Shawshank, VA 9/26/2011 (PennyPayDay) – European investors are buying into the story that a revamp of the European Financial Stability Fund (EFSF) is on its way any day now, though not everyone is convinced. Huw Pil, at Goldman Sachs, reckons the markets might be getting ahead of themselves, and doubts that the announcement of a €3tn (£2.6tn) plan to save the euro by recapitalising banks, giving more firepower to a bailout fund and allowing Greece to default on its debts, is imminent.
The schedule of further measures announced by the G-20 on Friday envisaged a less immediate response, possibly to be announced at the Cannes G-20 summit in six weeks' time, Pil notes.
Furthermore, the scope for EFSF enlargement is likely to be constrained by political considerations and the recent ruling of the German Constitutional Court while there are also concerns about whether the European Central Bank could lend to the EFSF directly.
David Beers, the head of ratings agency Standard & Poor's (S&P) sovereign rating group, has suggested in an interview with the Reuters news agency that a deeper fiscal union between members of the Eurozone could increase borrowing costs for 'core' European countries.
"If governments are unable to focus on the long-standing impediments to growth, then austerity alone is not going to give you growth," Beers said, citing the case of Italy.
There are also rumours that investors will be expected to take a further hit on their exposure to Greek national debt.
In July the investors, who are mostly made up of banks, agreed to take a 21% write down - a "haircut" in City parlance - on their Greek debt, but the new plan could see this rise to 50%.
Beers alluded to this, saying S&P believes European policy makers are also finally realising that Greece's debt restructuring will take place with significant haircuts.
The news does not seem to be unduly the shareholders of banks, with lenders BNP Paribas, Credit Agricole and Societe Generale plus investment bank Natixis four of the top five blue-chip risers in Paris, though all trail in the wake of insurer AXA, which is glad to see a recovery in its European equity portfolios. In Germany, Deutsche Bank and Commerzbank are also bowling along happily, but they too see their strong gains outdone by an insurer, this time Allianz.
Meanwhile, Mohamed El- Erian, the Chief Executive of Pacific Investment Management Co (PIMCO), which has the biggest bond fund in the world, has stuck his oar in, predicting a slow-down in growth of the global economy, with Europe going ex-growth.
El-Erian predicted Europe's economy would contract by between 1% to 2% with the US simply flat-lining.
His view was backed up by a measurement of German business confidence from the Ifo institute, which fell to is lowest level in 15 months, though the September index level of 107.5, down from 108.7 in August, was above the 106.5 expected by economists.
On the corporate front, the big news over the week-end was that UBS Chief Executive Oswald Grübel has fallen on his sword over the rogue trading incident that saw the bank swallow billions of dollars of unauthorised trading losses.
In the statement announcing Grübel's resignation, UBS's Chairman Kaspar Villiger said: "The board regrets Oswald Grübel's decision. Oswald Grübel feels that it is his duty to assume responsibility for the recent unauthorized trading incident. It is testimony to his uncompromising principles and integrity.”
Sergio Ermotti, currently in charge of UBS's European operations is take over the Chief Executive position on an interim basis.
Elsewhere in a busy banking sector, there are reports that Franco-Belgian investment bank Dexia is hoping to offload another €20bn of toxic loans, which would bring the total amount dumped to a nice round €100bn since the financial crisis took hold in the latter part of the previous decade.
French business daily Les Echos, citing an unnamed source at the bank, said the company might take a 10% loss on the loans, such is its desire to get the bad assets off its books.
Meanwhile, Bank of France governor Christian Noyer stated in an interview with Le Journal du Dimanche that French banks do not need to be recapitalised but could seek support from a public entity should it be necessary.
On speculation that the government planned to inject €10bn to €15bn in French entities, Noyer said, "there is no plan, and we don't need one."
Away from torrid banking sector, steel distributor Kloeckner is looking brittle after its chief executive reportedly grumbled that the usual post-summer pick-up in business had yet to materialise.
Elsewhere in Germany, drugs leviathan Bayer is wanted after its prostate cancer drug Alpharadin came up trumps in a Phase III study, with those patients who used it showing a significant increase in survival levels.
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