Consider the following from Reuters:
PARIS/LUXEMBOURG, Oct 4 (Reuters) - France and Belgium will guarantee the financing of stricken bank Dexia , finance ministers pledged on Tuesday as officials scrambled towards a rescue that will most likely involve a break-up.
“To this end, they pledge to guarantee financing raised by Dexia,” Francois Baroin and Didier Reynders said in a joint statement that made clear the governments’ aim was to protect account holders and creditors of the Franco-Belgian financial group.
Interestingly, the very same bank was deemed to be perfectly adequately capitalized by the moronic stress tests earlier this year. Here are Dexia’s individual results:
See, no additional capital required. Then, why the hell do they need a bailout? Exactly, the stress tests ignored liquidity issues and deemed sovereign defaults impossible. This unequivocally makes the latest round of stress tests a total absolute failure. Though, it is not like this wasn’t known immediately after the tests were released.
You only need to look at their latest balance sheet figures to know that the bank will fail in an environment were sovereigns are going bankrupt:
And liabilities and equity:
Yep, that is about 102 to 1 implied leverage based on tangible common equity. And the bank just happens to be big holder of Greece junk.
EU and the individuals responsible for the stress tests need to be held accountable for their failure. They need to be replaced with people who understand banking and especially the rather simple fact that lying does not create confidence. Unfortunately, EU is ran by people who openly admit that when it gets serious you need to lie.
Here is the share price since the stress tests. Lying about the bank’s solvency did not make the bank solvent. Next we will just have to see how will governmentless Belgium, a country with 400 billion dollar GDP, bail out a bank with 517 billion euros in assets.
And lastly, referring to the Reuters article and the justification of this bailout, it is not the purpose of the state to protect bondholders. If we continue to bail out creditors we will end up in a much deeper ditch. I recently penned a bit more about moral hazard and how it contributed to his mess. Unfortunately, we are repeating the same mistakes.