2011 September

European Banks Reject IMF Estimates

European bankers and politicians as well, have rejected a call by the International Monetary Fund (IMF) that the banks need 200 billion euros ($290 billion U.S. dollars) in new capital to ease the sovereign debt losses in the euro zone. The IMF estimate is much higher than the bank’s estimates of capital needs following a stress test in July.

IMF chief Christine Lagarde released a statement on Saturday calling for mandatory capitalization of European banks to prevent a world wide recession. This has raised questions as to whether the European banks have raised enough capital to withstand a downturn in the European economies as well as worldwide.

The European Commission said it sees no need for drastic action since the release of the stress-test results. “Our analysis of the situation hasn’t changed, it is in fact shared by the member states. We did have an in-depth discussion when the results of the stress tests for banks were presented and this our diagnosis and there is no reason to change it now,” Commission spokesman Amadeu Altafaj told a regular briefing.

Governments in the euro zone and The European Central Bank disagree with the IMF. They believe the IMF estimates were met using questionable methodology. Officials from German banks insist there is no immediate need to inject capital into German banks. France has also taken a similar stance according to French Budget Minister, Valerie Pecresse. “French banks are now better capitalized than a year ago; they passed stress tests which were extremely tough less than a month ago. I don’t think there is any cause for worry over French banks,” she said at an event on Thursday.

European bank shares traded slightly lower on the STOXX 600 European Banking Index while bank to bank lending rates edged slightly higher. There are still concerns among investors about the European banks and the economies within the euro zone. The ultimate question is how will Europe deal with the sovereign debt crisis it now faces.

Brazil’s Central Bank Unexpectedly Cuts Overnight Lending Rate

In a surprising move, Brazil’s Central Bank just announced that it is cutting its Selic (overnight) lending rate from 12.5% to 12%. One interesting piece in the bank’s statement reads “Reevaluating the international scenario, the committee considers that there has been substantial deterioration, shown by, for example, generalized and large reductions in growth projections for the principal economic blocks.”

The committee goes on to say it “understands that the complexity surrounding the international environment will contribute to the intensification and acceleration of the current process of moderation of domestic activity, which has already manifested itself, for example, in the reduction of growth forecasts for the Brazilian economy.”

Basically what this means is that Brazil is devaluing their currency. This is a big deal because the Brazilian economy is pretty big, this isn’t some developing or third world country doing this. The news is sure to rattle the markets in developing nations as well as those in developed nations. Definitely something the average investor did not want to see going into the long Labor Day Weekend.

Here’s the full translated statement:

“The monetary policy committee decided to reduce the Selic rate to 12.00 percent per year, without bias, with five votes in favor of the cut and two votes to keep the Selic rate at 12.50 percent. Reevaluating the international scenario, the committee considers that there has been substantial deterioration, shown by, for example, generalized and large reductions in growth projections for the principal economic blocks. The committee understands that this increases the chances that restrictions that are today seen in various mature economies will prolong themselves for a longer period than expected. The committee also notes that in these economies, there appears to be limited space for the utilization of monetary policy and that a restricted fiscal scenario prevails. Therefore, the committee understands that the international scenario shows a bias toward disinflation on the relevant horizon.

“For the committee, the transmission of foreign developments to the Brazilian economy could materialize through various channels, among them the reduction of trade, moderation of investment flows, more restrictive credit conditions and worsening consumer and business sentiment. The committee understands that the complexity surrounding the international environment will contribute to the intensification and acceleration of the current process of moderation of domestic activity, which has already manifested itself, for example, in the reduction of growth forecasts for the Brazilian economy. Therefore, on the relevant horizon, the balance of risks for inflation becomes more favorable. Furthermore, the revision of the outlook for fiscal policy also points in that direction.

“In this context, the committee understands that by mitigating at this moment the effects coming from a more restrictive global environment, a moderate adjustment of the basic rate is consistent with a scenario of convergence of inflation to the target in 2012.
The committee will attentively monitor the evolution of the macroeconomic environment and developments on the international scene to define the next moves in its monetary policy strategy.”

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