Wednesday, September 7, 2011

EU Follows U.S. in "Hear No Evil, See No Evil" Solutions on Debt

The market is rallying quite strongly today on little news.  I am wondering if there was leakage of this plan that has hit Bloomberg about the EU looking the other way on admitting reality.  This is a lighter form (for now just a lot of kicking the can down the road) of what the U.S. did in April 2009 via FASB, banks are allowed to carry debt (in our case, mostly mortgage) at what they deem fair, rather than current market prices.  This "make believe" valuation method was credited, in part, for easing stress on banks, and you know what happened after that.  Until banks actually foreclose on properties they can claim whatever they 'believe' to be the value, so it allows for a relative small amount of losses to be 'admitted' each quarter.   This methodology also worked wonders for the REIT market.

Looks like the EU is learning well... and of course if you knew this information before other people did, it's quite an advantage in the market.  So in summary - as long you don't admit there is a problem, there is not a problem - at least in banking circles.   Greek debt at 100 cents on the dollar! Want some?

  • The European Union is delaying proposals for senior bondholders of failing banks to take losses because the measures may spook investors at a time of market turbulence and they need more work, according to two people familiar with the situation. 
  • Michel Barnier, the EU’s financial services commissioner, will unveil draft legislation on the measures in October at the earliest, said one of the people, who declined to be identified because negotiations on the proposals are continuing. The bondholder plans are part of broader proposals for orderly closure of failing lenders that the European Commission, the 27- nation EU’s executive arm, had intended to present this month.
  • “The pricing of bank debt spiked” in January when the commission published a preliminary version of its plans, the British Bankers’ Association said in a paper published on its website today. It is “uncertain” whether a move to a so-called bail-in regime in which senior bondholders would financially contribute to bank wind downs “has been fully priced in at this stage,” the BBA said.
  • The EU move “is part of a broader trend to soften or delay the imposition of regulatory measures in the face of mounting concerns about the ability of the financial sector to support growth,” Richard Reid, the International Centre for Financial Regulation’s director of research, said in an e-mail.

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