Where is the European Bond and Banking crisis going next?
Well Europe has a simple problem – it can’t sell its debt, neither sovereign nor private bank debt – at an interest rate they can afford. Italy sold €7.5 billion in bonds but at rates that are completely unsustainable. To give you an idea of the dire situation Italy’s leaders and bankers have created, 3.5 billion of that debt was sold in 3 year bonds. The rate on them was a crippling 7.89%. Just a month ago the rate on Italy’s 3 year bonds was 4.93%. A jump of nearly 3% in a month!
The markets know that the bank debt crisis is about to get a whole lot worse because as nations fail to grow at the fatuous rates they all claimed they would, nations will have a funding crisis and that in turn will curtail the funding and guarantees they can force their people to lavish upon the banks. Thus Moody’s said this morning,
All subordinated, junior-subordinated and Tier 3 debt ratings of 87 banks in countries where the subordinated debt incorporates an assumption of government support were placed on review for downgrade, the ratings company said in a statement today. The subordinated debt may be cut on average by two levels, with the rest lowered by one grade, Moody’s said.
Lenders in Spain, Italy, Austria and France have the most ratings to be reviewed as governments in Europe face limited financial flexibility and consider reducing support to creditors, the rating company said.
That means either Erste or Raiffeisen will begin to figure in the headlines as will UniCredit, Intesa and most of the Caja’s. As those banks begin to be downgraded and have to turn to their central banks and the ECB for even more of their funding so they will cut any lending to countries further east. Hungary is already in crisis talks with the IMF.
It is worth bearing in mind how dependent eastern countries are not only on western banks for finance but also upon those same nations as export markets. Western banks control about three quarters of banking in Eastern Europe. UniCredit via its subsidiary Bank Austria is the largest player. The Greek banks have a large presence as well as Commerzbank. Commerzbank has already said it will curtail all it operations except those in Poland.
As for the dependence on Western Europe for exports: the Czech Republic exported an amount roughly equivalent to 49% of it economy to the Euro region in the last year, Hungary’s exports to the Euro zone were about 44% of its GDP and Poland’s exports to Europe were 20% of its GDP. As Europe slows back to recession those countries will face a collapse of exports and growth, compounded by a freeze on any lending from the banks which will lead to closures and bankruptcies.
All of which will further deepen losses at Western banks such as UniCredit.
BUT the real question is who will Europe turn to to sell the debt that it MUST sell? This is where the real and present danger lies. The Italian government has already started rather pathetically asking Italians to be patriotic and buy Italy’s debt themselves. As Belgium had already done a few days earlier. But the real danger sign, for me, was from Spain.
Spain’s new Prime Minister asked for ideas for how to fund a ‘bad bank’ into which Spain’s private banks could dump up to 100 billion euros of bad debts that they STILL had on their books. That the Caja’s are still hiding such huge amounts of bad debt is hideous, but not the real danger. The real danger, in my opinion, is that, as reported in Bloomberg,
Aristobulo de Juan, a former head of banking supervision who helped tackle an industry crisis in the 1980s that caused the collapse of more than 50 lenders, said in a Nov. 17 column in Expansion that he favored using deposit guarantee funds as a bad bank that would absorb real-estate losses with the costs shared by the Bank of Spain and lenders.
This is a confusingly written paragraph. Perhaps deliberately so or more prosaically because the writer was simply cribbing a press release and didn’t stop to think about it. So let us look at it carefully.
The flashing red light for me is “…using the deposit guarantee funds as a bad bank…” On face value that means he is proposing to take the money which should be there to guarantee YOUR deposits, those of ordinary depositors, and to divert it to use it instead as capital for setting up a bad bank. That would mean if or when a bank or banks collapsed the money that should be used to make sure your money is still there would be gone and so would all your money. The guarantee money would have gone to set up the bad bank so that private bank debts could be guaranteed leaving ordinary depositors without ANY protection AT ALL.
Now the bankers would say that since the bad bank would have the ‘assets’ it had bought from them, which it could sell, the money would actually still be there, only tied up in assets. Sadly those would be the assets that were so rotten the banks had to get rid of them. And when the banks collapsed those assets would become even more worthless because there would be no one left standing who would ever want to buy them. Thus the experts would be lying, as they so often do, and in fact the deposit guarantee money, under this plan, would be gone, gone gone. And once more the people who would have made off with it would be the bankers and their bond holders who are….other bankers.
But am I right about this? Surely if I was, this would have been picked up by mainstream news and trumpeted from the roof tops. I thought that and waited for it to happen.It didn’t. So perhaps I am wrong and have misunderstood the suggestion. So let’s look at the confusing bit of the paragraph where it talks about the costs being absorbed by the Bank of Spain and the private banks. Isn’t that saying that the deposit money won’t be used but instead the Private banks and the Central Bank of Spain will pay? In which case what was all that about the deposit money about?
The answer, I think, is that the ‘cost’ the Bank of Spain and the Private banks will absorb are the losses the banks will have to take on the value of the assets they sell to the bad bank. Confused? They certainly hope so. It’s actually simple. The banks are still holding these ‘assets’ at ridiculous valuations. Often near face value, despite them being non-performing loans which are paying nothing or near to nothing and being backed by assets that are so worthless they simply cannot be sold. If it was otherwise the banks would be keeping the loans or would have sold the assets for the cash they so badly need.
The Caja’s and other banks have, at a conservative, ‘official’ estimate, bad loans and worthless assets which the banks value at around 100 billion euros. The question is what will the bad bank – AKA the Spanish Tax payer pay for those assets? The figure being put about is closer to 60 billion euros. That leaves the banks with an up front loss of 40 billion euros. THAT is the cost the Bank of Spain and the Private banks will ‘absorb. NOT the larger 60 billion cost of buying them. That larger 60 billion is where the Deposit Insurance money comes in.
So let’s look at the deal being proposed by such a senior figure. There would be a write down of 40 billion. But the private banks wold not take even this loss. Instead the loss would be shared with the Bank of Spain AKA the Spanish tax payers. What the Spanish tax payers would get for their share of that 40 billion is a share in some toxic loans backed by worthless property speculation deals and half finished, now wreaked, developments which will in the end be demolished.
Then the Spanish tax payers will ALSO find that ALL the money which should be there to guarantee their life savings in the event of a bank collapse will NOT BE THERE because it will have been used as capital for the Bad bank to guarantee the rubbish assets the bank has bought. And that capital will disappear as the value of the assets and loans declines which they will or will simply catch fire en masse if and when the banks collapse as a group. The upshot of all this?
If I lived in Spain and I thought for one instant that this suggestion might be taken up – and being a suggestion made by such a senior figure and one allowed to get in to the press and one so favourable to the banks, you have to think it has every chance of being taken up – if I thought that for one instant, I would remove ALL my money from the bank and keep it as cash burried beneath the floor of my house.
Because to leave it in the bank would mean leaving it completely unsecured without any deposit guarantee. In short is this idea gains any traction at all I would recommend taking your money from the bank as soon as possible. If you wait for the idea to be made law it will be too late. At that point neither the government nor the banks will not allow you to take your money.
And lastly, if this is being proposed in Spain. It WILL come to a country near you too. In my view this suggestion heralds the end game.