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The bank always wins. This very popular expression can make sense if we analyze the political and financial agreement adopted by the Summit of heads of state and government to provide a solution to the debt crisis that the European Union suffers.

The banking sector has agreed to recapitalize and “forgive” 50% of the debt owed by Greece. But this acceptance is not done for free since in economics there is nothing that is adopted for anything in return.

The bill that European companies and families will have to assume in the coming months, especially during 2012, will mean that banks will put more conditions to grant credits and make them more expensive, while the entities will increase their promotions to attract the popular savings with the objective of facing part of the resources it will need to recapitalize.

Since Spanish banks say they will not want to go to state aid, which is more expensive to repay in the long term, there will be a series of actions that private individuals and companies that want to access private financing will notice.

The recapitalization will mean, among others, less access to bank loans and in this in a country like Spain where consumption does not quite take off, families are running out of savings, activity, and consumption is still not rebounding and small and medium-sized companies need the credit to continue paying suppliers and maintain their business.

As the bank will have to allocate to provisions in its balance sheets loans granted to municipalities and autonomous communities, public administrations will also see the private funding they need to pay their payroll and suppliers, which can have a consequence on jobs current and in the creation of new public jobs to have fewer financial resources.

All these situations are derived from the political meeting yesterday in Brussels. Banks have been discreet guests, but very present in the ten hours that have lasted the negotiations between the International Institute of Finance (IIF) and Europe to resolve the crisis of debt and confidence that the Union suffers.

The bankers, or rather, the representatives of the major European entities – especially French and German – were waiting last night in an annex building in Brussels for the solutions that the political representatives of the Union had to agree to tackle in the medium and long-term the current crisis of debt and define the new conditions to rescue a Greece in a state of “hidden” bankruptcy.

Finally, it was the banks themselves that assumed an effort to “forgive” 50% of the debt that Greece owes them, and, on the other hand, to accept recapitalization, which will put more pressure on them, to attract resources from their own and others’ clients. future episodes of war of the liability, increase the credit conditions offered to individuals and companies …

In short, the banks are those that have assumed to make concessions to save the euro and return the lost credibility in Europe among investors.

French President Nicolas Sarkozy made it clear yesterday: “The banks have agreed to make an effort of 100,000 million euros to help the euro”, in his press conference after receiving in an office along with the German Chancellor Angela Merkel those responsible for the banks integrated into the IIF.

But at what price have financial institutions agreed to get involved in Europe, save the euro and forgive 50% of the debt owed to them by the Greek state?

The agreements adopted last night left no doubt that banks will receive compensation, while at the same time recapitalizing their account and risk without, in principle, the public finances of the member states (citizens) taking on this risk.

Germany was determined to impose a very severe restructuring of the Greek debt to save the interests of its banks, which are along with the French, the main creditors of Greek debt, which would have led to officially declare Greece as a bankrupt country.

This possibility meant that the Union and the European financial system entered into an uncertain spiral and that it could infect other intervened economies such as the Irish or the Portuguese, as well as severe risks to other indebted economies such as those in Italy and Spain.

Having ruled out the official declaration of technical bankruptcy of Greece, the solution was to increase the rescue fund and recapitalize European banks, as well as to summon the European Central Bank (ECB) and its future governor, the Italian Mario Draghi, to continue with their policy of injecting liquidity into the financial system.

According to the agreement signed last night, Europe has convinced banks to forgive 100 billion euros of the 210,000 million Greek financial debt that are pending collection.

Europe will continue to lend money to Greece in exchange for hard adjustments and social cuts to reduce the public deficit, but these loans will be made long-term with lower interest rates precisely so that the Greek economy can return the loan without having to mortgage future generations.

European banks that lend money to Athens will receive paper guarantees provided by the Member States of the European Union for an amount of 30,000 million euros. In addition, the EU and the International Monetary Fund (IMF) will help Greece with credits amounting to 100 billion euros. All this aid must be reimbursed in the long term by the Greek authorities.

As regards the recapitalization of European banks, imposed by the countries of the Union and demanded in recent weeks by investors to avoid the paralysis of credit and liquidity that banks contribute to the system, it has been set at a certain amount of 106,000 million euros.

A figure that results from having examined the balance sheets and income statements of the banks and savings banks of the euro area after taking into account their loss of value at the end of September with respect to the sovereign debts held by these bond entities and Letters from the Greek, Irish, Spanish, Portuguese and Italian economies and compared to the accumulated earnings with respect to the equivalent debts of the United Kingdom and Germany.

On this basis, the community regulators have evaluated for each bank the path they must take to achieve the 9% percentage of the capital ratio (core tier 1, in banking terminology). This objective should be achieved as the deadline on June 30, 2012.

It is for this reason that today Spanish banks and savings banks have begun to communicate to the CNMV the capital needs of some 26,000 million euros in order to comply with the requirements of the European Union.
Apart from the requirement of 9% of basic capital, Brussels has indicated that European banks will have to value their sovereign debt portfolio at market prices and not issue prices.

This bill is especially hard for the Greek banks, which are very exposed to the debt of their country for having bought in bulk Greek sovereign debt, which will have a need for recapitalization that will add 30,000 million euros. The Italian banks will have to recapitalize in 14,800 million euros, the French bank, in 8,800 million euros and the German, in 5,100 million.

Fewer dividends for shareholders

To avoid resorting to state loans, or what is the same ask for public assistance that they must return with interest in the short and medium term, banks that are healthy can compute their benefits as own reserves.

This will mean that the shareholders of the banks will see a considerable reduction in the dividends they should receive in 2012. Or what is the same, the shareholders (owners) of the banks must make sacrifices to stop receiving these dividends.

Increase the rescue fund

European leaders decided together with the bank to rise to 50% the reduction of Greek debt, while the capacity of the permanent Rescue Fund will be extended to close to 1 trillion euros.

Another of the master lines designed by the EU to strengthen European banking will be the possibility that the sector will have to capture liquidity in the markets with EU guarantees, which will allow entities to finance themselves at better prices. In addition, you can account for your convertible bond issues as the capital of the highest quality, as claimed by Spanish banks.

On the other hand, a draft of the summit obtained by Reuters ensures that the Eurozone Rescue Fund, valued at 440,000 million euros, “will have the capacity to leverage several times”, but the details will not be agreed until November.

The document contemplates two ways to leverage the fund: by issuing risk insurance, by investing in a special investment vehicle or both at the same time. According to this information, the rescue fund would probably have a base of between 250,000 and 275,000 million to leverage. Therefore, the size of the European rescue fund after leverage would reach 1 trillion euros.

In addition, the draft urges Spain to take additional measures to balance its budget, especially with regard to the labor market and its competitiveness. Another paragraph on the measures to be adopted by Italy was still blank but will be completed during the night, according to the news agency.

The agreement on the cancellation of the Greek debt has gone ahead after intense negotiation between the countries of the eurozone and the banking. Finally, it has been decided, that the withdrawal is 50%, as it had already leaked during the summit. According to EU sources, the objective “is to reach a level of Greek debt of 120% of GDP in 2020”.

More social cuts and tax increases in Italy

The Italian government of Prime Minister Silvio Berlusconi has promised his European partners that he will take the necessary measures to improve his control and growth of public debt before November 15.

The Italian government is committed to carrying out labor and pension reforms, with the retirement age up to 67 years by 2026, according to a letter sent to the EU summit in Brussels.

In addition, the transalpine country has also promised to raise 5,000 million a year through the sale and valuation of state property for the next three years.

The European Union opens up to the capital of emerging countries

To get out of the debt crisis, the European Union can no longer do it alone but will need external capital. The countries interested are the emerging economies, such as China, Russia, Brazil and also Japan. “European countries should welcome investments from emerging countries such as China and actively help us,” Fu Ying, deputy foreign minister at the delegation of this country in Brussels, assured this week.

In exchange for receiving the capital of the Asian country, China demands the support of the European Union to facilitate its entry into the World Trade Organization (WTO), which would eliminate certain tariffs on Chinese products and facilitate their import into the European Union.

The Chinese are not the only ones interested in buying sovereign debt from European countries. Japan has already allocated 2,228 million euros after attending three broadcasts launched in Europe and is willing to go to more. It also adds to the interest of Japan, the economies of Russia and Brazil.

China could also support Europe by ensuring that it will contribute to the rescue of the eurozone by investing in the European Financial Stability Fund (EFSF), as reported by AFP, citing European diplomatic sources.

French President Nicolas Sarkozy hopes to meet today with his Chinese counterpart, Hu Jintao, to negotiate on the Asian country’s participation in the EFSF. “China is in favor” of contributing to the EFSF and will do so through an autonomous investment entity, according to this information.

Experts say that the Asian giant would already have about 500,000 million dollars in European debt.

Klaus Regling, director of the EFSF, is scheduled to meet Friday with Chinese officials in Beijing to discuss China’s investment in the rescue fund.

Related The Spanish banking will not need the State to capture 26,161 million The German Constitutional rejects the parliamentary mode to rescue the euro Sarkozy says that without the agreement of the EU “everyone would have gone to catastrophe”