September 15, 2011 - Consortium to Extend Loans to Euro-Area Banks

The ECB announced today that a consortium comprised of the Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank to extend three-month loans to euro-area banks, in an effort to ensure they have adequate cash flow for the remainder of 2011. With this news there is optimism that more policy makers are collaborating to help to contain the European sovereign debt crisis. Separately the new head of the IMF in delivering a speech this morning asserted we “are in dangerous waters” and “world resolve” is necessary to remedy the EU debt issues. 

Stock futures rallied, and the U.S. Dow was up 100 points at 9:15am today after the above announcement, in reaction to the European Central Bank announcement of new liquidity measures in cooperation with the Federal Reserve; specifically, the U.S. equity markets, and the FTSE and Nikkei valuations increased over 1% on the news of the September 14 discussions regarding a) Greece's resolve to restructure its budget and pay its debt obligations (in discussions with France, Germany, and Greece), while b) China announced its willingness to continue to lend to the EU community and by inference and subject to conditions, purchase the proposed euro bonds (refinancing vehicles) that were discussed by the European Commission on September 13. Separately, China announced this week a $1 billion subsidy for the Carribbean countries, however to place in perspective, the ECB has made short term loans (since June 2011) to certain EU countries (Ireland, Spain, Portugal, Italy, Greece) in the amount of 450 billion euros.

In exchange for China's participation in an EU/ECB debt restructuring, China has made clear that it desires the EU to allow China exports to flow freely, and devoid of tariffs, in the EU. This will be a significant EU concession.

Separately, EU banks will be impacted, and this is why funds infusions are necessary; here's why: if any EU country debt due to the banks is written off as part of the broader plan, the banks will recognize a bad debt expense, which is a reduction to the banks' capital base (this is a simple observation, as existing reserve for bad debts balances need to be considered). Then, any resulting in bank capital will then reduce the amount of loans the banks can make (banks cannot make loans with capital they don't have); accordingly, there would still be a liquidity/lending restriction imposed on the banks. Costs of borrowings also increase for borrowers.

In the U.S. today, it was announced that industrial production in the U.S. unexpectedly rose in August, signaling manufacturing growth. Separately, applications for unemployment benefits climbed by 11,000 to 428,000 in the week ended September 10, highest number of claims since the end of June, and reflecting the risk of further weakness in the labor market. Regarding the President’s jobs bill announced the week of September 5, Senator Harry Reid of Nevada, the majority leader, stated he will place the bill on the legislative calendar but the date is uncertain and there is a recess until the end of September; the bill could very well be debated and in three separate sections, as there are voiced reservations on the bill as expressed by both Democrats and Republicans. Extension funding for the Federal Aviation Administration and a short-term spending plan ahead of the jobs bill.

Timothy Speiss is the Partner-in-Charge of EisnerAmper's Personal Wealth Advisors Group and Vice President of EisnerAmper Wealth Planning LLC. He chairs our Asia Practice and is a member of the firm’s community service group, EisnerAmper Cares.

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