Regulators from France and Belgium decided to bail out and bust up Dexia, a totally wayward Belgian bank laid low by the Greek and related debt crises in Europe. It’s official, we have now exported the ultimate export: Too Big to Fail.
This bailout – and it is the first bank bailout in Europe (at least one that is actually being called that) – prompted finance ministers from the euro zone to say the same may need to be done for the entire European system and that, in turn, convinced traders that even terribly run outfits like Dexia of Belgium is too big to fail.
The announcement hit the wires around 3:15 p.m. EDT on Tuesday and the S&P 500 went up 4% in 45 minutes after that vague statement.
The Europeans have been willing to bail out Greece — even those paragons of fiscal virtue, the Germans, who in reality are about as fiscally prudent as Kim Kardashian when meeting with a wedding planner. But unlike Ms. Kardashian, they shun headlines to avoid their own banks from melting down and requiring a bailout.
If Greece defaults – they will, next year – most European banks, including the Germans, will take a huge hit on their balance sheets and will need to raise capital, which will not be available from private investors, so they’ll need to be bailed out. This will anger taxpayers more than bailing out those wayward Greeks. So, to date, the politicians have put off the inevitable, which is more money for the banks.
Belgium’s Dexia has been unable to get short-term funding for operations due to exposure to all sorts of sovereign and other debts. Moody’s warned it would be soon downgrading the bank, and the stock took a hit and regulators and politicians stepped in and announced they would structure a bailout.
And like Caesar conquering the Belgae – this set the man up to do the same in Britain, giving him accolades and large silver mines – the regulators and governments in questions got accolades from markets but instead of getting silver, they need to spend a great deal of silver.
Re-capitalizing the banks in Europe is beginning to end. It will take months, maybe years, and there will be lots of headlines and teeth-gnashing, but it will happen. Right now, the talk is about “guarantees” of debts, and these legacy debts total roughly $17.5 billion dollars. These guarantees are going to end up being cash injections into the bank. And once a structure and some numbers are in place, European leaders will move on and let Greece default.
The longer the delay, the higher the cost. Did I mention the Belgian government guaranteed and otherwise supported Dexia assets to the tune of $121 billion in 2008?
And did I mention that Dexia passed the European bank stress tests this past summer – (everyone thought these tests were a joke, this is proof) – and this problem underscores there is no logical reason investors should believe anything about the safety or health of European banks.
What does this mean? First, more headlines for traders as speculation increases on “whose next?” to be bailed out.
Second, investors now know regulators have no serious understanding of how to properly evaluate the banks or if they do, they are not sharing with the public. They will stay away as they anticipate more problems and future needs for capital that will dilute existing shareholders.
Third, there will be continentwide bank re-capitalizations. Forget guarantees, this really means more capital over time for the banks from the public treasury – first on a name-by-name basis then individual countries will emulate what we did in the U.S. three years ago and re-capitalize all banks in their country as needed.
This will result in taxpayer money going into the banks – and not being put into social welfare and other government programs. This, in turn, means more austerity and a deeper recession there – and here.
But you can start your trading in Europe. The obvious plays are shorting the European banks with long-term puts to get past the headlines, the big dog is Deutsche Bank (NYSE:DB), followed by Banco Santander (NYSE:STD), you can short them here. You cannot short any bank, right now, over there. That regulatory strategy worked well for Lehman and Bear, didn’t it?