Wall Street barred from European bond sales in retaliation for credit crisis

We have a bit of a divide developing between the EU and the U.S. on banking and bank reform. The most significant move in this tiff has come in retaliation for Wall Street’s role in helping countries like Greece hide their debt burdens. According to the Guardian newspaper, all American banks have been shut out of the sovereign bond market in Europe. While many might think the U.S. government does not have a role to play in this dispute, I know from my own experience as a diplomat that the U.S. government is very aggressive about advocating for U.S. firms abroad.

The Guardian says:

European countries are blocking Wall Street banks from lucrative deals to sell government debt worth hundreds of billions of euros in retaliation for their role in the credit crunch.

For the first time in five years, no big US investment bank appears among the top nine sovereign bond bookrunners in Europe, according to Dealogic data compiled for the Guardian. Only Morgan Stanley ranks at number 10.

Goldman Sachs doesn’t make the table. Goldman made it to number five last year and in 2006, and number eight in 2007, the data shows. JP Morgan was in the top ten last year and in 2007 and 2006 but doesn’t appear this year.

"Governments do not have the confidence that the excessive risk-taking culture of the big Wall Street banks has changed and they still cannot be trusted to put the stability of the financial system before profit," said Arlene McCarthy, vice chair of the European parliament’s economic and monetary affairs committee. "It is no surprise therefore that governments are reluctant to do business with banks that have failed to learn the lesson of the crisis. The banks need to acknowledge the mistakes that were made and behave in an ethical way to regain the trust and confidence of governments."

European sovereign bond league tables are now dominated by European banks such as Barclays Capital, Deutsche Bank, and Société Générale, the Dealogic table shows. Their business model is usually seen as more relationship-based, while US investment banks have traditionally been focused on immediate deal-making.

Being left out of government bond sales means missing out on one of the top fee-earning opportunities this year, given the relative drought in mergers and acquisitions and stock market flotations. Western European governments need to raise an estimated half a trillion dollars this year to refinance debts and pay for bank bailouts and rising unemployment.

I would expect the U.S. bank lobby to pressure the Obama Administration into developing demarche communiqués at the State and Commerce Departments condemning this as a protectionist move. This is the type of work that State and Commerce does regularly on behalf of companies like Chiquita Brands International. The bank lobby is much more powerful. So, one should expect this to rise to an Ambassador-level talking point.

But apart from American firms being shut out of European sovereign debt deals, there are a lot of other ideas in the hopper which indicate an increasing friction between Europe and the United States on bank reform. Obama proposed a $117 billion bank levy (the so-called “financial crisis responsibility fee”) which is to tax banks in order to pay back taxpayers for the bailout he and President Bush conducted. European leaders have been cool to this plan. Obama received support from Bank of England Governor Mervyn King on the issue of banning proprietary trading under the Volcker rule. But, on other meaningful banking sector reforms, there has been little agreement.

Moreover, an influential German politician has floated a contentious idea for a European Monetary Fund to replicate the functions of the International Monetary Fund. The fund proposal is an implicit recognition that the IMF would be a palatable option for a workout of the Greek sovereign debt crisis if not for American influence and control at the IMF. This idea has been panned by other leading German political figures. However, German Chancellor Merkel has some praise for it. The fact that plans for an EMF are proceeding despite its irrelevance to the current debt crisis in Europe tells you that it is a political move to gain independence from the IMF.

On the surface, relations between Europe and the U.S. appear to be mostly harmonious. However, recent developments demonstrate a significant divide on finance and banking between the U.S. and Europe. To date, President Obama’s popularity in Europe has not translated into any substantive trans-Atlantic initiatives, at least on the banking and finance front. And judging from this anti-Wall Street move, I don’t imagine it will anytime soon.

The interesting bit is how much of this is just politics.  In the Greek case, up to fifteen banks may have helped Greece hide debt. Yet, the focus here is on Wall Street firms – I suspect purely for demagoguery. Should we expect a tit-for-tat move of some sort?

Stay tuned.

Sources

Europe bars Wall Street banks from government bond sales – Guardian

Bananas and ‘1992’: the Battle to Preserve Protected Trade from the Caribbean – Trocaire