Brown\’s right on this

“The truth is that European banks are in a worse state than American banks, that they never really recapitalized even though they said they would,” Mr Brown said. “They didn’t write off their toxic assets. They’re not lending, and they’ve been trying to disguise the extent of the problems they face.”

The European banks just haven\’t been writing down their bonds to market (ie, likely default) values.

The UK banks have been, as we saw when RBS insisted that Greek bonds were on the books at 50% of par.

The effect of this is that as and when default does occur the UK banks have already taken the losses: the European ones not and so they will fall over and the UK ones not.

13 thoughts on “Brown\’s right on this”

  1. So Much For Subtlety

    “The effect of this is that as and when default does occur the UK banks have already taken the losses: the European ones not and so they will fall over and the UK ones not.”

    Yes but I think we are probably beyond that stage. We have to ask when the European banks go, how much of the rest of the banking system are they going to take with them? That the French banks will collapse because of the policies that has meant they have lent to support French foreign policy is a foregone conclusion I think. However if they go, which British and American banks will follow them?

    As I have said before, it is shotguns and canned food time.

  2. So Much For Subtlety

    France has history on this. They will bail out their useless banks even if they end up like Greece. Depend on it. Their banks do – that’s why they haven’t bothered to recapitalise or even mark investments to market.

    Obviously if UK banks are shareholders in these banks they will be wiped. But if they are bondholders they will in effect be protected by French taxpayers.

  3. hang on: I thought mark to market was one of those absolutely non-negotiable regulatory requirements.

    Or is greyer? i.e. Greek bonds are trading above their likely value when they default and so:
    – RBS has essentially assigned them a lower value than current market prices and have thus posted imaginary losses ahead of expectation
    – European banks are following the letter of mark to market and will have to show that loss when it crystallises.

    Next question: if you’re right (and I tend to agree with you on this) that the market prices in expectation rather than simply current performance, why hasn’t the market priced Greek bonds closer to the default value?

    Tim adds: Grey area. Bonds to be held to maturity do not need to be marked to market. Bonds held in the trading book must be.

    Which gives a coach and horses really: define which bonds you intend to hold to maturity and which you’ve got on the trading book?

    UK banks tend (tend, mind you) to mark the whole lot to market. Euro banks seem to have an awful lot they intend to hold to maturirty.

  4. The Pedant-General

    Two points. Firstly, under IFRS rules securities held for investment (in “banking books”) don’t necessarily have to be marked to market. Secondly, as we know from the 2008 financial crisis, just because something is a regulation that “can’t be evaded” doesn’t mean it isn’t evaded, if regulators and auditors collude.

    Last time I looked the market was pricing Greek bonds at about 65% below par. That looks like a pretty deep discount to me. Anyone got an update?

  5. @diogenes “is anyone actually buying up Greek bonds, even at 65% discount?”

    Yes. That’s why there is a market price.
    Some people bought Sudanese paper at a 98% discount- that was ridiculously overpriced of course.

  6. So Much For Subtlety

    Frances Coppola – “France has history on this. They will bail out their useless banks even if they end up like Greece. Depend on it. Their banks do – that’s why they haven’t bothered to recapitalise or even mark investments to market.”

    Yes but with whose money? The Europeans are probably not quite there yet, but more and more Western countries cannot afford these sums. Just trying to help the Italians seems to have pushed the French close to the edge. How are they going to be able to bail out their own banks? If the Germans won’t play at any rate.

    “But if they are bondholders they will in effect be protected by French taxpayers.”

    Who are already paying massive sums for high levels of youth unemployment, early retirees, high medical expenses and so on. All on top of a declining population. Will they have enough spare cash?

    I think Europe may survive this but that we have voluntarily come so close to a systemic failure brought on by ideological wankery is fairly appalling.

  7. “Might make a nice souvenir.”

    What’s the going rate for one of those epic 500 Billion Zim Dollar notes?

  8. So Much For Subtlety

    “I think Europe may survive this but that we have voluntarily come so close to a systemic failure brought on by ideological wankery is fairly appalling.”

    I don’t think it has any chance of surviving in its present form. Your point about the effect on France of bailing out its useless banks is well made: I probably should have said German taxpayers, not French. That’s certainly what Sarkozy wants to see. Merkel is understandably opposed to that idea. But Sarkozy has the upper hand: the only way the Eurozone can survive is if Germany subs every other country, including France. And even that is doubtful without external assistance.

    It isn’t just France that will look like Greece. The whole Eurozone is set for a very, very big depression. But they will ensure that French and German banks survive, even if people can’t afford to eat. Aren’t political priorities wonderful.

  9. Multi-billion-zim$ notes cost about ten rand at Victoria Falls or the tourist-fleecing facility in Livingston; basically independent of face value.

  10. Weren’t US banks allowed to mark to make believe under the FASB rule change? So their depth in the doodoo isn’t really known?

  11. Pingback: Some interesting stuff I saw last week | Flip Chart Fairy Tales

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