more than three years to change the structure of a balance sheet.

Why the Core TIER 1 ratio is no longer an argument

The issue of capital is at the heart of the banking crisis, for two reasons. On the one hand, asset write-downs contributed significantly in 2008 to meet this capital. This is not without consequences on the financing of the economy and growth: the less the bank owns capital, the less it can grant credits.

It is true that if we stick to the numbers, the Core Tier 1 ratios of European banks are far from bad: English banks are at 9% (for the record, the requirements of Basel III, which must be implemented from 2013, impose a ratio of 4.5%, and France is not far behind, with ratios that turn, for most major French banks, around 7%.

But the definition of Core TIER 1, and especially the way the banks constitute it, lacks transparency in the eyes of a number of economists, as pointed out by a Citi analyst quoted Friday by the Financial Times. This opacity, which provoked controversy during the publication of the latest stress tests, was, however, largely overshadowed by the unveiling of the banks’ exposure to sovereign debt, presented as the most important result of the tests.

But if it is possible to put everything and anything in the Core TIER 1 column, any statement from the banks ( “our own funds are above the 10% mark” ) or the IMF ( “banks are undercapitalized ” ) becomes questionable.

Economists are now more likely to estimate that the Core TIER 1 ratio should reach 15 or 20% instead of the 6% required by Basel III, especially if it is necessary to restart the credit machine.

On the other hand, the “race to the virtue” in terms of capital can have adverse effects: it is precisely because these funds cost them dearly to keep in reserve that the American banks have, before the crisis, liquidated a number of capital-intensive activities. And credit is one, hence the massive use of securitization, which allows you to sell a loan and sell it immediately, to make it disappear from its balance sheet, says a report from the French Documentation published in 2009. The money saved was then placed on the markets, which at the time offered good earnings prospects.

Excessive optimism and American plot

Why, after the intervention of the State, after Basel III, after the stress-tests, are the banks still incapable of demonstrating their solidity? The reasons are numerous.

First, because neither Basel III nor the stress tests have any effect on refinancing and the credit crisis of banks: as markets continue to believe that banks remain undercapitalized compared to their banks. balance sheet, they remain penalized. This concern is not fantasy: there are still far too many “rotten” assets in circulation, as the Dexia case has shown.

It is precisely the enormous size and balance sheet structure (too much exposure to Greece, Italy, etc.) that led to the downgrading of Societe Generale and Credit Agricole’s notes in mid-September. Moody’s agency. The weight loss treatment started at BNP and Société Générale. Dexia had also made the announcement in September, but it was already too late.

The liquidity risk was also largely underestimated by the banks themselves, who did not expect the interbank market to collapse. Banks no longer lend themselves to each other, states have less and less leeway to bail them out. On the other side of the Atlantic, distrust is such that the Fed and US funds no longer want to invest in France, even if it means harboring a sense of conspiracy against the euro.

Finally, the return of sustainable growth was expected earlier. Christian Noyer, president of the Banque de France, estimated in October 2008 that the rebound in growth, announced for the second half of 2009, was “insufficiently taken into account”. This excess of optimism has undoubtedly fed a certain casualness on the part of banks vis-à-vis their balance sheet, they have been too slow to clean up.

Fall 2011, looking for a lasting solution

Three years after the start of the banking sector’s troubles, it is necessary to provoke a new “confidence shock”, but the lack of consensus on a European scale is hard to feel. France is particularly worried about losing its AAA rating, which it has – miraculously – conserved since the beginning of the crisis, which would have the effect of increasing the price of its financing on the markets (rise in the rate of French bonds).

An obsession that does not make much sense, say, economists Henri Sterdyniak and Catherine Mathieu, the French Observatory of economic conjunctures: from the moment when there is monetary sovereignty, a defect is impossible to consider. And to recall that “Japan (…) is a 10-year debt to 1% despite a debt of 210% of GDP, the United States (…) are debt at 2% with a debt of 98 % of GDP, the United Kingdom (…) gets into debt at 2.5% for a debt of 86% of GDP ” .

The only solution in their eyes is, therefore, a mutualization of the European debt: “the member states of the eurozone must regain their monetary sovereignty by the almost complete joint guarantee of public debts”. The measure is expensive, but the big money is short of ammunition.

In the meantime, the ECB has emerged from its drawers out of the ordinary mechanisms to deal with the most urgent: extension of the system allowing banks to borrow unlimited and fixed rate until June 2012, and loans of money to banks on one year, exceptionally long- Justicescholars online instalment loans.

On Wednesday, the IMF interfered in the debate when its director Europe, Antonio Borges, raised during a press conference the possibility for the Fund to intervene by buying the debt of countries in difficulty, by the intermediate of an ad hoc vehicle. The IMF’s most endowed foreign currency countries, China at the forefront, may be interested in buying this debt.

The device is not new, pointed out Mr. Borges, a vehicle of the same kind, the “Oil facility”, was created in the 70s, following the oil shock, to allow the producer countries enriched by the rise courses to lend money to countries whose increase has deepened deficits. The “oil facility” died in 1982, when Mexico declared itself insolvent.