The European leaders appear to have agreed on tougher fiscal
discipline, such as balanced budgets on the part of individual
countries. However, according to Reuters, Germany stands between
critical steps being passed - issuing of Eurozone bonds and
allowing the European Stability Mechanism (ESM) to become a
bank.
Issue of Eurozone bonds will pave the way for greater fiscal
union in Europe. And as a banking entity, ESM will be able to raise
resources from the market and operate with some degree of corporate
freedom. It would now bank on country contributions. ESM, which
goes into effect in 2013, has kept a window open for non-Eurozone
participation.
The recent summit reveals the fractured opinion across the
continent as country leaders seek to protect their turf. The UK for
example, refuses to sacrifice its own interests to resurrect the
Eurozone.
Apart from the political wrangling and one-upmanship, Europe's
problem emanates from a) losses from US sub-prime and other
structured products, b) structural issues, like- real estate asset
bubbles and c) sovereign debt crisis stemming from the recession
and poor fiscal governance.
The Maastricht Treaty (1992), which created the euro, too had
prescribed strict fiscal guidelines. The failure on the part of
Eurozone members to toe the treaty perpetrated the present crisis.
Will the new European initiative usher in a new dawn?
Negative fallout of the crisis will be severe on the banking
sector.
HSBC Holdings Plc
(
HBC
), Europe's largest bank by market value and
UBS AG
(
UBS
), Switzerland's largest bank recently faced credit ratings
downgrades.
According to the OECD, European banks are not as
well-capitalized as the US banks. They follow the Basel system of
capital adequacy to risk-weighted assets (RWA) without recognizing
the relationship of RWA and total assets (
TA
). The banks therefore, indulged in high leverage.
Major US banks -
Bank of America
(
BAC
),
Citigroup
(
C
),
JP Morgan
(
JPM
),
Wells Fargo
(
WFC
),
Goldman Sachs
(
GS
),
Bank of New York Mellon
(
BNY
) and
Morgan Stanley
(
MS
) have also not been spared downgrades.
According to the Bank of International Settlements, US banks
have an exposure of $767 billion to the European debt market.
Credit Default Swaps ($518 billion) and direct lending ($181
billion) are major parts of this exposure. A wobbly Europe and
exposure to its debt would have pushed for the downgrade.
BANK OF AMER CP (
BAC
): Free Stock Analysis Report
CITIGROUP INC (
C
): Free Stock Analysis Report
GOLDMAN SACHS (
GS
): Free Stock Analysis Report
HSBC HOLDINGS (
HBC
): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis
Report
MORGAN STANLEY (MS): Free Stock Analysis Report
UBS AG (UBS): Free Stock Analysis Report
WELLS FARGO-NEW (WFC): Free Stock Analysis
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