Revealing news this today – According to Frankfurter Allgemeine Credit Default Swaps for many of Europe’s biggest banks shot up yesterday. And what is most interesting is which banks fared worst: the big two in Spain, BBVA and Santander and in Germany, Commerzbank.
Why should CDS costs shoot up yesterday? Well yesterday was, as I noted in the last post, the day the European Commission was busy talking about how, in future, Bond holders might be expected to share some of the losses in any default or insolvency. No sooner has the suggestion been made that bond holders might not be sacrosanct and might have to share in the actual fate and loss of the banks from whose debts they have been drawing a profit and suddenly the cost of insuring those debts shoots up. And to add to the bond holders shock and outrage, this morning in an editorial the FT itself was arguing for unmasking the false religion of holding Senior bond holders as graven gods and making them pay too.
Makes you wonder if the bond holders knew all along that the banks were not as sound as they claimed but had hitherto not cared because they were confident that they were never going to share in any debacle and could therefore enjoy buying up bonds and reaping the profits from them risk free. Risk free until yesterday that is.
Overnight the banks which had seemed imperturbable, banks which the bond market and CDS traders seemed totally confident of, are all of a sudden being called in to question.
All last year I muttered darkly about BBVA, Santander and Commerzbank and looked foolish for doing so. I and others felt all could not be as well with them as they markets and bond buyers seemed to indicate they were. Despite their share prices holding up I and others were convinced these banks had to be sitting on large as yet undeclared losses. The Spanish banks from still unmarked losses of about 85 billion euros according to Moodys, on the Spanish property bubble and stupid loans to now bankrupt developers and at Commerzbank, exposure to bad loans in the East and possibly lots of American CDOs. Commerzbank has been in trouble so many times it should have an ASBO (For non Brits an ASBO is an Anti Social Behaviour Order – a kind of restraining order on persistent offenders)
Of course what has really had new doubt cast upon it, is not the banks directly, but the profitability of buying their debt. Until now the bond holders were supremely confident of being untouchable and so the bank’s debt and insuring that debt was stable. Because the debt was stable so was the share price. Now the entire confidence trick has been shaken. And suddenly there they are, the three banks whose health seemed so inexplicable, suddenly having their CDS costs pop out.
It tells me that there were indeed fundamental reasons for doubting the soundness of those banks but that as long as it was felt that the Bond holders were going to be absolutely protected by their home nations then no one worried about those fundamental problems. Such problems it seemed to have been agreed were destined to be the tax payers problem.
But as soon as it is even hinted that those problems might cost the bond holders as well, the true state of concern over Europe’s big banks starts to surface. So far Santander, BBVA and Commerzbank. I wonder how long it will take before UniCredit joins them?
There is no reason or room for doubt with respect to the financial health of the banks.
For as long as the major global banks are allowed to disregard mark-to-market accounting rules that apply to everyone else, then you know the banks are not solvent. And for as long as the US$ is the global reserve currency and the Fed maintains swap lines, then you know that European banks too are insolvent.
This is the objective empirical truth. Everything else; all announcements, all new regulations, all newly hired CEOs, all those people that are fired for negligence, all new fangled financial instruments… that is all fluff.
If, despite the astronomical bonuses the banks have been paying out in the past three years, the SEC and the Fed still allow said banks to disregard those accounting rules that apply to everyone else, then you know the banks are insolvent.
There is no room for doubt.
It is only a matter of how long the authorities can keep the gig going.
But, as some of us suspect, this is the end of this iteration of the monetary system, then before social unrest brought about by the break down of society and social institutions morphs in open revolution, our "leaders" will plunge us in a world war.
A bon entendeur.
Morning Guido,
I agree with you entirely about the true state of our banks. And I agree it isn't really a matter of conflicting opinions, they are objectively insolvent. Just take away government supports and they would blow away like bad smells.
All I'm pointing out, I suppose, is that we may now have a reliable metric for assessing the relative peril of one bank versus another. If the bond holders really think they might have to share the pain then borrowing costs and CDS costs will start to reflect those real risks in a way they have not till now, because of government guarantees and assurances that the bond holders would never be touched.
I think we will now start to get, courtesy of the bond holders, our first glimpse of the real state of the banks.
I'll also be interested to see what happens to the Spanish and Italian bond auctions.
"I think we will now start to get, courtesy of the bond holders, our first glimpse of the real state of the banks."
Stupid question: Is this because the bond holders/buyers are privy to information not available to the general public?
Hello Myopia,
Not a stupid question at all. The Bond buyers no doubt have far better information than we do. But what I really meant was not that they suddenly had more or better information than they had previously, but that they now had a reason to act upon the information they already had about the real state of the banks and therefore the real risks of default.
The actions of the bond holders, IF they now believe they may not be protected from losses – which is a very big IF – but if they come to think that, then they will price the risk of insolvency and default, realistically for the first time in two years.
For the last two years the risk associated with bond buying was disconnected from the state of the banks whose bonds they were buying. The risk was simply to do with the believability of a Nation's promise to save the bond holders at all cost.
Once that promise is perceived to have been withdrawn then the relevant risk of buying bonds reverts to what it should be – the state of the institution whose bonds you are buying.
Sorry if I am not being clear about this.
Ah OK thanks. So basically the situation up to now has been moral hazard on steroids and the politicians are looking at removing some of the steroids 🙂
Yes, but you can never trust junkies to keep their word.
From Zero Hedge
""Successful" Portugal Bond Auction Cost To ECB: €1 Billion In Two Days"
http://www.zerohedge.com/article/successful-portugal-bond-auction-cost-ecb-%E2%82%AC1-billion-two-days