Europe Using US as Model to Fix Debt Crisis

European policymakers are taking a page out of their American counterparts' playbook to address their burgeoning sovereign debt crisis, banking analyst Dick Bove said.

The European Central Bank already has begun its own version of quantitative easing, the program used by the Federal Reserve  to recapitalize banks during the financial crisis that exploded in 2008, said Bove, vice president of equity research at Rochdale Securities.

At the same time, Bove said the ECB is well on its way to a "partial nationalization" of European banks, in which it will take equity stakes in the institutions as it seeks to stabilize the financial system.

The end result could be a boon for banks in the US and elsewhere that will benefit from the pain their European competitors will have to endure, Bove believes.

"The suffering in Europe may impact the rest of the world. However, there will be significant opportunities for non-Euro banks if this train of events occurs," Bove said in a research note. "The Euro zone banks will now become quasi utilities. Thus, the non-Euro zone banks will begin to fund the private sector companies that the Euro zone banks cannot handle."

Comparisons between the current state of European banking, which is bracing against the losses the system will take from likely national debt defaults, and the situation in 2008 when U.S. banks took massive writedowns from subprime mortgage losses, are easy to make.

Both suffered as much or more from illiquidity as insolvency, and solutions to both situations focus heavily on government backstop measures to ensure that capital remains flowing.

A move starting Dec. 21 that will allow European banks to borrow at low rates and in turn buy up sovereign debt looks, to Bove, "suspiciously likequantitative easing  ."

In the U.S. Fed's QE measures, it slashed interest rates to near zero and bought up mortgage securities and government debt to recapitalize the banks and get money flowing through the system.

The European version also includes low rates and incentives for banks to buy sovereign debt.

A notable difference: The ECB will not buy the debt itself, allowing it to avoid navigating the political minefield in which the Fed found itself.

"The reason that the ECB is not opening the flood gates to buy sovereign bonds in unlimited amounts is due to what happened in the United States," Bove said. "In this country, once the Federal Reserve made it known it would use quantitative easing to buy Treasury debt, the Congress abandoned any attempt to deal with U.S. deficit. The ECB has learned this lesson and is not letting European governments slide back into their old habits. It wants some discipline."

In exchange for the loans, European banks will have to sell equity and comply with stringent capital requirements.

"European banks must sell equity and buy sovereign debt. They will be forced by these parameters to abandon private sector offerings and private sector clients," Bove said. "The clients that will be the first to go will be those outside each bank’s country."

Similarly, Bove sees two possible solutions coming to address the complications brought about because the widely disparate European nations must abide by the rules of the same currency.

He predicts a possible "pseudo-euro" of lower quality issued to heavily indebted countries, which then can default on their obligations and devalue their currencies in order to cheapen their debt.

In the second case, he sees "partial nationalization" as governments purchase stakes in the European banks, in much the same way the US government took positions in Wall Street's largest financial players.

"This program may actually start today with a Commerzbank sale of stock to the German government," Bove said. "The problem with this approach is that the private sector is starved for funds and this causes a significant recession of greater than normal longevity."

For Bove, all of the scenarios point towards opportunities for US banks, which have gotten clobbered this year over concerns that the European crisis will spread across the Atlantic and infect the American financial system. He said the situation will be much like the 1990s when US banks took clients from failing Japanese institutions.

"This is not a phenomenon that will begin; it began months ago," he said. "The fear of contagion is a myth. The ability to gain market share is reality."

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