Category Archives: banking

How Corporate Zombies Are Threatening The Eurozone Economy, by Tyler Durden

Part of capitlism’s survival of the fittest is allowing the unfit to die. Precisely what Europe has not done since the last financial crisis. From Tyler Durden at zerohedge.com:

The recovery in Eurozone growth has become part of the synchronised global growth narrative that most investors are relying on to deliver further gains in equities as we head into 2018. However, the “Zombification” of a chunk of the Eurozone’s corporate sector is not only a major unaddressed structural problem, but it’s getting worse, especially in…you guessed it…Italy and Spain. According to the WSJ.

 The Bank for International Settlements, the Basel-based central bank for central banks, defines a zombie as any firm which is at least 10 years old, publicly traded and has interest expenses that exceed the company’s earnings before interest and taxes. Other organizations use different criteria. About 10% of the companies in six eurozone countries, including France, Germany, Italy and Spain are zombies, according to the central bank’s latest data. The percentage is up sharply from 5.5% in 2007. In Italy and Spain, the percentage of zombie companies has tripled since 2007, the Organization for Economic Cooperation and Development estimated in January. Italy’s zombies employed about 10% of all workers and gobbled up nearly 20% of all the capital invested in 2013, the latest year for which figures are available.

The WSJ explains how the ECB’s negative interest rate policy and corporate bond buying are  keeping a chunk of the corporate sector, especially in southern Europe on life support. In some cases, even the life support of low rates and debt restructuring is not preventing further deterioration in their metrics. These are the true “Zombie” companies who will probably never come back from being “undead”, i.e. technically dead but still animate. Belatedly, there is some realisation of the risks.

Economists and central bankers say zombies undercut prices charged by healthier competitors, create artificial barriers to entry and prevent the flushing out of weak companies and bad loans that typically happens after downturns. Now that the European economy is in growth mode, those zombies and their related debt problems could become a drag on the entire continent.

“The zombification of the corporate sector and banks (is) a risk for future living standards,” Klaas Knot, a European Central Bank governor and the head of the Dutch central bank, said in an interview.

In some ways, zombie firms are an unintended side effect of years of easy money from the ECB, which rolled out aggressive stimulus policies, including negative interest rates, to support lending and growth. Those policies have been sharply criticized in some richer eurozone countries for making it easier for banks to keep struggling corporate borrowers alive.

To continue reading: How Corporate Zombies Are Threatening The Eurozone Economy

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Bank Deposits No Longer Off Limits as ECB Seeks Power to Freeze, by John Glover and Alexander Weber

Here’s the camel’s nose under the tent. In the next financial crisis you can be sure that bank’s will be unable to pay all of their liabilities. Customer deposits are liabilities, and bank runs start when people get nervous about their bank. Here’s the Catch-22, governments would be given the authority to freeze deposit withdrawals, but only at banks that are failing or likely to fail. In other words, as soon as the government freezes deposits, depositors will know the bank has one foot in the grave. That should calm them down. From John Glover and Alexander Weber at bloomberg.com:

  • Working paper retains power to stop payments of failing firms
  • Payments stay to affect derivative payments for up to 5 days
An illuminated euro currency symbol is projected on to the European Central Bank (ECB) headquarters in Frankfurt.Photographer: Martin Leissl/Bloomberg

The European Central Bank intensified its push for a tool that would hand authorities the power to stop deposit withdrawals when a bank is on the verge of failing.

ECB executive board member Sabine Lautenschlaeger said that bank resolution cases this year showed that a so-called moratorium tool, which would temporarily freeze a bank’s liabilities to buy time for crucial decisions, is needed. Her comment comes as policy makers in Brussels debate how such measures should be designed, and just days after the ECB officially called for the moratorium to extend to deposits as well.

Sabine Lautenschlaeger

Photographer: Krisztian Bocsi/Bloomberg

“If we have a long list of exemptions and we have a moratorium that doesn’t work, I do not want to have a moratorium tool,” Lautenschlaeger told a conference in Frankfurt on Tuesday. “Then you will never use it.”

EU member states appear ready to heed the request, according to a Nov. 6 paper that develops their stance on a bank-failure bill proposed by the European Commission. They suggest giving authorities the power to cap deposit withdrawals as part of a stay on payments only after an institution has been declared “failing or likely to fail.”
The power to install a moratorium “can in principle apply to eligible deposits,” the paper reads. “However, resolution authority should carefully assess the opportunity to extend the suspension also to covered deposits, especially covered deposits held by natural persons and micro, small and medium sized enterprises, in case application of suspension on such deposits would severely disrupt the functioning of financial markets.”

Class Warfare: People Are Out For Blood, by Simon Black

We live in an age of envy that doesn’t distinguish between rightfully acquired fortune and those which were stolen or swindled (usually with the assistance of the government). From Simon Black at sovereignman.com:

Roughly two thousand years ago, the government of ancient Rome was facing a serious problem.

The tributium capitus, or poll tax, that they had imposed across their provinces was becoming unpopular.

And there was among a growing minority of Roman subjects who felt they were being forced to pay an unfair, overly burdensome, disproportionately high tax bill.

Things got so bad that there were small revolts, especially in one of Rome’s critical eastern provinces where many simply refused to pay.

Eventually the authorities were able to round up the leader of the movement– a youthful, charismatic local artisan who was brought before the provincial prefecture.

After reviewing the evidence, though, the prefecture found that the leader had actually done nothing illegal, and according to ancient texts, announced to the public:

“I have examined him in your presence and have found no basis for your charges against him. . .”

But the crowd was out for blood. They wanted the resistance leader put down for good, viewing him as arrogant and disrespectful of their values.

Plus the central government in Rome wanted to send a strong message to strike fear in everyone subverting their authority and not paying tax.

So in the end the prefecture bowed to pressure, and the resistance leader was sentenced to death.

His name was Jesus Christ.

Two thousand years later there seems to be a lot of people out for blood again.

Over the weekend we witnessed the release of the “Paradise Papers,” another gigantic leak of financial records (similar to last year’s “Panama Papers”) which shows how clients of a Bermuda law firm have legally used foreign corporate and trust structures for privacy and tax mitigation.

Among the names unearthed so far are Madonna, U2’s Bono, actress Keira Knightly, Formula 1 star Lewis Hamilton, Queen Elizabeth II, and US Commerce Secretary Wilbur Ross.

And the public is outraged.

The basis of this outrage is that rich and powerful people are ‘hiding’ trillions of dollars in offshore tax havens, places like Switzerland and the Cayman Islands.

 

To continue reading: Class Warfare: People Are Out For Blood

How US Debt Slaves Get Trapped by “Deferred Interest”, by Wolf Richter

Read the fine print on those “great deals” retailers offer to get you to sign up for their credit cards. From Wolf Richter at wolfstreet.com:

But over the next 2 months, they’ll try to prop up US retailers and the entire global economy.

Credit cards play a huge role in what the US retail industry hopes will be a $682-billion splurge by Americans over the holiday selling season. Already, total revolving consumer credit outstanding – mostly credit cards – has reached $1 trillion, up 5.4% from a year ago, and will surge over the next two months, as US consumers try to prop up the global economy by going deeper into debt.

So the consumer finance industry is proffering its services via store-branded credit cards to make this happen. It’s not doing this for the love of the US economy but to extract its pound of flesh from consumers who don’t make enough money to pay off their credit card balances every month – the very debt slaves that carry the $1 trillion on their backs – and who don’t read the fine print. For them, the finance industry has a special money extraction tool: “deferred interest.”

When consumers are at the cashier or online, they may get offers of 0%-financing and a discount on the first purchase if they sign up for a store-branded credit card on the spot. A study by WalletHub of the financing options offered online by 75 large US retailers found that all retailers that offer store-branded cards with 0% financing use “deferred interest” clauses:

Deferred-interest financing is like a wolf in a sheep’s clothing, pairing an enticing offer – something like “no interest if paid in full” or “special financing” – with a clause that allows the deal to turn ugly if you make the slightest mistake. Paying your bill a day late or owing even $1 when the promotional period ends would enable the issuer to retroactively apply finance charges to your entire original purchase amount, as if the intro rate never existed.

These “deferred interest” clauses are “commonly found in the fine print of retailer payment plans,” it says. They’re easily overlooked in the heat of the checkout battle. But they specify that high interest rates – up to 29.99% among the credit cards studied – may be applied retroactively to the full purchase amount back to the purchase date if one of these two common things happens:

  • Customer misses a monthly payment, or
  • Customer doesn’t repay the full balance within the 0% intro period.

 

 

To continue reading: How US Debt Slaves Get Trapped by “Deferred Interest”

Stabbing With Their Steely Knives, They Just Can’t Kill the Beast, by Doug “Uncola” Lynn

Saving the best for last. From the always interesting Doug “Uncola” Lynn at theburningplatform.com:

 You were blameless in your ways from the day you were created till wickedness was found in you. Through your widespread trade you were filled with violence, and you sinned. So I drove you in disgrace from the mount of God, and I expelled you, guardian cherub, from among the fiery stones. Your heart became proud on account of your beauty, and you corrupted your wisdom because of your splendor…

– Ezekiel 28: 15-17

In horror stories originating from the times of the first songs there have always been common enemies.  Creatures of sinister intelligence, blind violence, disingenuity, clever crafters of schemes, or often containing the capacity for all of these; lurking in the dark, or hidden in plain sight, but always waiting and watching.  Little Red Riding Hood and the Three Little Pigs suffered through the antics of wily wolves. Rapunzel and Hansel and Gretel agonized before the wicked wills of warted witches; and with Jack of Beanstalk fame it was jeering giants who longed to grind his bones for bread, alive or dead.  Star Wars had Darth Vader and the Lords of the Sith, whereas it was the evil eye of Sauron that ruled over J.R.R Tolkien’s shadowy land of Mordor.  And for most of the world’s religions today it remains Lucifer, the morning star, who fell from heaven by the weight of a prideful heart and now reigns as the Prince and Power of the Air; tempting, taunting, and tantalizing, all of mankind.

In every story, there are heroes and villains introduced and funneled into the friction of rising action that results in a climax followed by the falling action which precedes any resolution.  Also known as the Five Elements of a Plot, these components are the sine qua non of universal story telling across any genre or medium.

To continue reading: Stabbing With Their Steely Knives, They Just Can’t Kill the Beast

He Said That? 10/26/17

From J. Edgar Hoover (1895–1972) was the first Director of the Federal Bureau of Investigation (FBI) of the United States, appointed director of the Bureau of Investigation—predecessor to the FBI—in 1924. He was instrumental in founding the FBI in 1935, where he remained director until his death in 1972 at the age of 77. News summaries, April 7, 1955:

Banks are an almost irresistible attraction for that element of our society which seeks unearned money.

Does that include the bankers?

Catalonia’s Political Crisis Snowballs into an Economic Crisis, by Don Quijones

A Catalonian separation from Spain would be economically detrimental to both sides. From Don Quijones at wolfstreet.com:

Independence would be “horrific” and amount to “financial suicide,” said Spain’s Economy Minister. But financial suicide for whom?

It’s not easy being a Catalan bank these days. In the last few weeks the region’s two biggest lenders, Caixabank and Sabadell, have lost €9 billion of deposits as panicked customers in Catalonia have moved their money elsewhere. Many customers in other parts of Spain have also yanked their savings out of Catalan banks, but less out of fear than out of anger at the banks’ Catalan roots.

Moving their official company address to other parts of Spain last week may have helped ease that resentment, allowing the two banks to recoup some €2 billion of deposits. But the move has angered the roughly 2.5 million pro-independence supporters in Catalonia, many of whom have accounts at one of the two banks. Today they expressed that anger by withdrawing cash en masse.

Many protesters made symbolic withdrawals of €155 — a reference to Article 155 of the Spanish constitution, which Madrid activated today to impose direct rule over the semi-autonomous region. Others opted for €1,714 in a nod to the year 1714, when Barcelona was captured by the troops of King Felipe V, who then proceeded to suppress the rights of rebellious regions.

Some bank customers withdrew a lot more than that. The council of Argentona, a small town outside Barcelona, closed its accounts at Caixabank and Sabadell and transferred all €2.25 million of its funds to a branch of the Dutch lender Triodos. If other institutional or business customers follow Argentona’s example, Caixabank and Sabadell could have a big problem on their hands.

The fallout of political instability in Catalonia is being felt across the whole economy. Real estate investment in the region, both domestic and foreign, is drying up. Starwood European Real Estate Finance, the European subsidiary of the U.S. property giant Starwood Capital, has announced that it’s shifting its focus away not only from Catalonia but Spain as a whole, and toward more stable European markets.

It’s not just investments that have been put on hold. People are not spending much either. Important consumer purchases have been put on hold until some semblance of stability returns, and people are not going out as much as before. Based on my own observations, the bars are emptier and the streets are quieter.

To continue reading: Catalonia’s Political Crisis Snowballs into an Economic Crisis