The Eurozone crisis may have been averted for the time
being, but to be honest, they are yet to see the break of dawn. As the clock
ticks and urgent decisions are needed to be made, Germany and France have given
hopes to the rest of the Eurozone that they have an approach or in their words a
“Bazooka” to “blow” the Eurozone problem out of the danger zone. Bazooka it may
be… But the question is, what if they miss the target? And this would not be
something you could brush off with a simple “oops!”
Germany and France are working on (and claim to have)the approach to address
the Eurozone mess. As much as they have propagandized it, they have not let the
rest of the world into their approach. I mean, it’s a good sign that Angela
Merkel and Nicolas Sarkozy are meeting to discuss the issue… But investors are
going to need to see a layout (at least a general one) as soon as possible.
Things may seem hunky-dory right about now but if no hints are going to be
shared soon, investors may become restless and the market may become very
choppy. This may actually become true as Germany and France have stated that
their lips are zipped on this issue till the end of the month where they will
make the idea public by announcing it in the Cannes Summit.
Even then, France and Germany are having two different views
on this whole debt issue. France wants to recapitalize banks in order to have
more money circulating. But this would work to favour the nation as France is
having fears of a possible downgrade of their AAA-rated bonds if money becomes
tight. The 440 billion Euro bailout has already had some cash flowing through
the region but in order to have it running without the possibility of falling
flat on its face, the Eurozone would need at least 1.5 trillion Euro; which at
this point may be impossible to raise upfront as it might be a major strain on
the member states. So the alternative might be to leverage the European
Financial Stability Facilities (EFSF), which investors are less enthusiastic
about.
Germany on the other hand feels that national governments
should take care of their own dirty laundry. And since Germany is Ra-Ra about
the private sector sharing into the crisis, it is very possible that they are
planning on recapitalizing banks but may not be on board with the same reason
as France as France should learn to do its own laundry (from Germany’s point of
view). Having said that, it is clear that the focus is currently shifted to the
banking sector as there are fears of a banking crisis waiting to take place… So
for those who said banks were safe and didn’t quite believe that they could
become messed up… well, this is the point is go “I TOLD YOU SO” (plus, where do
you think the word BANKrupt comes from?)
So, recapitalizing banks… is this good or bad? There are two
ways that they might be looking at recapitalizing the banks.
1) Drop in share
price with dividend payouts or 2) Create new shares. But what do they have in
store? If they choose to
- Drop share price with dividend payouts
a.
Shareholders would not be very happy as their
shares would be significantly devalued.
b.
Banks would not be exposing themselves to (much)
new investors and would only be answerable to current shareholders.
a.
Shareholders would be able to buy into these
without having to trade-off of their previous investments.
b.
Banks would be exposing themselves to a new pool
or investors creating more market exposure.
If there is a choice that is to be made, the second option
would be the lesser of two evils.
While that is happening to the banks, Greece’s problems are
still evolving (I think Darwin was studying the wrong subject to prove his
theory). As Greece is ironing out (or trying) it’s creases, things look like it
may not work out too well or as what is being expected. If you ask me, it might
be wise for Greece to think of defaulting on its debts simply because it is
evolving into a Debt-a-saur (trying to make this dry article a little humorous…
so work with me here). But this decision
should not be made until the banks in the Eurozone are prepared to absorb the
HUGE losses that would be incurred by the default. To put it into perspective,
think of it this way, you have loaned a million dollars to someone and are
waiting for that person to pay back. If the person can’t payback and is on the
verge of declaring bankruptcy, you might want to make sure that you are in a
position where the million dollars in not that significant to be written-off by you.
By,
Ashveen Chakravarthy Sekaran
October 11th, 2011
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