What next?

The G20 late yesterday said they are “committed to a strong and coordinated international response to address the renewed challenges facing the global economy.” Whatever this means we’ll have to see but anything short of another round of debt reduction for Greece, among other things, and we’ll again be wasting everyone’s time. Greece, Germany and some EU officials still are putting on the public face that just by satisfying the conditions of the bailout they can get thru this. Hopefully behind the scenes the discussions are more realistic. Moody’s, in downgrading Greek banks “believes that private creditors may incur substantial economic losses on their Greek government bond holdings beyond the terms of the current debt exchange.” With respect to the ECB and calls for them to lower interest rates, do some really think that a benchmark rate of say 1% is a game changer relative to 1.5%? Did that work for the Fed? An ECB official did say “if the data in early Oct shows that things are worse than we anticipated, we will look at the kind of decisions we have to take for that.” The bottom line issue for the ECB is whether to print or not to print in buying sovereign debt, not whether to cut rates 25 or 50 bps. On the story yesterday that 16 European mid tier banks on the cusp of falling below certain capital ratios need to raise capital sooner rather than later, an EU official said they still have until Apr ’12.

S&P futures are off their lows after ECB member Nowotny is explicitly laying out one of the steps they can take to ease the ever growing funding stress in the European banking system. While he says still “there is no immediate liquidity problem for banks” he does see issues with banks refinancing themselves longer term, thus “the ECB will probably discuss reintroducing a 12 month tender,” aka 12 month loans.

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