As summer comes to an end, the clouds are getting thicker over the European banking system. The efforts to deny the fragile situation of banks at the core of Europe didn’t work out. Here are 5 updates.
Will this affect EUR/USD? The pair is currently at the top of the range.
Ben Bernanke’s speech in Jackson Hole got the most attention but left many waiting for the next Fed decision. News for the banking system came out when the markets were closed:
1) Urgent recapitalization from the head of the IMF: In Jackson Hole on Saturday,Christine Lagarde said that European banks need urgent funds and that action should be taken quickly. She even suggested that it will be mandatory. Here’s a quote:
They must be strong enough to withstand the risks of sovereigns and weak growth. This is key to cutting the chains of contagion. If it is not addressed, we could easily see the further spread of economic weakness to core countries, or even a debilitating liquidity crisis
2) More emergency funding from the ECB: Yet again, an unnamed European bank needed a helping hand from the ECB to get dollars. Is it a German bank that caused the flash crash in the DAX? Here’s a thought:
$5m were provided on morning August 25 from ECB to a German bank otherwise this bank was in default,
3) Radical plan for banks: Reports are coming in that EU officials are scrambling to make a radical plan for banks. Why? Severe liquidity problems:
Without citing sources, the paper said officials from the European Central Bank and European Commission are considering offering central guarantees over certain types of debt issued by banks. The paper goes onto say that the move comes after a number of European banks where shut out of international money markets.
4) European banks are highly leveraged: German banks are leveraged 32:1. That’s higher than Lehman’s 31:1 and before the recent crunch and the the agreement for Greek restructuring.
The official number for France’s Societe Generale is 28:1. Not much better. Unofficial numbers are far worse.
5) Trichet denies: “Don’t believe a rumor until its denied”. The president of the ECB denied a problem in the same conference:
Referring to the ECB’s extended long-term financing operations, Trichet said banks have more than enough collateral and said “the idea that we have a liquidity problem in Europe is plain wrong … because of this non-standard measure we have taken.”
Are you convinced that the Non standard measures solved the liquidity problem? In the past, Trichet has strongly rejected certain ideas or actions, but was forced to retreat later on. Perhaps the radical plan will be launched soon.
EUR/USD is trading at around 1.45, just under the 1.4520 resistance line. This is the top of a range that accompanies us for a few months. Hopes of QE3 in the US can send it breaking higher.
But what will happen if the banking system freezes in Europe?
As the summer ends and everyone is returning, we’ll get answers soon.
For more on EUR/USD, see the euro dollar forecast.Get the 5 most predictable currency pairs