otopeoo lloooclol 5toblllty loclllty (l5l) was creaLed by Lhe euro area member sLaLes followlng Lhe

declslons Laken May 9 2010 w

High quality global journalism requires investment. Please share this article with others using
the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy Ior more
detail. Email Itsales.supportIt.com to buy additional rights.
http://www.It.com/cms/s/0/43e34a42-I0d3-11e0-aec8-00144Ieab49a.html#ixzz1aN3j7gSW
Bank of England`s QE gamble splits
sentiment
By David Oakley
Desperate times call Ior bold measures. The Bank oI England`s decision to launch a second
round oI quantitative easing to stimulate growth in the UK highlights the grave risks Ior
Iinancial markets as the economy teeters on the brink oI a double-dip recession.
It leaves investors in a precarious position as they ponder whether to switch into growth
assets, such as cyclical stocks, and sterling or opt Ior the saIety oI UK government bonds as
they weigh up the Bank`s latest gamble oI buying a Iurther 75bn oI gilts.
More
On this story
O Shock and awe Irom Bank oI England
O ECB boosts liquidity and holds rates
O Editorial Central bankers get back to work
O ex QEasy does it
O Bank oI England increases QE by 75bn
Click to enlarge
Robert Parkes, equity strategist at HSBC, says: 'QE is one big monetary experiment and no
one really knows what will happen or where the money will go. On top oI that, there is the
uncertainty surrounding the eurozone crisis and global growth that could overshadow
everything.
The initial reaction to QE saw equities jump and gilt yields and sterling Iall, which was
positive as the drop in gilt yields and sterling should in theory spark lower company
borrowing costs and improve export competitiveness, in turn buoying growth.
However, by the end oI the week sterling was higher against both the dollar and euro since
Thursday`s announcement. Gilt yields also jumped sharply as positive US jobs data
encouraged so-called risk-on` trades, which saw UK equities extend their winning streak to a
third day.
onger-term, it is harder to predict where these markets will go, or indeed iI they will be
aIIected by QE stimulus at all.
Broadly, there are two camps: the optimists, who think extra Iinancial stimulus will work;
and the pessimists, who Iear it may have little impact because oI the size oI the problems at
home with austere Iiscal measures still hurting the economy and the threat oI more turbulence
in the eurozone and worries about the US.
The optimists predict the buying oI gilts will aid recovery, supporting the case Ior equities
and sterling. Certainly, the Iirst round oI QE that saw the Bank buy 200bn oI gilts between
March 2009 and January 2010 coincided with the equity rally and the eventual strengthening
oI sterling that year.
Some Iund managers say they switched some QE money Irom their gilts sales into riskier
assets such as equities and corporate bonds. One says: 'We did start buying more cyclical
assets in the spring oI 2009 and QE helped encourage that move as it aided sentiment. QE can
do the same again.
The Bank oI England recently estimated that QE1`s 200bn had a peak eIIect on real gross
domestic product oI an additional 1.5 to 2 percentage points, which means a 75bn injection
should roughly equal between 0.5 to 0.75 percentage points.
But other Iunds that switched out oI gilts in 2009 say their reason Ior doing so was more due
to the turnround in the US economy at that time.
Alan Wilde, head oI Iixed income and currency at Barings, says: 'QE in the UK in 2009
helped the market, but in the broad scheme oI things I think the markets and asset allocations
were mainly driven by what was going on in the US.
There is also the risk that some QE cash will be channelled into the emerging markets rather
than sterling denominated assets, as was the case last time.
However, among more pessimistic investors and strategists, the big Iear is that QE2 will be
undermined by external Iactors. Some are already saying that more rounds oI stimulus are
needed.
Anthony O`Brien, strategist at Morgan Stanley, says: 'I think the Bank will have to try a bit
more shock-and-awe iI it wants much oI an eIIect. There is still a threat oI a double-dip
recession. The European recovery is Ialtering and the US is not out oI the woods.
He thinks the uncertainty in the global outlook makes a strong case Ior buying gilts. Indeed,
Morgan Stanley is Iorecasting 10-year gilts to end the year at 2.20 per cent 20 basis points
lower than currently. The bank expects gilt yields to remain low next year, ending 2012 at
2.50 per cent, as growth remains a problem.
This pessimism on growth explains why banks are less positive on equities. HSBC has cut its
end-oI-year Iorecast Ior the FTSE 100 by more than a 1,000 points compared with a month
ago to 5,150 more than 100 points lower than currently.
The outlook Ior sterling is more equivocal. BNY Mellon predicts sterling to end the year
lower against the dollar but higher against the euro.
The pessimists, thereIore, appear to have the upper hand Ior the time being as gilt yields
hover close to 100-year lows and the outlook Ior equities and sterling remains clouded.
Yet, amid all the uncertainty, many market participants agree on one thing: Iurther measures
are likely with QE3 and possibly QE4. Even more rounds oI stimulus, however, may have a
limited impact iI the eurozone and the US slip into recession.
lgh quallLy global [ournallsm requlres lnvesLmenL lease share Lhls arLlcle wlLh oLhers uslng Lhe llnk
below do noL cuL pasLe Lhe arLlcle See our 1sCs and CopyrlghL ollcy for more deLall Lmall
fLsalessupporL[fLcom Lo buy addlLlonal rlghLs hLLp//wwwfLcom/cms/s/0/04993d2aef6f11e0
941e00144feab49ahLml#lxzz1an48ckCy
Banks face new European stress tests
By Patrick Jenkins in ondon, Alex Barker and Peter Spiegel in Brussels, Gerrit Wiesmann
in Berlin and Hugh Carnegy in Paris

Europe`s top banking regulator has started to re-examine the strength oI the region`s banks,
modelling a big writedown oI all peripheral eurozone sovereign debt.
The exercise, conducted by the European Banking Authority, could potentially identiIy
capital shortIalls across the banking system oI as much as t200bn ($266bn).
More vldeo
More
On this story
O n depLh Lurozone ln crlsls
O Ml urges swlfL acLlon on Lurope banks
O ow Lo recaplLallse a conLlnenL's banks
O exla poses seLback for L8A sLress LesLs
O LdlLorlal Save Lhe soverelgns Lo save banks
The EBA, which is mid-way through a two-day crisis board meeting designed to assess the
potential hit oI mass sovereign restructurings, will use market values, to set 'haircuts on
banks` sovereign holdings.
The regulator is also closely involved in talks with European oIIicials and governments over
mechanisms that could be used to Iorcibly recapitalise banks, enabling them to cope with
sovereign deIaults.
The move, a tacit admission that the European Banking Authority`s two previous rounds oI
bank stress tests were not suIIiciently robust, came as Angela Merkel, the German chancellor,
said she was prepared to recapitalise her country`s banks iI necessary. She suggested she
wanted to discuss joint EU-wide bank support eIIorts at an EU summit in two weeks.
'We`re under the pressure oI time and I think we need to take a decision quickly, Ms Merkel
said aIter meetings with the European Commission in Brussels.
nteractive graphic
European stress tests 2011

This interactive graphic shows the Iull results oI the European Banking Authority`s previous
bank stress test, published in July. Some banks have since taken measures to boost their
capital.
According to senior oIIicials involved in the process, the EBA has been instructed to provide
a country-by-country breakdown oI how much new capital banks would need in the event
that Greece`s bonds were written down.
The oIIicials insisted the move was not an indication that EU leaders were preparing Ior a
Greek deIault. Instead, they said it was a precautionary measure intended to inIorm rapidly
accelerating negotiations on EU-wide bank recapitalisations.
The International Monetary Fund also gave its support Ior a quick recapitalisation, with
Antonio Borges, the IMF`s Europe director, saying a lack oI Iunding was causing banks to
cut back on lending, which in turn was a drag on economic growth.
Mr Borges pegged the cost oI a Europe-wide recapitalisation at t100bn-t200bn, and urged
leaders to require all European banks to take part.
The primary hold-out appeared to be France. Despite Paris`s ongoing eIIorts to rescue Dexia,
the troubled Franco-Belgian bank, the French government signalled it was uncomIortable
with the accelerating talk oI recapitalisation, insisting its banks did not need help.
'French banks do not need more capital than they have decided to accumulate by 2013, one
French oIIicial said.
The top three French banks, BNP Paribas, Societe Generale and Credit Agricole, all own
huge stocks oI debt issued by struggling eurozone peripheral countries like Italy, Greece and
Spain and have come under intense pressure Irom Iinancial markets. All three have
committed to reach minimum core capital levels set under the Basel III regulatory regime by
2013, six years ahead oI the oIIicial deadline.
Jrg Asmussen, the German deputy Iinance minister, indicated Berlin was looking to
'backstop its banks more quickly. Mr Asmussen told the Financial Times that Berlin was
looking at reactivating a bank rescue Iund that expired last year. 'Under this |reactivated|
regime, banks could apply Ior new capital and continue to keep operating, Mr Asmussen
said.
Paris is resisting a quick recapitalisation eIIort run out oI national capitals. According to
French oIIicials, Paris preIers to conduct Europe-wide capital injections with the eurozone`s
t440bn rescue Iund. But the Iund, the European Financial Stability Facility, will not have
those powers Ior at least several weeks.
'The response, iI it must be made, will be European, it will be collective, it will not be
French, Iinance minister Franois Baroin told RT radio.
Any state recapitalisation could threaten France`s triple A sovereign debt rating, which
underpins its own Iiscal retrenchment plan and its ability to help anchor the eurozone`s crisis
measures.
George Osborne, British chancellor oI the exchequer, has long argued that Britain`s banks are
relatively well capitalised compared with those in the eurozone.
While Mr Osborne is satisIied with the situation at the moment, Treasury oIIicials say that
'we are constantly vigilant about the saIety oI British banks in the event oI contagion
spreading Irom Greece across the eurozone.
For instance, there is a view in senior government circles that iI the Greek crisis led to a
break-up oI the euro and widespread turmoil in the sovereign debt market that could require
Iurther recapitalisation oI the UK banking sector.
Signs the European leaders were moving to recapitalise banks helped European shares rise
Ior the Iourth day in a row. The FTSE EuroIirst 300 index jumped 3.1 per cent, while
European bank stocks rose by 4.6 per cent. The UK`s FTSE 100 index was also up 3.2 per
cent amid the growing hopes that policymakers will act to stem the problems in the region
lgh quallLy global [ournallsm requlres lnvesLmenL lease share Lhls arLlcle wlLh oLhers uslng Lhe llnk
below do noL cuL pasLe Lhe arLlcle See our 1sCs and CopyrlghL ollcy for more deLall Lmall
fLsalessupporL[fLcom Lo buy addlLlonal rlghLs hLLp//wwwfLcom/cms/s/0/2613f34cf0fc11e0
bad900144feab49ahLml#lxzz1an4Wr1Ws
lgh quallLy global [ournallsm requlres lnvesLmenL lease share Lhls arLlcle wlLh oLhers uslng Lhe llnk
below do noL cuL pasLe Lhe arLlcle See our 1sCs and CopyrlghL ollcy for more deLall Lmall
fLsalessupporL[fLcom Lo buy addlLlonal rlghLs hLLp//wwwfLcom/cms/s/0/373432fef0ff11e0
b36f00144feab49ahLml#lxzz1an3Av8pL
Merkel and Sarkozy to hold talks on crisis
By Quentin Peel in Berlin and Hugh Carnegy in Paris
Angela Merkel and Nicolas Sarkozy will talk on Sunday in an attempt to reconcile the
diIIerences between Germany and France over how to tackle the eurozone Iinancial crisis and
Iund an expected recapitalisation oI European banks.
The talks between the German chancellor and French president will Iocus on how to prevent
contagion spreading as the soaring cost oI government debt in peripheral eurozone members,
such as Greece and Italy, has undermined conIidence in European banks because oI their
holdings oI sovereign debt.
More
On this story
O Slovak coallLlon ln deadlock over ballouL fund
O 8uslnesses urge quanLumrleaprLo beaL crlsls
O rlsh credlL unlons face sLrlcLer rules
O 8arroso enLers fray over bank supporL
O Moody's downgrades nlne orLuguese banks
The two leaders` longer-term plans Ior a new layer oI 'economic governance to co-ordinate
the Iiscal policies in the 17-member currency union also Iace resistance Irom smaller
countries, IearIul that they may lead to big country domination, and reduce the role oI the
European Commission.
Despite protestations to the contrary, divisions have emerged between the two capitals on
how to maximise the use and eIIectiveness oI the eurozone`s emergency rescue Iund the
t440bn ($590bn) European Iinancial stability Iacility and whether to use it to top up the
capital resources oI banks holding large amounts oI downgraded eurozone government debt.
Ms Merkel, the German chancellor, is resisting moves to leverage the Iunds available to the
EFSF, to expand its capacity to buy eurozone sovereign bonds and provide precautionary
loans to governments Iacing liquidity diIIiculties. France wants to maximise the Iirepower oI
the Iund, to stem the danger oI contagion Irom the Iinancial crisis in Greece and other
peripheral eurozone members.
Berlin is also adamant that any bank recapitalisation should be Iinanced Iirst by the banks
themselves and second by their national governments, beIore there is any recourse to the
EFSF Ior Iunds.
Paris played down the diIIerences on Friday, insisting that there was 'no divergence
between the two capitals on the question oI bank recapitalisation.
'We are agreed with Germany that it is a Iact that the banks must have more capital,
including the French banks, said Franois Baroin, French Iinance minister.
President Sarkozy met Christine agarde, head oI the International Monetary Fund, Ior an
hour in Paris on Saturday, ahead oI his meeting with Ms Merkel.
Ms agarde was the Iirst to call Ior an urgent recapitalisation oI European banks in August, at
the time irritating European leaders. The IMF estimates the cost oI a Europe-wide
recapitalisation at t100bn-t200bn.
As French Iinance minister until she joined the IMF in the summer, Ms agarde is well
positioned to help reconcile the positions oI Paris and Berlin. Neither Mr Sarkozy nor Ms
agarde made any comment aIter their talks.
Ms Merkel spelt out a three-step process oI recapitalisation on Friday, insisting that the
eurozone rescue Iund should only be used in extreme circumstances, and subject to strict
conditionality, iI a eurozone government said it was 'unable to cope on its own.
She stopped short oI calling Ior recapitalisation, saying only that 'we will Iollow the advice
oI our experts...iI they say we must recapitalise.
Mr Baroin agreed that in the Iirst instance the sources oI new bank capital should be private,
with public Iunds being used 'only as a last resort. There were several options Ior this 'but
we have not yet discussed these at the European level, he added.
French oIIicials have stressed that the country`s banks are taking steps to meet minimum
capital requirements set under the Basel III regulations by 2013, and continuing to insist that
they do not need more capital despite their big exposure to risky eurozone sovereign debt.
Speaking aIter talks with Mark Rutte, the Dutch prime minister, the chancellor stressed the
close convergence oI their views and the need to involve all 27 EU member states in any
agreement. She also gave her blessing to a Dutch plan Ior a European commissioner to be
appointed to police the Iiscal rules oI the eurozone.
Another division between France and Germany has been apparent on plans to review the
terms oI private bondholders` involvement in a Iurther Greek rescue package, agreed in July
by eurozone leaders.
Germany is one oI several eurozone countries trying to revise the terms oI the deal, according
to which banks and other Iinancial institutions agreed to roll over or swap their bonds, taking
a notional 21 per cent 'haircut, at a time when the Greek paper is trading Iar lower in
Iinancial markets.
French oIIicials accept that the private sector will have to make a bigger contribution to
supporting Greece than the 'haircut on Greek sovereign debt already agreed.
Paris is open to 'technical amendments, they said but this could be done via maturities and
interest rates, rather than by 'renegotiating something completely diIIerent.

nvestors turn bearish on Germany and
France
By Tracy Alloway

Investors are taking increasingly bearish bets on Germany and France, suggesting they
believe Europe`s crisis could spread to the monetary union`s stronger members.
The cost oI protecting German government bonds against deIault surged to a Iresh record this
week. Credit deIault swaps reached almost 122 basis points on Tuesday, meaning it would
cost the equivalent oI $122,000 annually to insure $10m worth oI German paper Ior Iive
years.
More
On this story
O ShorL vlew 8eLLlng agalnsL lrance
O LdlLorlal CommenL Lurope ln 1rlcheL's debL
O erman parllamenL approves LlSl boosL
O lrance flghLs pressure Lo recaplLallse banks
O Across Lhe zone Member sLaLes' flnances dlssecLed
Buying CDS protection on Germany can equate to betting that it will have to pick up the tab
Ior bailing out Europe`s so-called peripheral nations, analysts say.
The question oI how much support Germany is willing to provide to weaker eurozone
members has been a point oI contention between European politicians, with Iierce debate
over the scale and method oI bail-outs taking place.
This week`s reports on moves to recapitalise Europe`s ailing banks appear to have added
pressure to European government credits.
The Iragile banking system was one oI the Iactors which prompted Moody`s, the credit rating
agency, to announce late on Friday it was reviewing Belgium`s Aa1 sovereign credit rating.
Other Iactors it cited were the deteriorating Iiscal position because oI Ilagging economic
growth, and overall concerns linked to the eurozone crisis.
Investors believe banks in weaker eurozone members may receive billions oI euros through
Europe`s collective bail-out Iund, the t440bn European Iinancial stability Iacility. Banks in
stronger countries could be handed extra money by their own governments.
Credit Suisse strategist William Porter says investors should buy CDS protection on Germany
and other European sovereigns with top credit ratings, to proIit Irom their declining
creditworthiness.
He notes that correlation or the degree to which European government bonds are moving
together has increased since the start oI the region`s debt crisis. He suggests that the
Iortunes oI the AAA-rated countries oI Europe have recently been moving more and more in
step with those oI Italy and Spain.
'We have arrived at a stage oI the crisis that is purely systemic, Mr Porter says.
Still, there appears to be some variation in the perceived creditworthiness oI stronger
European governments.
The spread between yields on 10-year French and German government bonds reached almost
75bp this week, meaning investors are demanding a higher premium to hold paper Irom
France. The diIIerence between the two sovereign debts hovered around 30bp until this
summer.
German government bonds are still perceived as a 'go to haven Ior nervous investors. That
means that, even as the cost oI protecting German debt reached a record this week, the yield
on the bonds remained stubbornly low, having Iallen to around 2 per cent since the start oI
last month.
However, some commentators think that might change as Europe`s crisis progresses.
Monument Securities` chieI economist Stephen ewis says: 'As we look at the way the debt
crisis is evolving, core countries will no longer be seen as saIe havens, because they will be
sharing some oI the problems oI the poorer members.
additional reporting by Stanley Pignal in Brussels
lgh quallLy global [ournallsm requlres lnvesLmenL lease share Lhls arLlcle wlLh oLhers uslng Lhe llnk
below do noL cuL pasLe Lhe arLlcle See our 1sCs and CopyrlghL ollcy for more deLall Lmall
fLsalessupporL[fLcom Lo buy addlLlonal rlghLs hLLp//wwwfLcom/cms/s/0/1de37e0ef22d11e0
b43900144feab49ahLml#lxzz1auc7[6o
Fannie and Freddie debt fuels anxiety
By Henny Sender in Hong Kong and Michael MacKenzie in New York

Asian and Middle Eastern central banks and sovereign wealth Iunds are increasingly anxious
about the saIety oI their investments in the debt oI Fannie Mae and Freddie Mac , despite the
assurances oI US government oIIicials.
Spooked by US political wrangling, major investors including the National Pension Service
oI Korea and the Kuwait Investment Authority have sold out oI their holdings oI the debt oI
the US Treasury-backed housing agencies since the 2008 global Iinancial crisis. OIIicials
Irom central banks, including the Bank oI Japan, say they will be Iar more cautious in Iuture.
More
On this story
O llA crlLlclses lannle and lreddle law flrms
O lreddle under flre over bad loan procedures
O lannle and lreddle close Lo seLLlemenL wlLh SLC
O S downgrades lannle and lreddle
O lannle Mae and lreddle Mac downgraded
'The GSEs |government sponsored enterprises| are not saIe, said one senior oIIicial at an
Asian central bank, who added that his institution was reluctant to sell its existing holdings
because oI Iears oI spooking the market.
Fannie and Freddie which own or guarantee most US mortgages were made wards oI the
Treasury just beIore the Iailure oI ehman Brothers in 2008. They have since been dependent
on its Iinancial support.
Many Ioreign investors are not reassured by the increasingly explicit US government
guarantee, and are wary oI the debt that the two housing agencies issue. The political Iallout
over the US debt ceiling this summer and the consequent Standard & Poor`s downgrade oI
US sovereign debt intensiIied Iears that politics might derail the US government promise to
guarantee the debt.
'We have become hostage to the irresponsible behaviour oI politicians, said Bader al-Saad,
head oI the KIA, in a New York speech last month. 'What happened during the debt
negotiations will make many countries think twice about the investment environment oI the
US.
Investors are also worried that iI the Federal Reserve keeps printing money, the value oI the
debt will Iall in terms oI their own currency, a calculation that dollar-based investors do not
have to make.
The Council on Foreign Relations think-tank released a study in July showing that purchases
oI Fannie and Freddie debt by the central banks oI Brazil, Russia, India and China had
declined.
'At the peak, Asian central banks accounted Ior 40-50 per cent oI the purchases, said a
senior analyst at one major Wall Street Iirm, reIerring to the period beIore the global Iinancial
crisis hit in 2008. 'Today, it is between 10 and 20 per cent.
Since its peak in mid 2008, Ioreign central banks holdings oI GSE debt have Iallen 26.4 per
cent to $724bn today, according to Bloomberg research.
The Federal Housing Finance Agency which regulates Fannie and Freddie, has tried to
reassure investors saying they would have recourse to the Treasury in the case oI any deIault.
But data Irom Credit Suisse shows a material change in the appetite, which dropped markedly
Irom July. For example, Asia took only 3 per cent oI $4bn oI 5-year Fannie debt issued in
August at a spread oI 35.5 basis points over Treasuries, a relatively wide level, compared to
earlier this year.
Even though Asian and Middle Eastern investors are buying less Fannie and Freddie debt, the
price oI the bonds does not reIlect their Iears oI the risk. Fannie and Freddie debt trades at a
very narrow spread to Treasuries. But analysts said market prices have been skewed because
oI Fed involvement. During the Iirst round oI quantitative easing in 2009, Ior example, the
Fed bought more than $175bn oI GSE debt in the secondary market. Former Fannie Mae
oIIicials and other people Iamiliar with the situation said the sellers oI that debt were mostly
Asian central banks.
One Iormer Fannie oIIicial said the Fed buying 'had a huge impact, adding that spreads
would have 'widened substantially otherwise.
lgh quallLy global [ournallsm requlres lnvesLmenL lease share Lhls arLlcle wlLh oLhers uslng Lhe llnk
below do noL cuL pasLe Lhe arLlcle See our 1sCs and CopyrlghL ollcy for more deLall Lmall
fLsalessupporL[fLcom Lo buy addlLlonal rlghLs hLLp//wwwfLcom/cms/s/0/af0f7f4ef30711e0
838300144feab49ahLml#lxzz1aucLMMx
exia agrees to Belgian bail-out
By Stanley Pignal in Brussels

Belgium`s nationalisation oI the domestic operations oI Dexia was Iormally agreed in the
early hours oI Monday by the bank`s board oI directors and the Belgian government, along
with state guarantees worth t90bn ($120bn) to Iinance the rest oI the group.
Brussels will pay t4bn to take over Dexia Bank Belgium, which includes a large retail bank
in a group which is otherwise Iocused on lending to local governments. The Iorced
divestment is the Iirst step in the dismembering oI the Franco-Belgian bank aIter it Iell victim
to a liquidity squeeze prompted by the eurozone debt crisis.
Dexia`s management was Iurther instructed by its board to start negotiations to pair its French
municipal loans business with the Banque Postale, a bank tied to the postal system in France,
and the Caisse des Depts et Consignations, the French sovereign wealth Iund that owns
stakes in both Postale and Dexia.
France, Belgium and uxembourg will jointly underwrite Dexia`s Iinancing needs up to
t90bn Ior 10 years, in a repeat oI 2008 when the three governments stepped in with t150bn
oI guarantees to tide over Dexia aIter it ran into Iinancing diIIiculties.
Belgium will provide 60.5 per cent oI the guarantee, or t54bn, with France up Ior 36.5 per
cent and uxembourg 3 per cent, it was agreed aIter discussions between the French and
Belgian prime ministers on Sunday.
More
On this story
O eal reached on breakup of sLrlcken exla
O CC sLeps ln Lo ald lrench munlclpallLles
O exla Lo be dlsmanLled over weekend
O S downgrades exla dlvlslons
O exla shares suspended
Shares in the bank whipsawed when they resumed trading on Monday aIternoon, Ialling 36
per cent at one stage beIore rising 6 per cent and then Ialling back to where they closed last
week at t0.85.
The bail-out negotiations were made more complicated by Iears on Belgium and France`s
side about the impact that new liabilities contracted to save the bank could have on their
public Iinances.
The French government is said to be concerned about how the Dexia liIeline could aIIect the
country`s triple A credit rating, which allows it to borrow cheaply on international markets
and gives it added clout in eurozone bail-out negotiations.
Standard & Poor`s credit rating agency on Monday conIirmed the sovereign debt ratings oI
Belgium and France aIter details oI the rescue plan were announced.
The agreement pushes Belgium`s net debt to gross domestic product ratio up by 1 percentage
point to 97.2 per cent.
Belgium on Friday was placed on a negative ratings watch by Moody`s, which cited the
banking situation as one Iactor Ior a possible Iuture downgrade. The spread oI Belgian 10-
year bonds compared with benchmark German paper, a key indicator oI perceived risk,
stands at slightly less than 2 per cent, up Irom 1 per cent at the start oI the year.
The government guarantees will help Iinance what remains oI Dexia aIter the Belgian and
French spin-oIIs, which are expected to be Iollowed by other divestments including Dexia`s
stake in DenizBank, a Turkish lender, and its asset management business. Talks to sell the
uxembourg unit to a consortium led by the Qatari sovereign wealth Iund are under way.
The remaining 'bad bank will consist mainly oI a bond portIolio worth about t100bn, which
requires Iinancing which has weighed down Dexia`s balance sheet since the 2008 bail-out.
Jean-uc Dehaene, the Iormer Belgian prime minister who has chaired Dexia since 2008,
blamed 'a crisis within a crisis Ior the lender`s woes. 'Had it not been Ior this external
Iactor |the eurozone crisis|, we would have managed, he said at a press conIerence Monday
morning.
Along with Pierre Mariani, current chieI executive, he blamed the pre-2008 management Ior
saddling Dexia with short-term debt. 'Those who created this situation should examine their
own consciences.
Belgium`s actions echo the downIall oI Fortis, which in 2008 was rapidly nationalised beIore
being sold to BNP Paribas.
'We are happy to have been able to Iree Dexia Bank Belgium oI any links and any risk that
might have come Irom its holding by Dexia SA |the listed entity|, said Didier Reynders,
Belgian Iinance minister.
None oI the problematic bonds that will stay in the 'bad bank structure were acquired aIter
October 2008, the bank said. The vehicle will remain listed using Dexia`s existing holding
structure until Iurther notice, said Mr Mariani.
The staII oI the head oIIice will be oIIered jobs by the local subsidiaries being spun oII.
Dexia`s reliance on short-term Iunding Irom markets is ultimately the reason why it was
Iorced to ask Ior state aid last week. Dexia beIore 2008 moved aggressively to Iinance its
long-term loans by raising short-term money Irom wholesale markets, instead oI attracting
consumer deposits, as is more conventional Ior banks.
The new management, brought in aIter the 2008 bail-out, moved to cut the amount oI short-
term Iunding required, which has been cut Irom t260bn to just under t100bn. However, even
that proved to be too much aIter markets seized up during the summer because oI the
eurozone crisis.
The European Commission, which acts as the European Union`s antitrust enIorcer, said it
would review the deal to ensure it was in line with EU rules on state aid.
KBC, the Belgian banking group, accepted a t1bn oIIer Ior its uxembourg-based private
banking arm, KB. Precision Capital, a Qatari-backed Iund, is the second potential suitor Ior
KB aIter a 2010 planned sale to India`s Hinduja Group Iell through because oI regulatory
concerns.
The price is lower than the t1.35bn price tag to Hinduja, partly due to Ialtering market
conditions but also hit by earlier capital releases. KBC said it would receive a t700m capital
boost. KB has assets under management oI t47bn
lgh quallLy global [ournallsm requlres lnvesLmenL lease share Lhls arLlcle wlLh oLhers uslng Lhe llnk
below do noL cuL pasLe Lhe arLlcle See our 1sCs and CopyrlghL ollcy for more deLall Lmall
fLsalessupporL[fLcom Lo buy addlLlonal rlghLs hLLp//wwwfLcom/cms/s/0/8336eb1af34011e0
838300144feab49ahLml#lxzz1auc1!3CC
European leaders delay summit
By Peter Spiegel in Brussels

European Union leaders have decided to postpone next Monday`s summit by a week in order
to get closer to a deal on Greece ahead oI time, senior European oIIicials said.
The new summit, which will be held on Sunday October 23, is expected to set a course Ior
revisions to Greece`s second t109bn bail-out. But there were concerns that a report by
international lenders the so-called troika the European Union, the International Monetary
Fund and the European Central Bank on Greece`s Iiscal situation would not be ready in
time Ior Monday`s two-day gathering.
More
On this story
O Luropean Councll sLaLemenL
O Merkel and Sarkozy seL euro deadllne
O LdlLorlal Save Lurope's unlLy now
O Lurozone hopes hlnge on Slovakla
O n depLh Lurozone ln crlsls
In addition, leaders had hoped to complete agreement on increasing the Iirepower oI the
eurozone`s t440bn rescue Iund but Iinalising the technical details oI proposals to do so has
proved more diIIicult than anticipated.
Despite the delay, oIIicials said there was increasing agreement on a strategy to recapitalise
Europe`s struggling banks, with France backing oII Irom its insistence that the rescue Iund be
used as a Iirst line oI deIence. National governments will instead be on the hook iI a bank
cannot recapitalise on the open market.
In announcing the one-week postponement, Herman Van Rompuy, president oI the European
Council and chair oI all EU summits, said he had also asked Iinance ministers to hold an
emergency meeting oI their own ahead oI the summit to prepare the ground Ior decisions by
the EU`s 27 leaders.
'This timing will allow us to Iinalise our comprehensive strategy on the euro area sovereign
debt crisis covering a number oI interrelated issues, Mr Van Rompuy said.
lgh quallLy global [ournallsm requlres lnvesLmenL lease share Lhls arLlcle wlLh oLhers uslng Lhe llnk
below do noL cuL pasLe Lhe arLlcle See our 1sCs and CopyrlghL ollcy for more deLall Lmall
fLsalessupporL[fLcom Lo buy addlLlonal rlghLs hLLp//wwwfLcom/cms/s/0/2caa63ecf32911e0
838300144feab49ahLml#lxzz1auc?C3po
Beijing intervenes to help stabilise banks
By Simon Rabinovitch in Beijing
euLers
Beijing will buy more shares in China`s biggest banks, in an expression oI support Ior the
beleaguered stock market and most concrete state action to date to shore up conIidence in the
slowing economy.
Central Huijin, the domestic arm oI China`s sovereign wealth Iund, will buy the shares to
help stabilise the pillars oI the country`s Iinancial system, the oIIicial Xinhua news agency
said on Monday.
Coming as the Chinese stock market closed at a 30-month low, the move was the strongest
sign that Beijing wants to engineer a restoration oI conIidence in share prices and the
economy. It paid instant dividends with a rally in the Iinal minutes oI trading on Monday.
Although Chinese growth has so Iar held up well, the European debt crisis and the risk oI a
double-dip recession in the US have cast a shadow over the country`s economy. With
inIlation running near three-year highs and debt levels swollen by heavy spending,
economists doubt that Beijing could launch the kind oI stimulus it did when the global
Iinancial crisis struck in 2008.
Sensing vulnerability, investors have turned against China, driving down commodity prices,
betting on the chances oI a government deIault and selling shares in the banks that are the
economy`s liIeblood.
More
On this story
O beyondbrlcs 8anks rally afLer Chlna buys shares
O Cplnlon Cracks ln 8el[lng's edlflce
O Squeeze on developers cheers Chlna
O Chlna's banks fall Lo dlspel bad loan fears
O Analysls Chlnese flnance A shadowy presence
The government, through Huijin, is already the majority shareholder in all oI the country`s
major banks. While the announcement gave no details about how much more it intends to
buy, it was unabashed in declaring that it aimed to halt the roughly 30 per cent slide in bank
stocks in recent months.
In a rebuII to traders who have been betting that the renminbi will weaken as the Chinese
economy slows, Beijing also allowed the currency to record its biggest one-day gain in years
on Monday, letting it rise 0.6 per cent against the dollar.
The motivation Ior that also appeared to be diplomatic, with the US Senate set to vote on
Tuesday on legislation that would punish China Ior keeping its currency undervalued.
Xinhua said the objective oI the Huijin move was 'to support the healthy operations and
development oI the key state-owned Iinancial institutions and to stabilise the share prices oI
state-owned commercial banks.
It added that Central Huijin would start the purchases 'in the coming days, buying shares in
the country`s Iour largest banks: Industrial and Commercial Bank oI China, China
Construction Bank, Bank oI China and Agricultural Bank oI China.
The last time Huijin made such a publicised move was in September 2008, when the outbreak
oI the global Iinancial crisis had dealt a blow to the Chinese stock market. The Chinese
market staged a huge rally aIter Huijin`s 2008 move, which also paved the way Ior broader
government support Ior the economy in the Iorm oI an Rmb4,000bn ($625bn) stimulus
package.
The announcement that Huijin was again wading into the market made an immediate impact.
Mainland China`s stock markets were already closed, but Chinese bank shares in Hong Kong
turned sharply positive on the news. ICBC, which had been down 3 per cent, rallied at the
Iinish line to close up 1 per cent. Analysts said the sudden turnround may have partly
reIlected short covering.
Global investors have soured on Chinese bank shares over the past year, worried that their
bad debt levels will soar because oI their lending spree since 2008. Shorting Chinese bank
shares in Hong Kong has also been a popular play Ior investors who believe that the world`s
Iastest-growing major economy is due Ior a slowdown.
'They |Huijin| are trying to signal to the market that they Ieel conIident, said Sanjay Jain, a
Chinese bank analyst with Credit Suisse. 'And oI course valuations are depressed, so it`s not
a bad idea to buy at these levels Ior a long-term strategic investor.
Europe`s revamped strategy to beat its two-year sovereign debt crisis won the backing oI
global Iinance chieIs, who urged the region`s leaders to deal 'decisively with the turmoil
when they meet Ior emergency talks in a week`s time.
European oIIicials yesterday outlined the initiatives they`re considering at a meeting in Paris
oI Iinance ministers and central bankers Irom the Group oI 20 economies. With the
continent`s Iiscal woes rattling Iinancial markets and threatening the world economy,
governments were urged to complete the plan at their Oct. 23 summit in Brussels and to tame
the threat oI contagion by maximizing the Iirepower oI their 440 billion-euro ($611 billion)
bailout Iund.
'The plan has the right elements, U.S. Treasury Secretary Timothy F. Geithner told
reporters in Paris. Bank oI Canada Governor Mark Carney said that 'some oI what is being
considered, iI Iully implemented, would be suIIicient in our opinion.
Policy makers held out the possibility oI rewarding European action with more aid Irom the
International Monetary Fund, while splitting over whether the Washington-based lender
needs a Iillip oI cash.
'Substantial Arsenal'
'The IMF has a substantial arsenal oI Iinancial resources, and we would support Iurther use
oI those existing resources to supplement a comprehensive, well-designed European strategy
alongside a more substantial commitment oI European resources, Geithner said. He added
that the U.S. would back more money Ior the IMF only iI a 'compelling case was made as
its current $390 billion war chest is 'very, very substantial.
Europe`s strategy, which has still to be made public, currently includes writing down Greek
bonds by as much as 50 percent, establishing a backstop Ior banks and multiplying the
strength oI the newly-enhanced European Financial Stability Facility, people Iamiliar with
the matter said Oct. 14. Optimism the crisis may soon be tamed spurred stocks higher last
week and pushed the euro to its biggest gain against the dollar in more than two years.
European oIIicials 'will have leIt Paris under no misunderstanding that there is a huge
amount oI pressure on them to deliver a solution, U.K. Chancellor oI the Exchequer George
Osborne told reporters. Next weekend 'is the moment people are expecting something quite
impressive.
Agreement 'Close'
German Finance Minister WolIgang Schaeuble said his G-20 counterparts welcomed
Europe`s 'conIirmation that we`re aware oI our responsibility and we`ll solve the problems in
the euro zone. European Union Economic and Monetary AIIairs Commissioner Olli Rehn
told Bloomberg Television that euro-area authorities are 'close to an agreement on how to
capitalize banks.
The G-20 oIIicials -- who met to prepare Ior a Nov. 3-4 gathering oI leaders in Cannes,
France -- said the world economy Iaces 'heightened tensions and signiIicant downside risks
that must be addressed.31
They vowed to keep banks capitalized and Iinancial markets stable, while reiterating an
aversion to excess currency volatility. They also considered shortly naming as many as 50
banks as systemically important, two oIIicials said.
Almost two years to the day since Greece set the crisis in motion by announcing it had
underestimated its budget deIicit, Europe`s latest strategy hinges on putting it on a viable
path. Austerity has plunged Greece deeper into recession and provoked civil unrest that
threatens political stability.
Italy Targeted
Failure to curb the pain has led to Portugal and Ireland requiring bailouts, and markets are
now targeting larger debt- strapped nations such as Italy. Investors are concerned that iI the
crisis is allowed to Iester, the world economy could Iace a repeat oI the chaos that Iollowed
the 2008 collapse oI ehman Brothers Holdings Inc. Geithner warned three weeks ago that
Iailure by Europe to act would risk 'cascading deIault, bank runs and catastrophic risk.
In the works is a Iive-point plan Ioreseeing a solution Ior Greece, bolstering oI the EFSF
rescue Iund, Iresh capital Ior banks, a new push to boost competitiveness and consideration oI
European treaty amendments to tighten economic management.
The Greek bond losses now envisaged in the plan may be accompanied by a pledge to rule
out debt restructurings in other countries that received bailouts, such as Portugal, to persuade
investors that Europe has mastered the crisis, said the people on Oct. 14.
\tions Discussed
Options include tweaking a July accord struck with investors Ior a 21 percent net-present-
value reduction in Greek debt holdings. One variant would take that reduction up to 50
percent, the people said.
Under a more aggressive proposal, investors would exchange Greek bonds Ior new debt at a
lower Iace value collateralized by the euro area`s AAA-rated rescue Iund, the people said.
The ultimate option is a restructuring involving writedowns without collateral, they said.
The bank-aid model under discussion is to set up a European-level backstop capitalized by
the rescue Iund, the people said. It would have the power to take direct equity stakes in banks
and provide guarantees on bank liabilities.
OIIicials are considering seven ways oI multiplying the strength oI Europe`s temporary
rescue Iund. The options break down into two broad categories: enabling it to borrow Irom
the European Central Bank or using it to partly insure new bonds issued by distressed
governments. The ECB has all but ruled out the Iirst method, making bond insurance more
likely, the people said.
EFSF Cuarantees
EFSF guarantees oI new bonds might range Irom 20 percent to 30 percent, a person Iamiliar
with those deliberations said. Recourse to bond insurance suggests the central bank will need
to maintain its secondary-market purchases Ior an unspeciIied 'interim period, people said.
ECB President Jean-Claude Trichet, who attended his last G- 20 meeting beIore he retires
Oct. 31, reiterated the central bank hopes to stop purchasing government bonds once the
EFSF is able to take over.
A consensus is emerging to accelerate the setup oI a permanent aid Iund planned Ior July
2013, the European Stability Mechanism. This week`s discussions will Iocus on creating it a
year earlier, in July 2012, and easing unanimity rules that permit solitary countries to block
bailouts.
OIIicials divided over whether Europe`s travails meant the IMF should be handed more cash,
beyond agreeing it must have 'adequate resources to IulIil its systemic responsibilities.
Emerging markets such as China are considering whether the lender needs more money,
while oIIicials Irom the U.S., Germany and Canada were among those to say either that the
euro area must Iix Ior its problems Iirst or the IMF already has plentiIul and untapped
resources.
Italian media reported last month that Prime Minister Silvio Berlusconi had been caught on
wiretaps making disparaging sexual comments about German Chancellor Angela Merkel.
A diplomatic blunder at any time, the insults were especially inopportune when the question
haunting investors these days is whether Germany will get into bed with Italy.
European bank stocks have Iallen as borrowing costs climbed in recent months amid rising
concern that they may have to take greater losses on debt issued by Greece, Italy, Ireland,
Portugal and Spain. As policy makers seek to make lenders hold more capital to absorb
potential losses, investors and analysts say the banking crisis can`t be solved unless Germany,
the region`s richest country, shows it`s willing to stand behind Italy and Spain, the two
biggest debtors oI the Iive countries.
'What needs to happen as part oI this package is that the possibility, the discussion or even
remote likelihood oI haircuts on Spain and Italy needs to be killed and taken out oI the
market, Philippe Bodereau, a portIolio manager and global head oI Iinancial institutions
credit research at PaciIic Investment Management Co., said in an Oct. 12 interview with
Bloomberg Television. 'Bank recapitalizations are necessary but not suIIicient.
C- Ministers
Finding a way out oI the European crisis will top the agenda at a meeting oI G-20 Iinance
ministers and central bankers in Paris this weekend. None oI the proposed solutions --
whether they involve the European Central Bank or the 440 billion-euro ($606 billion) rescue
Iund known as the European Financial Stability Facility -- can work without Germany, and
by proxy the ECB, oIIering blanket support to Italy, said Iormer International Monetary Fund
ChieI Economist Simon Johnson.
'Does the ECB stand behind Italian debt like the Federal Reserve stands behind U.S. debt?
That`s the only question, said Johnson, now a proIessor at the Massachusetts Institute oI
Technology and a Bloomberg View columnist. 'Everything else is derivative Irom that
question. They won`t tell you that, and they can`t decide.
German and French leaders pledged at a meeting Oct. 9 to devise a plan to recapitalize banks,
help Greece and strengthen Europe`s economic governance. Merkel said aIter meeting with
French President Nicolas Sarkozy that Europe will do 'everything necessary to ensure banks
have enough capital.
'Tem\orarily Higber'
All lenders judged by the region`s top banking regulator to be systemically important should
be required to hold 'temporarily higher amounts oI capital, European Commission President
Jose Barroso said on Oct. 12. The European Banking Authority discussed making the banks
hold core capital equal to at least 9 percent oI their assets, up Irom a 5 percent core Tier 1
capital requirement imposed in the stress tests carried out by the regulator earlier this year,
according to a person Iamiliar with the proposals.
That might not calm investors, said John Raymond, an analyst at research Iirm CreditSights
Inc. in ondon.
'You can`t analyze banks` capital needs until you know what`s going to happen to the
sovereign debt, and they haven`t told us, Raymond said. 'That`s the problem.
Dexia, Erste
The European Union moves come aIter this month`s breakup oI Dexia SA (DEXB), a
Franco-Belgian lender, and a surprise 1.6 billion- euros in writedowns and provisions at
Vienna-based Erste Group Bank AG (EBS) illustrated the shortcomings oI regulatory stress
tests on about 90 oI the region`s banks in July. Both Dexia and Erste passed the tests, which
were criticized Ior Iailing to take into account potential markdowns on the value oI
government debt.
A new review should assess 'all sovereign debt exposure in Iull transparency, Barroso said.
Government bonds will be valued more closely to current market prices than in the July stress
tests, according to a person Iamiliar with the matter.
Those new criteria would lead to a 220 billion-euro capital shortIall at 66 oI the participating
banks, with the biggest gaps at Edinburgh-based Royal Bank oI Scotland Group Plc (RBS),
FrankIurt-based Deutsche Bank AG (DBK) and Paris-based BNP Paribas (BNP) SA,
according to a note published yesterday by Credit Suisse Group AG analysts.
The challenge is Iinding a source oI capital. Requiring European governments to supply it
would risk adding to the debt oI countries already struggling with budget deIicits, according
to Alastair Wilson, chieI credit oIIicer Ior Europe, the Middle East and AIrica at Moody`s
Investors Service.
Raising Ca\ital
'Concern about the banks is driven in part by the sovereigns, which may be weakened by
putting money into the banks, Wilson said in an interview. 'We have to recognize that there
are consequences Ior sovereigns in recapitalizing the banking system.
EIIorts by banks to raise capital Irom the private sector will be hampered unless investors can
be sure there`s a limit to potential losses on sovereign debt, Ralph Schlosstein, chieI
executive oIIicer oI Evercore Partners Inc., a New York-based investment bank, said in an
interview.
'II you want to have any hope oI getting money Ior the banks Irom private sources, you have
to be able to tell them what these sovereign debt assets are worth, Schlosstein said. Europe
has to show it`s providing a convincing level oI support to countries including Spain and Italy
'as a precondition or simultaneous to a recapitalization oI the banks.
Stress Tests
Greece, Italy, Ireland, Portugal and Spain, known as the GIIPS, have about 2.9 trillion euros
oI government bonds outstanding, according to data compiled by Bloomberg. Italy, the third-
largest issuer oI debt aIter the U.S. and Japan, accounts Ior more than halI, or 1.59 trillion
euros, the data show.
About 413 billion euros oI GIIPS debt is held by 38 oI Europe`s largest lenders, according to
an analysis oI the stress-test results by Alberto Gallo, a strategist at RBS in ondon. Those
holdings equal almost 40 percent oI the banks` 1.1 trillion euros oI equity, according to Gallo.
European banks, having agreed to a voluntary loss oI about 21 percent, are bracing Ior Iurther
writedowns on Greece`s 288 billion euros oI government bonds, which carry Moody`s
second- lowest rating oI Ca and an equivalent CC by Standard & Poor`s. European oIIicials
are considering writedowns oI as much as 50 percent on Greek bonds as part oI a revamped
strategy to combat the crisis, people Iamiliar with the discussions said.
Confidence Vote
Such losses could be dwarIed by writedowns on Italy`s debt.
'I can`t imagine a Iund that is big enough to also guarantee Italy in total, Martin Blessing,
CEO oI FrankIurt- based Commerzbank AG (CBK), said on Sept. 20, reIerring to the EU`s
rescue Iund, the EFSF, approved yesterday by Slovakia, the last oI the 17 euro zone countries
to do so. 'Italy is a whole other situation than Greece.
Berlusconi, the 75-year-old billionaire media tycoon and Italy`s longest-serving prime
minister, today won a conIidence vote in Parliament that he called earlier this week aIter the
lower house Iailed to rubber stamp a 2010 budget report on Oct. 11. ast month he won
approval Ior a 54 billion-euro package oI budget cuts, the country`s second since July, which
was adopted in exchange Ior ECB agreement to buy Italian bonds.
Mario Draghi, 64, the Bank oI Italy governor who will become president oI the ECB at the
end oI the month, said on Oct. 12 that Italy`s austerity plan won`t be suIIicient because
interest rates on the country`s debt could rise and create 'a spiral that may end up being
ungovernable.
Ratings Cut
On Oct. 4, Moody`s cut its assessment oI the nation`s long- term debt Ior the Iirst time in
almost two decades, lowering it three levels to A2 with a negative outlook, on concern that
weak growth will hamper Berlusconi`s eIIorts to balance the budget. Italy`s debt is 119
percent oI its gross domestic product, the second-highest in Europe behind Greece.
The downgrade meant Italy joined Spain, Ireland, Portugal, Cyprus and Greece as euro-
region countries whose credit rating has been cut this year. Unlike Ireland and Portugal,
which Iollowed Greece in seeking bailouts Irom the European Union and the International
Monetary Fund, Italy had managed to skirt the worst oI the Iallout Irom the debt crisis until
this year.
Italian growth, 0.8 percent in the second quarter, has lagged behind the euro-region average
Ior the past decade. Berlusconi told legislators yesterday that austerity may slow the economy
Iurther, and he promised tax, constitutional and judicial reIorms to boost the economy.
'Panicky Markets'
Italy`s borrowing costs climbed and the value oI its debt Iell. The yield on the country`s 10-
year bonds has risen to 5.80 percent Irom 4.88 percent at the end oI June. The yield surged as
high as 6.19 percent on Aug. 4 beIore the ECB announced plans to start buying Italian and
Spanish bonds.
'The real issue is that panicky markets treat the sovereign debt oI big and solvent countries
such as Italy and Spain as toxic assets, said Holger Schmieding, a ondon-based chieI
economist Ior Berenberg Bank. 'II policy makers can convince markets that these assets are
saIe, there would be no need Ior banks to bolster their capital against an imaginary risk oI an
actual writedown on these assets.
Unlike the U.S. and Japan, Italy can`t print money to buy its own debt when demand runs
low. Instead, its central bank is a part oI the ECB, whose strict mandate to combat inIlation
was inIluenced by Germany`s pre-World War II experience with hyperinIlation.
German Finance Minister WolIgang Schaeuble said this week that Europe won`t use loose
monetary policy or 'cheap money to alleviate the region`s debt burden and argued last
month that Iinancial institutions should be required to share the burden oI helping the most
troubled nations.
'The challenge to bring crisis-hit countries back on track must not be leIt to taxpayers alone,
Schaeuble said in a Sept. 24 speech in Washington during the annual meeting oI the Institute
oI International Finance.
Italian Bonds
Italian bonds are trading below Iace value because investors have determined the debt doesn`t
have the Iull backing oI the ECB, said Kenneth RogoII, a Harvard University economics
proIessor and Iormer chieI economist at the IMF.
'It`s clear that it doesn`t, because iI it did it wouldn`t be selling at a discount, RogoII said.
'It`s clear that it`s not unambiguous how Iar the ECB would go and how Iar the EFSF would
go.
Rules promulgated by the Basel Committee on Banking Supervision have encouraged banks
to hold government bonds issued in their own countries` currency because they`re treated as
risk-Iree and highly liquid assets.
RogoII, co-author oI 'This Time Is DiIIerent: Eight Centuries oI Financial Folly, said
there`s a long history oI governments creating rules designed to encourage banks to hold their
own debt.
'ld Story'
'Just think about it: II you`re the government regulating the bank, what kind oI government`s
going to say, Don`t hold too much oI our debt, because you know you can`t trust us`? he
said. 'One oI the arguments that proponents oI bailouts oIten use is iI we don`t bail out the
country and we let the government deIault, the banking system may not come back Ior a
decade. This is an old story.
JoseI Ackermann, 63, CEO oI Deutsche Bank, Germany`s biggest lender, said at a
conIerence in Berlin yesterday that 'it is not the capital Iunding oI banks that is the problem,
but rather the Iact that government bonds have lost their status as risk-Iree assets.
Even talking about the need to recapitalize banks is harmIul, he said.
'Systemic Dimension'
Jean-Claude Trichet, 68, a Frenchman who is stepping down as ECB president aIter eight
years in the role, warned on Oct. 11 that the region`s crisis 'has reached a systemic
dimension because it has moved to some oI Europe`s larger countries Irom the smaller
economies.
His successor`s ability to pursue policies that would help Italy -- such as lower interest rates
and ECB purchases oI Italian debt -- will depend on whether Germany assents, said MIT`s
Johnson. Policies pursued by the EFSF, which draws on money Irom all 17 euro-zone
countries, also will be inIluenced by Germany, the Iund`s largest contributor.
Asked in August iI bailouts oI euro-area nations unable to deal with widening budget deIicits
would be acceptable 'even iI they were necessary to keep the euro zone intact, 59 percent oI
Germans disagreed and 20 percent agreed, according to a Bloomberg/YouGov Plc poll.
Berlusconi`s alleged remarks about Merkel haven`t been conIirmed by the Italian government
or prosecutors, whose wiretaps were reportedly the source oI the recording. They were
blogged about and commented on widely, including in Bild, Germany`s largest tabloid
newspaper.
'Perce\tion Factor'
Berlusconi has never commented on reports oI the remarks about Merkel and has condemned
the use oI wiretapping in investigations. Niccolo Ghedini, Berlusconi`s deIense lawyer,
couldn`t be reached on his mobile phone.
The Italian prime minister, who has been criticized Ior comments about women and
diplomatic gaIIes, Iaces Iour criminal charges, including one accusing him oI paying Ior sex
with a minor. Since entering politics, he has Iaced dozens oI trials and investigations and, by
his own count, has spent more than 400 million euros deIending himselI. He has said he is
innocent oI all charges and that Italian judges are out to destroy him.
'II you were a German taxpayer, how much would you be willing to pay to keep Silvio
Berlusconi in the liIestyle to which he`s become accustomed? Not much, Johnson said. 'It`s
a perception Iactor.
lgh quallLy global [ournallsm requlres lnvesLmenL lease share Lhls arLlcle wlLh oLhers uslng Lhe llnk
below do noL cuL pasLe Lhe arLlcle See our 1sCs and CopyrlghL ollcy for more deLall Lmall
fLsalessupporL[fLcom Lo buy addlLlonal rlghLs hLLp//wwwfLcom/cms/s/0/f1c3b04400a211e1
ba3300144feabdc0hLml#lxzz1c8L438w
Banks buoyant as capital needs clarified
By FT Reporters
European banks may need to raise as little as t20bn in Iresh capital under a plan to shore up
the region`s teetering Iinancial system, as they hoard proIits and sell oII assets rather than tap
investors Ior Iunds to meet an estimated t106bn shortIall across the region.
Investors sent bank shares soaring in response to the plan hammered out in the early hours oI
Thursday morning, which gave Europe`s banks until the end oI June next year to meet a new
9 per cent ratio oI 'highest quality capital.
More
On this story
O Lex Luropean banks
O 8lgger halrcuLs puL sLraln on reek banks
O Spanlsh banks begln search for exLra t26bn
O ellef for lrench banks llfLs shares
O Lallan banks cool Lo demand for more caplLal
Cllck Lo enlarge
Adjusting Ior retained earnings, capital top-ups in countries that already have speciIic bailout
packages in place including Greece and Portugal and the ability oI Spanish banks to
convert debt into equity, analysts said European banks would only need to raise between
t20bn-t30bn in 'new capital to meet these requirements.
'This is not a bank recapitalisation exercise Ior European banks, said analysts at Credit
Suisse. 'We do not expect to see many rights issues with banks expected to meet
requirements through other means, such as eliminating dividends, deleveraging, lower
compensation and disposals.
As part oI the deal, European banks, along with other private holders oI Greek sovereign
debt, will have to swallow a 50 per cent haircut on the Iace value oI their bonds more than
double an earlier agreement as part oI the deal.
Fears remain over funding
Even amid investors` euphoria surrrounding the plan to shore up European banks, senior
bankers warned privately that it may not be suIIicient to revive term Iunding markets, which
have been closed since the summer, write Alex Barker and Megan Murphy.
The European Banking Authority, which is overseeing the plan, provided little detail on what
speciIic steps will be taken to reopen banks` access to term Iunding at reasonable conditions,
to avoid what it termed 'a spiral oI Iorced deleveraging and the ensuing credit crunches.
Together with the European Commission, the EBA has long promoted the idea oI a guarantee
scheme Ior bank bonds as a means to revive Iunding markets. But they have struggled to win
the backing oI member states Ior a Europe-wide scheme, designed to avoid the problem oI
weaker countries having to underwrite weak banks.
OIIicials believe there was some progress at the summit, with language that permits options
on the scheme to be explored and Ior work to begin on coordinating across Europe a term
sheet Ior such a guarantee scheme, so that Iees and access criteria are broadly the same.
One option being examined is to involve the European Investment Bank in oIIering the
guarantees, a model that would relieve pressure on sovereigns. However, extending its
mandate is strongly opposed at the moment by the UK, the Netherlands and some Eastern
European countries who are reluctant to let their taxpayers indirectly underwrite Spanish or
Italian bank borrowing.
'We don`t like it and we don`t want it to happen, said one diplomat. An alternative is Ior the
EIB to be involved in setting up the vehicle and running the scheme, rather than oIIering
Iunding.
Banks including Royal Bank oI Scotland Group and Deutsche Bank have already written
down their holdings oI Greek debt to market value, while French banks said the 50 per cent
discount would be included in their third-quarter results, Iinally bringing them into line with
some oI their German and British rivals
'Both sides moved towards one another and reached a satisIying compromise in the interest
oI Europe, JoseI Ackermann, chieI executive oI Deutsche Bank, said.
Europe`s leading banks rushed to reassure investors that they would meet the 9 per cent core
tier one capital ratio target without resorting to rights issues or public Iunds, with several
pointing to already announced asset disposal programmes.
BNP Paribas said it was bringing Iorward a deadline Ior it to meet the 9 per cent target Irom
January 2013 to June 2012 and was already setting aside two-thirds oI its proIits to boost
capital, while the rest would come Irom a de-leveraging plan outlined in September. Societe
Generale echoed BNP by saying it would accelerate existing plans to hit the new target by
2012, by using proIits and Iurther reducing its liquidity needs.
Even as markets cheered news oI the deal, analysts cautioned that crucial details remained
unclear including what assets banks can count as capital, how the weakest banks will raise
Iunds, and what additional steps will be taken to support banks` access to Iunding to stave oII
a Iinancing crunch.
While there is a June 30 deadline Ior banks to reach the higher capital threshold, decisions on
whether institutions need to tap state resources will be taken much sooner.
Banks have been told to submit a plan to regulators detailing exactly how and when they plan
to meet the target, either through restructuring, converting debt to equity, issuing new shares,
or cutting back on dividends and bonuses.
II regulators at both a national and European level are unconvinced that a bank will be
able to make the higher capital level under its own steam, they are likely to take action as
soon as the diIIiculties become clear, say European regulators.
Spanish banks, Iaced with a t26.2bn recapitalisation bill the second biggest national total
aIter Greece said on Thursday they were conIident oI reaching the EU-mandated targets on
time without calling on state aid.
Banks such as Santander and BBVA said they would reach or even exceed the 9 per cent
target through organic capital growth Irom proIits and scrip dividends, through asset sales,
and by managing their balance sheets and the way they weighted the riskiness oI their assets.
The European Banking Authority`s decision to accept within its deIinition oI capital bonds
that convert by the end oI October 2012 an extension oI the general June 2012 deadline
seemed designed to accommodate the maturing oI a large convertible issue Irom Santander,
the eurozone`s biggest bank by market capitalisation.
EBA details EU measures to restore confidence in banking sector

Measures to strengthen banks` capital positions
Santander said on Thursday that its required extra capital oI t14.97bn would be reduced to
t6.47bn by the exercise oI t8.5bn oI convertibles.
The Bank oI Italy said the t14.7bn additional capital the EBA said its banking system
required was only 'indicative and that the actual requirement would be given in November.
In Portugal lenders said they would consider tapping a t12bn state Iund to comply with the
EU plan.
Reporting by Megan Murphy in London, Alex Barker in Brussels, Jictor Mallet in Madrid
and James Boxell in Paris
lgh quallLy global [ournallsm requlres lnvesLmenL lease share Lhls arLlcle wlLh oLhers uslng Lhe llnk
below do noL cuL pasLe Lhe arLlcle See our 1sCs and CopyrlghL ollcy for more deLall Lmall
fLsalessupporL[fLcom Lo buy addlLlonal rlghLs hLLp//wwwfLcom/cms/s/0/fe44c416ffe111e0
844100144feabdc0hLml#lxzz1c8LvMo[m
'olcker defends his rule` from critics
By Tom Braithwaite in New York

Paul Volcker: 'It`s going to sound odd,' he says, laughing, 'but I`d like to see banks being
reasonably proIitable'
Paul Volcker has not been marching at 'Occupy Wall Street but he is likely to have a greater
impact on the Iinancial sector than the sleeping-bagged masses in New York`s Zuccotti Park.
'It obviously reIlects a Ieeling oI restiveness and concern, which I guess is understandable,
says the Iormer Federal Reserve chairman oI the protests. 'I don`t know how much oI it is
directed towards income inequality.
More
On this story
O l1 Alphavllle volcker ls all up ln your bonus
O Wall SLreeL braces for LlghLer regulaLlon
O lears over exempLlons Lo volcker rule
O 8anks ouLslde uS face prop Lradlng ban
O n depLh uS flnanclal regulaLlon
AIter the Iinancial crisis, Mr Volcker`s own concern was directed at what he saw as
unchecked dangers in the banking system. AIter a long campaign, the Obama administration
decided to embrace his proposed ban on banks` proprietary trading.
The so-called 'Volcker rule, which seeks to prevent banks trading Ior their own account and
also limits their ownership interest in hedge Iunds, became law as part oI the Dodd-Frank
Act. Earlier this month, regulators published their proposal on how to implement it.
It was immediately set on by bank executives as a huge compliance burden that could hurt
real businesses by sapping liquidity and trampling on 'market making, where a bank stands
between a buyer and seller oI securities rather than trades Ior itselI.
'I`m obviously happy with the rule in general, says the 84-year-old Mr Volcker in an
interview at his midtown Manhattan oIIice. 'There`s an exaggeration about the complication
it`s complicated enough but the actual rule itselI is not 250 pages. The lobbyists want to
Iind some bacon to take home to their Iriends oh, we Iound a loophole here` so the
regulators try to make things as precise as they can.
II the banks do not like his rule, they should look at Glass-Steagall, the more draconian
1930s-era response to bank excesses that Iorcibly separated commercial and investment
banking. Mr Volcker went back and looked at it, he says, and Iound language that was
indisputably simpler but also tougher.
'It said an aIIiliate oI a bank cannot be principally engaged` a wonderIul phrase in
underwriting, he says. 'The other part is a much longer sentence that says you can act Ior a
customer in buying or selling a security but it`s got to be in the customer`s account and it
never can be on your account. That is a really strict interpretation oI no proprietary trading.
You can do zilch. You can service a customer but you can`t put anything on your books. So iI
the banks want to make it simple and go back to Glass-Steagall let`s go!
Most bankers are concerned about openly Iighting back against an elder statesman oI Iinance,
who Iought a Iamous and successIul war against inIlation in the 1970s. But privately they are
scathing about the rule. 'He came up with this wacky rule that had nothing to do with what
caused the crisis, and the anti-business crowd took it over, said one. 'We`re beyond the
arguing that this is a pointless rule because it`s obviously too late Ior that.
For his part, Mr Volcker wants to see the industry heal aIter the pain oI the crisis and its
continued aItershocks. 'It`s going to sound odd, he says, laughing, 'but I`d like to see banks
being reasonably proIitable.
He notes that Canadian banks, which have perIormed relatively well in the past Iew years,
have a more traditional model and unlike the US are the main players in the mortgage
market. 'US banks are shut out oI the mortgage market, he says, lamenting the presence oI
Fannie Mae and Freddie Mac, the giant mortgage guarantors that remain in government
conservatorship aIter their near-collapse in 2008.
'I don`t see any reason why we could not develop a mortgage market in which banks are
much more involved and steadily proIitable, he says, and takes aim at a shibboleth oI the US
economy. 'It doesn`t have to be a 30-year mortgage, either. We need a little imagination
why can`t we develop a shorter-term mortgage or a variety oI mortgages?
He cites John Reed, the Iormer Citigroup chieI executive, who also hankers aIter a simpler
model, as his authority on the subject. 'He says |proprietary trading| creates a terrible cultural
problem Ior a commercial bank, says Mr Volcker. 'A commercial bank has clients who look
out Ior the long-term interest oI the client. You`re out there trading and paying your guys
zillions oI dollars Ior successIul trading, it aIIects the whole culture oI the institution in a way
that is destabilising.
In the end, then, much oI this comes down to pay. II banks play a 'Iundamental role in the
economy, they ought to be proIitable, says Mr Volcker. 'Doesn`t say they need to make 20
per cent a year and pay their traders 50 per cent oI the proIits. I don`t have a solution to the
pay thing. It`s got very excessive in some areas, but iI you deal with this proprietary activity
which is the source oI some oI it, you`ve taken some oI the incentive away. That is
something the protesters 60 years his junior would agree with