We certainly can’t rule out the European banking system as the catalyst for the next cataclysmic financial crisis. From Christopher Whalen at theamericanconservative.com:
Our friends in Europe seem totally incapable of addressing their failing financial sector. And that’s not good for anyone.
Americans generally think of Europe first as a wonderful place to visit. They rarely ponder the economic and financial ties between the United States and European Union, but in fact these ties are extensive and significant to the stability of both economies. One area of particular connection involves the large banks and companies that provide services on both sides of the Atlantic. It is this area of commercial finance that risks are actually growing to the United States—in large part due to political gridlock in Europe stemming from the 2008 financial crisis.
Credit market professionals have been aware of problems among the European banks for many years. Their lack of profitability, combined with high credit losses and a lack of transparency have created a minefield for global investors going back decades. Whereas the United States has a bankruptcy court system to protect investors, in Europe the process of resolving insolvency is an opaque muddle that leans heavily in favor of corporate debtors and their political sponsors.
When we talk about true mediocrity among European banks, one of the leading example are, surprisingly, German institutions. Germany, after all, has a reputation for being the economic leader of Europe and a global industrial power, thus the continued failures in the financial sector are truly remarkable.
The biggest example, Deutsche Bank, Germany’s largest bank, has had problems with capital and profitability going back decades. But Deutsche Banks’s problems are not unique. What is troubling and indeed significant for American policy makers, however, is the nearly complete failure of our friends in Europe to address their banking sector, either in terms of cleaning up bad assets or raising capital to enable the cleanup.
The short answer to the question in the title is no. Alasdair Macleod explains why. From Macleod at mises.org:
Despite the ECB’s subsidy of the Eurozone’s banking system, it remains in a sleepwalking state similar to the non-financial, non-crony-capitalist zombified economy. Gone are the heady days of investment banking. There is now a legacy of derivatives and regulators’ fines. Technology has made the over-extended branch network, typical of a European retail bank, a costly white elephant. The market for emptying bank buildings in the towns and villages throughout Europe must be dire, a source of under-provisioned losses. On top of this, the ECB’s interest rate policy has led to lending margins becoming paper-thin.
A negative deposit rate of 0.4% at the ECB has led to negative wholesale (Euribor) money market rates along the yield curve to at least 12 months. This has allowed French banks, for example, to fund Italian government bond positions, stripping out 33 basis points on a “riskless” one-year bond. It’s the peak of collapsed lending margins when even the hare-brained can see the risk is greater than the reward, whatever the regulator says. The entire yield curve is considerably lower than Italian risk implies it should be, given its existing debt obligations, with 10-year Italian government bonds yielding only 2.55%. That’s less than equivalent US Treasuries, the global risk-free standard.
Government bond yields have been and remain considerably reduced through the ECB’s interest rate suppression and its bond-buying programs. The expansion of Eurozone government debt since the Lehman crisis has been about 50% to €9.69 trillion. This expansion, representing €3.1 trillion, compares with the expansion of the Eurosystem’s own balance sheet of €2.8 trillion since 2009. In other words, the expansion of Eurozone government debt has been nearly matched by the ECB’s monetary creation.
Bond prices, such as that of Italian 10-year debt yielding 2.55%, are therefore meaningless in the market sense. This has not been much of an issue so long as asset prices are rising and the global economy is expanding, because monetary inflation will keep the fiat bubble expanding. It is when a credit crisis materializes that the trouble starts. The fiat bubble develops leaks and eventually implodes.
The world is so mired in debt that virtually anything can ignite a crisis. From Tom Luongo at tomluongo.me:
Last year Turkey’s lira crisis quickly morphed into a Euro-zone crisis as Italian bond yields blew higher and the euro quickly reversed off a major Q1 high near $1.25.
It nearly sparked a global emerging market meltdown and subsequent melt-up in the dollar.
This week President Erdogan of Turkey banned international short-selling of the Turkish lira in response to the Federal Reserve’s complete reversal of monetary policy from its last rate hike in December.
The markets responded to the Fed with a swift and deepening of the U.S. yield curve inversion. Dollar illiquidity is unfolding right in front of our eyes.
Turkish credit spreads, CDS rates and Turkey’s foreign exchange reserves all put under massive pressure. Unprecedented moves in were seen as the need for dollars has seized up the short end of the U.S. paper market.
Martin Armstrong talked about this yesterday:
The government [Turkey] simply trapped investors and refuses to allow transactions out of the Turkish lira. Turkey’s stand-off with investors has unnerved traders globally, pushing the world ever closer to a major FINANCIAL PANIC come this May 2019.
There is a major liquidity crisis brewing that could pop in May 2019.
Martin’s timing models all point to May as a major turning point. And the most obvious thing occurring in May is the European Parliamentary elections which should see Euroskeptics take between 30% and 35% of seats, depending on whether Britain stands for EU elections or not.
ECB liquidity has kept the European economy and European government bond markets afloat. What happens when the ECB tightens the spigot? From Alasdair Macleod at mises.org:
It is easy to conclude the EU, and the Eurozone in particular, is a financial and systemic time-bomb waiting to happen. Most commentary has focused on problems that are routinely patched over, such as Greece, Italy, or the impending rescue of Deutsche Bank. This is a mistake. The European Central Bank and the EU machine are adept in dealing with issues of this sort, mostly by brazening them out, while buying everything off. As Mario Draghi famously said, “whatever it takes.”
There is a precondition for this legerdemain to work. Money must continue to flow into the financial system faster than the demand for it expands, because the maintenance of asset values is the key. And the ECB has done just that, with negative deposit rates and its €2.5 trillion asset purchase program. But that program ends this month, making it the likely turning point, whereby it all starts to go wrong.
Most of the ECB’s money has been spent on government bonds for a secondary reason, and that is to ensure Eurozone governments remain in the euro system. Profligate politicians in the Mediterranean nations are soon disabused of their desires to return to their old currencies. Just imagine the interest rates the Italians would have to pay in lira on their €2.85 trillion of government debt, given a private sector GDP tax base of only €840 billion, just one third of that government debt.
Posted in banking, Business, Collapse, Currencies, Debt, Governments, Politics
Tagged central bank policies, ECB, European banks, Mario Draghi, Target2
The unremitting downtrend in European bank stocks is not a good sign for the global economy or financial markets. From Wolf Richter at wolfstreet.com:
Bottom fishers were taken out the back and shot.
It just doesn’t let up with Deutsche Bank — or with European banks in general. A new day, a new scandal, a new historic low in the share price that has been in a death-spiral for over 10 years. Deutsche Bank shares plunged 7% today in Frankfurt, to a new historic low of €7.00, after briefly threatening to close at an ignominious €6.99. Its market cap is now down to just €14 billion. The stock has plunged 56% so far this year:
The European Commission — the executive branch of the EU — after nearly three years of investigating this, announced today that is suspects four unnamed banks of colluding to manipulate the vast market for US-dollar-denominated government-backed bonds between 2009 and 2015.
Europe is on edge, trying to figure out what the crazies in Washington are going to do next. From Tyler Durden at zerohedge.com:
Nearly five years after the Crimean crisis and subsequent western sanctions on Russia, Europe is increasingly “losing the appetite for punishing actions against Moscow,” writes Bloomberg in a new report suggesting investors are impatiently waiting for clarity on Russia as its economy enters bunker mode. Even willing European companies are now “starved of financing” on the mere threat of more punitive measures to come.
However, it’s precisely the psychological uncertainty of more looming US sanctions as lawmakers make continued threats over accusations of Russian meddling in the 2016 presidential elections that’s part of Washington’s arsenal. And when sanctions are handed down, it’s further the cloudy ambiguity in terms of what’s targeted when that produces a chilling effect: “The most effective sanctions are the ones that aren’t entirely clear, because the lack of clarity has a chilling effect on investment,” Frank Schauff, chief executive officer of the Association of European Businesses in Russia, told Bloomberg. He cited one sanctions law passed by Congress last year that has absurdly confusing language saying particular actions “will be in place for a long, long time.”
Posted in banking, Business, Foreign Policy, Geopolitics, Governments, Law, Politics, Trade
Tagged European banks, President Trump, Russia, Sanctions
Will Italy face off with the European Union? From Tom Luongo at tomluongo.me:
Deputy Prime Minister Matteo Salvini just declared himself the leader of the Europe’s future. He refuses to budge one inch in negotiations with the European Union over Italy’s budget now threatening to take down the government.
And in doing this he not only speaks for Italians, he is now speaking for that growing part of the European population who sees what the EU is morphing into and recoiling in horror.
Protests in France over Emmanuel Macron’s new tax on diesel have turned violent. The British leadership has completely betrayed the people over Brexit. They may win this battle but the animosity towards the Britain’s leadership will only grow more virulent over time.
As the core leadership in France and Germany fades in popularity, held in place because of domestic political squabbling, Angela Merkel and Macron are ratcheting up the rhetoric against the rising nationalism Salvini represents and are now pushing hard for their Federation of Europe before both of them leave the scene in the next few years, at best.
If they lose their battles with Salvini and Hungary’s Viktor Orban they may be run out of office with pitchforks and firebrands.
Posted in banking, Currencies, Debt, Economy, Geopolitics, Governments, Politics
Tagged EU, European banks, Germany, interest rates, Italy