When EU finance ministers meet next Tuesday to discuss the rise of the Euro it will be interesting to see how the “potential bombshell in the background” will be treated if touched at all.
The ongoing dispute between US and European regulators over the Basle II implementation and European banks´ reluctance to adopt US bank leverage ratio proposals is a potential threat, especially for Germany”s savings banks, hence they are naturally one of the prime opponents. They warn that the new rules could cause a credit crunch in Germany (and are not the only voice as we have heard from Mr Guttenberg and others in previous days). As banks have to divert cash from lending to loan reserves in order to meet the new ratios some of them might be foreced to “drop their panties” and what may appear might be really ugly. It”s been a well known fact for some time that Germany”s savings banks have been inadequately capitalised and were amongst the first casualties of the sub-prime crisis. So far this has been kept “under the surface” as much as possible and German politicians don´t like any headlines on this to appear.
US and UK banks on the other hand have been shoring up capital levels by issuing debt and equity whereas their European peers have been dragging their feet or “sitting it out” as Mr Kohl would have done. As a matter of fact, leverage ratios in European banks are much higher than in the US, and they need to raise much more capital than US institutions were forced to do (potentially explains the current ECB policy). It seems as if European banks are hoping to ride the financial sectors” stabilization coattails without paying the price that US and UK banks did. Guess that won´t work out in the end and after all, leaving “bodies in the cellar” is not good for the global economic healing process. Global capital disparities will leave some institutions vulnerable until the next bubble bursts and it will be at least then, when Europe gets its real share of the current crisis, potentially creating another one. Better getting it sorted in the first place!
Whatever happens during the discussions, currency markets might be up for some volatile sessions on any news filtering through and that is what a trader needs! Be prepared and I wish us all to be on the right side of things, good luck and a good start into the new week, Safe ; )
