IMF sends a message to the ECB - quantitative easing

*IMF sends a message

IMF has released their report on potential future asset writedowns by financial institutions.
The global total expected is 4.1 Trn Usd, with US financial institutions to write down 2.7 Trn Usd (up from 2.2 Trn Usd) and 1.2 Trn Usd for European banks.

In addition, the IMF suggests European banks equity requirements will generate capital needs to raise 600 Bln Usd in capital while the US banks will need to raise a further 275Bln Usd. So far US banks have written down 1.3 trn Usd while European banks have taken 906 Bn Usd of losses.

Since the outbreak of the crisis in Q4 2007, US based banks have raised their capitalbase by 650 Bn Usd (Excluding TARP and other government sponsored programmes) while the European ones have raised 385 BN Usd.

Given the much larger projected asset writedowns for US banks (2.7 Trn Usd) vs European banks (1.2Trn Usd), the much higher remaining need for capital raising for European Banks (600 Bn Usd) vs US banks (275 Bn Usd) might sound surprising.
Well, when the crisis hit, European banks employed a higher leverage than US banks, 50% higher.


*IMF capital ratio assumptions tilted towards the soft side, balancesheets will have to shrink
IMF seems quite soft in their assumptions, possibly not to scare the living daylights out of the investors.
The capital injection neeeds are based on the Tangible Common Asset (TCE) to Tangible Equity (TE) ratio being 4%, which is moderate and the level prevailing before the crisis. IMF mentions that if a more decent 6% capital ratio would be applied, capital requirements would be higher, although IMF refrained from presenting those numbers. This is most likely not unintentional,,,,,

The IMF capital need projections were made under the assumption that the balance sheet size of the banks will remain the same. In practise, balancesheets will have to shrink. This threatens to be a severe test to the European banking system.


* European credit multiplier to be lower than the US one - quantitative easing next for the ECB
With European banks having higher leverage than their US counterparts, the Europen credit multiplier will be much lower than the US one.

This will have a major impact on monetary and fiscal policysettings. If the ECB havent got it by this stage, they soon will. The stage is set for the ECB to apply quantitative easing, pronto.
This should weigh on the CEE and Euro currencies.




*Some debt info outside the IMF report to consider in the process of shrinking balancesheets

While US banks holds assets corresponding to 85% of the US GDP, European banks hold assets that corresponds to 330% of the Eurozones GDP. As we know by now, some individual countries in the Eurozone are way higher on an individual basis, where Ireland has racked up debt corresponding to 11 times their GDP.

Further on, when it comes to bad debt, the US subprime debt under the worst case scenario will correspond to 8% of the US GDP, while potentially troubled loans from Eastern Europe and Asia held by European banks corresponds to 33% of the Eurozones GDP.

As long as the expected US recovery takes place in the 2H of this year and the China engine dont falter, this might not become a massive problem. But if either one should go wrong, what we have seen so far will in retrospect most likely look like a walk in the park.




*Position changes
- Added further to my long VIX calls
- Bought a leveraged bear ETF on US financial stocks
- Bought puts on Gold
- Bought more calls on IVN
- Took profit on half my short PLN, SEK and ZAR positions
- Took profit and closed my short TRY and HUF position

Trading environment remains choppy and will most likely remain so til trends reassert themselves. At the moment the increased riskappetite seems quitestrong. It remains to be seen whether it is a topping out phase we are currently witnessing.




As usual, good luck






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