Another big weekend in Europe coming.
Germany's Merkel and France's Sarkozy, with their respective finance ministers, will meet over the weekend to hammer out some kind of common front ahead of the EU Summit Meeting October 13-14. Both now favor recapitalization of the banking system: Merkel favors direct recapitalization from their respective countries, while Sarkozy, worried about his sovereign credit rating, seems to favor using the EFSF. They will come to some kind of agreement.
Now, European strategists are jumping on the bandwagon; most seem to favor a U.S. TARP-like program.
Today (Friday), Morgan Stanley issued a long report on European banks, noting there is no "silver bullet" but that Merkel's support for recapitalization this week has greatly increased the odds that there will be substantially more money available to banks in the very near future (100-200 billion euros rather than 50-100 billion). The goal: "recession-proof the core and depression-proof the periphery."
JP Morgan also has a note out today that starts off with "Euro-TARP is in our view the best risk-reward medicine for opening the Eurobank funding market."
Yesterday, ING issued a report entitled, "Time for a European TARP/SCAP" saying that "the market is requiring a more co-ordinated and accelerated re-capitalisation of the European banking system."
Europe: it was a big week. Angela Merkel moved from no need for recapitalization to being open to a Europe-wide recapitalization; the EU seems poised to reopen negotiations with Greek debt holders and forced them to take a bigger haircut. The ECB added a new loan facility as a lender of last resort, a sign that liquidity is getting tighter in Europe.
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