Shock Absorber to begin:
World market is happy with the recent funding mechanisms declared and agreed for the troubled European economies. Banks have been asked to absorb 50% of the pains of trouble assets. Another part of the funding will be provided by EFSF which will create a set of special-purpose vehicles financed by other investors, including sovereign-wealth funds & funds being raised via bonds. Together, these schemes are supposed to extend the value of the EFSF to €1 trillion ($1.4 trillion) or more. But this might look like an easy way out but in real terms it’s a tough game and more of expectation rather than granted game to win ahead.
EFSF is betting on big game since it’s predict that banks will be free enough to dispose their assets and abide the road map of the rescue plan. ESFS depends partly on France for its rating as France finances the rescue fund and any rating below AAA of France will damage the EFSF ratings too making its bond programme to face stiff difficulties. The EFSF will issue bonds which will be backed by the credit ratings of the 17-member nations of the euro zone hence bonds credit worthiness will depend on these nations fragile credit ratings.
Who buys At what?
Selling the assets will be tough for banks as supply of assets are more and purchasers will go for optimum level of bargaining. Troubled banks across Europe have already started sell of to meet earlier regulatory requirements and funding issues. Franco-Belgian bank Dexia SA recently sold its Belgian unit to the country’s government for EUR4 billion, is selling its Turkish unit DenizBank. Societe Generale SA and French rival BNP Paribas SA are both looking to sell their large aviation-financing businesses, and U.K. banks Royal Bank of Scotland Group and Lloyds Banking Group PLC are continuing to sell both non-core assets and non-performing loan portfolios, including packages of real-estate, aviation and shipping loans. So many assets are stock piled for disposition and buyers are aggressively bargaining to buy them out.
Banks are getting value for its assets around 50% to 70% of its original value due to extensive bargaining. Asian banks are already keeping an eagle eye on non-central assets being sold by European banks–for example, South Korean government-owned KDB Financial Group is in talks to buy HSBC Holdings PLC’s Korean retail business, and Australia’s QBE Insurance Group Ltd. and Japanese insurer MSIG are among potential buyers of the bank’s Asia-based general insurance businesses.
No Lending No Growth
Moreover the banks have decided that they will eliminate dividends, retention of earnings & reductions in loans. But all these measures will fail miserably since few of the banks are on profitable ladders hence ruling out the factor of dividends and retained earnings. Reduction of loans is going to create double impact less support to GDP growth via loans and secondly banks don’t have enough position in their balance sheet extend loans further. Along with this we should be clear to understand that GDP growth of Europe will be less and consumption will take a major hit affecting US, India and other Asian economies.
Focus lies at 9%
Moreover the banks have been asked to maintain that by the end of June 2012, banks are expected to establish a core-capital ratio of 9%. Banks are already focusing on meeting the limit of 9% rather than focusing on how to deal with the 50% absorption of debt pile. Implementation of Basel III norms will create further pressure on the lending to the European economy EU leaders already are pressing banks to restrain payments to employees and shareholders until they meet the capital target. Well this will further accelerate the slow down process of the European economy since banks will be lending Zero to the economy resulting negative growth for Europe. Hence we should not expect any numbers of growths from Europe. And even if we get any number it should be taken for cooked numbers derived from political amour. There is no relief from pains only consolation and regret is yet to begin. What every one is trying and dreaming to do is that wipe out all the pains and start playing the old game in anew fashion. Borrow and live without knowing who pays.

Indraneel Sen GuptaIndraneel Sen Gupta ([email protected] )

Global Macro Economic Researcher and Business Strategist

Master of Economics, MBA in International Business Management, ICWAI (Final)/CWM Final/Journalist

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Qualification: MBA
Company: IFAN Finserv Private Ltd.(SPA Group Company)
Location: mumbai, Maharashtra, IN
Member Since: 25 Sep 2019 | Total Posts: 130
God has been kind and the people with whom I have the journey of my career over the last 16 years have been great fortune to have them as my best friends standing today .Well, I hold more than 16 years of experience in the Financial Advisory, Global Macro Analysis and Business Development Strategy. View Full Profile

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June 2021