Weekends are busy for most folks. And then there's the world's central bankers. On Oct. 11-12, policymakers and officials from the U.S., Europe, and Asia burned the midnight oil to finalize a series of historic moves to shore up faltering banking systems worldwide.
Even in the era of the mega-bailout, the numbers remain eye-popping. For example, Germany set aside €500 billion in bank guarantee funds for the recapitalization of banks in distress and potential losses from loans. France said it will guarantee €320 billion of bank debt and set up a fund allowed to spend up to €32,040 billion to recapitalize banks.
What are the implications of the historic rescue effort? BusinessWeek and the S&P MarketScope staff rounded up insights from Wall Street economists and strategists on Oct. 13:
Phillip Finch, UBS Investment Research
We believe that we are moving rapidly toward the end game: full-scale state recap of the banking system to ensure sector solvency and restore market confidence. The British Banking Bailout plan is the first plan that provides direct state capital support—the bailout provides a comprehensive package that removes solvency and interbank concerns. It looks like other countries may follow the British lead, with the U.S. Treasury recently indicating that the $700 billion fund will be used to buy bank equities and insure bank debts. Over the weekend, European leaders agreed on a pledge to guarantee until the end of 2009 bank debt issues with maturities up to five years and to seek permission for governments to buy bank debt stakes. European leaders also have committed to recap what the statement called "systematically" critical banks in distress. Despite prospects of a worsening economic crisis, we believe that the nationalization of parts of the banking system could be viewed as the defining moment that marked the start of the end of the financial crisis. This suggests that we may be close to an inflection for the banking sector, although stock selection continues to remain critical. Poorly capitalized banks remain most vulnerable, while we view universal banks with high capital ratios and strong depository franchises as best placed for survival and market-share gains.
Donald Staszheim, Roth Capital
The U.S., Europe, Japan, and others [are] on the same page. We see no reason for equity investors to wait for the details of the Treasury plan. Washington has no choice but to go largely the same way that Europe and other countries already have—substantial nationalization of the banking sector. While there are lots of problems still to come in finance, these will be worked out. Equities have bottomed, in our view. Policy was more important this time in the bottom than is usual. The next issue is the severity of the hit to the economy and earnings. We see a deep, extended decline, with a slower-growth recovery fueled by less leverage than has been the case over the past two decades. Nevertheless, we believe that equities will remain the best way for most people (even though dispirited) to participate in the secular growth of the U.S./global economies. A winning long-run strategy—strong balance sheets, quality products, good niches, top management, market leadership, and downwind sectors.