The Labor Day holiday in the U.S. provided no respite for weary investors buffeted by the never-ending Euro sovereign debt crisis. Over the weekend, the alarmist rheteric ratcheted up a notch.
Global finance leaders like the World Bank's Robert Zoelick and the IMF's Christine Lagarde are warning the global economy has entered a new danger zone as the outlook has darkened suddenly over the summer, with the global economy facing a "threatening downward spiral". Both the U.S. Fed's Ben Bernanke and ECB president Jean-Claude Trichet have essentially stated that central bank policies are no substitute for resolute government action, while the IMF is flatly stating that the U.S. and European governments need to back off of austerity measures and shift to "growth-intensive measures" until the crisis has passed.
Meanwhile, Euro bank stocks as measured by the Euro Stoxx 600 bank index are crashing to March 2009 lows as investors/traders try to reprice these bank stocks to levels that reflect real balance sheet values after a full write-down of now-toxic sovereign debt holdings, and the probability of a liquidity/solvency event. Bankers themselves are now talking openly of the funding problems within the Euro financial system. ABN Amro Group NV Chief Executive Officer Gerrit Zalm said (Euro) banks are hoarding liquidity, making interbank lending more difficult, as funding from money and capital markets dries up. Deutsche Bank Chief Executive Josef Ackermann bluntly told a gathering of Euro bankers Frankfurt's annual Banks in Transition conference that "Many European banks could go under if they had to accept a "haircut" at current market valuations on their entire sovereign debt holdings instead of the 21% writedown that has been proposed on Greek sovereign debt. "It's stating the obvious that many European banks would not survive having to revalue sovereign debt held on the banking book at market levels," he said. Ulrich Schroeder, head of German government-backed KFW at the same conference said "The situation for banks is more dramatic than it was in 2008," he said in a panel discussion at the conference. "In 2008, governments were still able to support their banks. Now this is simply no longer possible," Schroeder said, adding that he knows of no bank that is able to issue a seven- or eight-year bond in the current environment."
But Deutsche Bank chief Ackermann dismissed the IMF's call for a recapitalization of the banks, saying a forcible recapitalzsation would "threaten to send the signal that politics has lost faith in the ability of existing measures to succeed," but added that market volatility will remain for as long as there is insecurity over Europe's ability to tackle the debt crisis.