Tag Archives: European banks

The ECB’s Financial Suttee, by Alasdair Macleod

European banks are a strong contender in the contest to see which institution or institutions leads the world into a humongous financial crisis. From Alasdair Macleod at goldmoney.com:

he European Commission is failing. Its response to Brexit and the pandemic, where it is now threatening emergency powers in order to secure vaccines is a latest throw of the political dice. Even before this development markets were getting the message with capital flight worsening.

The only thing that holds the Commission together is the magic money tree that is the ECB.

Following the recent change in the Commission’s leadership, the political dysfunction in Brussels is a new challenge for the ECB. It is already juggling with overindebted member states, a global rise in bond yields, a rotten settlement system and commercial banks both over-leveraged and with mounting pandemic-related bad debts.

It really is a horror show in the making.

Introduction

This week, the ECB took the next step towards its inevitable destruction of itself, its system and its currency. This ending, a sort of financial suttee where it joins the failing EU Commission on it funeral pyre, is plainly inevitable, and will increasingly be seen to be so.

On 3 March, Bloomberg reported “European Central Bank policy makers are downplaying concerns over rising bond yields, suggesting they can manage the risk to the euro-area economy with verbal interventions including a pledge to accelerate bond-buying if needed.”

Then last week, the story changed: the ECB vowed that: “Based on a joint assessment of financing conditions and the inflation outlook, the Governing Council expects purchases under the PEPP over the next quarter to be conducted at a significantly higher pace than during the first months of this year”.[i]

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The rapidly failing EU, by Alasdair Macleod

Any honest mark-to-market accounting and loan-loss provisions for Europe’s major banks would sink the EU. From Alasdair Macleod at goldmoney.com:

It is not widely realised that the EU concept is on its last legs. The bureaucratic inefficiencies and bad leadership were fully exposed last week over the inability of the EU to distribute vaccines and the attempts to blame everyone else. But a larger problem is hidden in the euro structure, comprised of banking and TARGET2 settlement systems.

This article discusses the precarious financial position of the commercial banks and the gaming of the TARGET2 system by national regulators to hide bad debts. The bad debt situation is now set to deteriorate at a faster pace thanks to the economic consequences of coronavirus lockdowns and is not helped by lack of vaccines, which defers the return to economic normality.

It is no exaggeration to conclude that the failure of its settlement system will bring down the ECB and the national central banks. The ECB will be gone, and NCBs will reform to administer new national currencies — there can be no other outcome.

With the euro failure the European Commission is likely to cede power to national interests, heralding a new era of immense political uncertainty as new currencies and government financing arrangements are devised.

Introduction

At a political level there appears to be frightening levels of ignorance about the economic consequences of punishing Britain for Brexit at a time when the EU’s own economy is teetering on the edge of a financial crisis.

Last week Britain’s remaining Remainers were revealed by the extraordinary behaviour of the European Union to have been little more than tilting at windmills. Without consulting the Irish or the British, the Commission triggered Article 16 of the Trade and Cooperation Agreement, in effect putting a customs border between Ireland and Northern Ireland. This was in direct contravention of earlier promises to respect the Good Friday agreement by not doing so. It was at the EU’s insistence that no border should exist onshore, separating Northern Ireland from the rest of the UK for customs’ purposes.  Despite this breach of an agreement upon which the ink was barely dry, the British government managed to keep its cool and persuade the EU to reconsider and back down.

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The destruction of the euro, by Alasdair Macleod

The euro will be destroyed by debt and the idea that somebody besides the debtor countries must pay it. From Alasdair Macleod at goldmoney.com:

The Eurozone is bust. The deterioration of TARGET2 imbalances have been hardly noticed, but in recent months it has been alarming. Despite official denials over the years that it is a matter of concern, it is increasingly obvious that the national banks of Italy, Spain and other nations with increasing bad debts are hiding them within the TARGET2 system. The first wave of Covid-19, which is leading to bankruptcies throughout the Eurozone, is now being followed by a second wave, which will almost certainly take out a number of important banks, in which case the cross-border euro system will implode.

Introduction

If ever there was a political construct the unstated objective of which is to enslave its population, it is the European Union. Its opportunity stems from national governments which, with the exception of Germany and a few other northern states, had driven or were on the way to driving their failed states into the ground. The EU’s objectives were to support the policies of failure by corralling the accumulated wealth of the more successful nations to fund the failures in a socialistic doubling-down, and to accelerate the policies of failure to ensure that all power resides in the hands of statist looters in Brussels.

It is Ayn Rand’s vision of the socialising state as looter in action.[i] All of surviving big business is aligned with it: those who refused to play the game have disappeared. Senior executives with extensive lobbying budgets are no longer at the beck and call of contentious consumers and have hollowed out their smaller competitors. They have opted for the easier non-contentious life of seeking favours of the looters in Brussels, enjoying the champagne and foie gras, the partying with the movers and shakers, and the protection they bribe for their businesses.

It is a corrupt super-state that evolved out of American post-war policy — the child of the American Committee of United Europe. Funded and staffed by the CIA in 1948, the committee’s objectives were to ensure the European countries bought into a US-controlled NATO, in the name of stopping Stalin’s westwards expansion from the post-war boundaries. This was the official story, but it is notable how it formed a template for subsequent American control of other foreign states. It is the action of the jewel wasp that turns a cockroach into a zombie, so that its lava can subsequently feed off it.

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The anatomy of a financial crisis, by Tuomas Malinen

A run on banks starting in Europe is certainly a realistic candidate to accelerate the deepening financial crisis. From Tuomas Malinen at gnseconomics.com:

In this blog, we present the anatomy of a financial crisis. A characteristic feature of a banking crisis is that it tends to follow, more-or-less, the same path regardless of the ‘shock’ or ‘trigger’ that initiates it.

The next phase of the crisis is likely to be a global financial crisis, as we have been anticipating for quite some time (see, e.g., Q-Review 4/2017). However, few understand what a financial crisis is, though it is probably among the most feared economic phenomena of mankind.

So, let’s dive in.

The initiation

If a banking system is sound and robust, it can usually withstand financial and economic shocks.

But a banking system may be fragile. Usually this is due to high leverage levels, where banks have either lent aggressively or carry risky financial investments on their balance sheets—usually both. Banks can also have a weak financial position, with chronically low profitability and insufficient reserves. As we have explained earlier, this is exactly the state the European banking sector finds itself in.

The onset of a financial crisis requires a trigger. The most common is a recession or the expectation of recession among consumers and investors.

Recession leads to diminished income and defaults by both corporations and households. This increases the share of non-performing loans in bank loan portfolios, reducing the value of loan collateral and increasing bank risks and capital needs. As write-downs and losses increase, mistrust among other banks and depositors and investors does as well. The bank’s share price will usually start to reflect this.

A ‘bank run’

If suspicion spreads, banks will be apprehensive about counterparty risk and will be unwilling to lend to one another even on an overnight basis.  If allowed to continue, this will have a calamitous impact on liquidity in money markets.

In the worst case, possibly fueled by rumors and insider information, a ‘bank run’ will ensue, where depositors try to withdraw their money suddenly and simultaneously.  In years past, depositors would queue outside of bank offices to obtain cash.  Now withdrawals are largely electronic.

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Inspired by Deutsche Bank Death Spiral, European Banks Sink to Dec 24, 2018 Level – First Seen in 1995, by Wolf Richter

The European banking system is in the kind of trouble that could presage a global financial crisis. From Wolf Richter at wolfstreet.com:

The benefit of NIRP: There’s hell to pay – even the ECB admits it.

European bank shares – which have been getting crushed and re-crushed for 12 years – are getting re-crushed again. On Friday, the Stoxx 600 Banks index, which covers major European banks, including our hero Deutsche Bank, dropped to an intraday low of 130.5 and closed at 131.2, thereby revisiting the dismal depth of December 24, 2018 (130.8).

European banks did not soar on the first trading day after Christmas, unlike other stocks. Instead they fell further and hit their multi-year low on December 27 (129). The index is down 21.5% from a year ago and 33% from January 2018:

The notable thing about European bank stocks is just how brutally they’ve gotten crushed and re-crushed since May 2007, when, after a blistering bubble run-up, the Stoxx 600 bank index topped out at 534, having quadrupled in the 12 years from October 1995, during the euro bubble when only the sky was still the limit.

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Deutsche Bank Death Spiral Hits Historic Low. European Banks Get Re-Hammered, by Wolf Richter

European banks are certainly a strong candidate to kick off the next financial crisis. From Wolf Richter at wolfstreet.com:

Just bumping along the bottom, from hopeless to hope and back to hopeless.

The amazing thing with Deutsche Bank shares is this: Since 2007, so for 12 years, bottom fishers have been routinely taken out the back and shot, every time, with relentless regularity – as have big institutional investors, from Chinese conglomerates to state-owned wealth funds, that thought they were picking the bottom. A similar concept applies to European banks in general. May 2007 was the high point. And it has been brutal ever since – 12 years of misery.

Deutsche Bank shares dropped another 2.9% on Monday in Frankfurt, and closed at a new historic low of €6.64 after hitting €6.61 intraday. This time, the blame was put on UBS analysts that finally stamped “sell” on the stock, replacing their “neutral” rating. Deutsche Bank’s market cap is now down to just €13.8 billion. Shares have plunged 39% over the past 12 months and 60% since January 2018 (data via Investing.com):

The bank has been subject to years of revelations of shenanigans that span the palette. Once a conservative bank that primarily served its German business clientele in Germany and overseas, it decided to turn itself into a Wall Street high-flyer that caused its shares to skyrocket until May 2007, when it got tangled up in the Financial Crisis that then led to a slew of apparently never-ending hair-raising revelations, settlements with regulators, and huge fines.

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When Deutsche Bank’s Crisis Becomes Our Crisis, by Christopher Whalen

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.

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Can the EU Survive the Next Financial Crisis? by Alasdair Macleod

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.

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Is Turkey “City Zero” in Global Contagion, by Tom Luongo

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.

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The Eurozone Is in a Danger Zone, by Alasdair Macleod

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.

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