Europe’s
Tottering Banks are
by Pater
Tenebrarum
Reuters reports that 'Europe prepares to come clean on hidden bank losses'. Prepares to come clean? You
mean, they haven't come clean yet? And what 'hidden losses'? Readers may recall
the farcical 'stress tests' by the European Banking Authority over the past few
years, which evidently failed to uncover what the true state of the banking
system was. We still recall that Dexia was given a clean bill of health as one
of the 'best capitalized banks in Europe' a mere three months before it failed
and had to be bailed out.
In addition, keep in mind that
commercial banks in places like Spain and Italy have loaded up big time on the
debt issued by their governments, so that the often invoked 'breaking of the
nexus between banks and their sovereigns' has definitely not happened. The
exact opposite has in fact occurred. Meanwhile, there seem to be a great many
toxic assets still rotting in the closets where the skeletons are habitually
kept. The Reuters report highlights what a gigantic farce this still is by
noting that 'nobody knows how big the losses are':
“Euro zone countries will consider on Monday how
to pay for the repair of their broken banks after health checks next year that
are expected to uncover problems that have festered since the financial crisis.
Nobody knows the true scale of potential losses at
Europe's banks, but the International Monetary Fund hinted at the enormity of
the problem this month, saying that Spanish and Italian banks face 230 billion
euros ($310 billion) of losses alone on credit to companies in the next two
years.
Yet five years after the United States demanded its big banks take on new
capital to reassure investors, Europe is still struggling to impose order on
its financial system, having given emergency aid to five countries. Finance
ministers from the 17-nation currency area meeting in Luxembourg will tackle
the issue of plugging holes expected to be revealed by the European Central
Bank's health checks next year.
The president of the European Central Bank underscored the need for action
in Washington at the meetings of the International Monetary Fund and the World
Bank.
"The effectiveness of this exercise will
depend on the availability of necessary arrangements for recapitalizing banks …
including through the provision of a public backstop," Mario Draghi said
on Friday. "These arrangements must be in place before we conclude our
assessment," he said.
But the ministers' talks face an additional hindrance because Germany's
finance minister, Wolfgang Schaeuble, is not expected to attend the two-day
Luxembourg meeting. Germany, Europe's biggest economy, in talks to form a new
government.
During the region's debt turmoil, the European
Union conducted two bank stress tests, considered flops for blunders such as
giving a clean bill of health to Irish banks months before they pushed the
country to the brink of bankruptcy.”
(emphasis added)
So the bailout mechanisms will
be put into place before the ECB even looks underneath the first stone.
Brilliant. If there is a € 230 billion hole in the balance sheets of Spanish
and Italian banks alone per 'IMF estimate', then the losses across the entire
euro-zone must be absolutely staggering (keep in mind that such estimates as a
rule turn out to be hopelessly overoptimistic).
The markets have become fairly
unconcerned about euro-land banks of late, no doubt due to the recovery in
peripheral sovereign debt and the fact that current account deficits have
largely disappeared – which is obviating the need for foreign financing. Even
though the Euro-Stoxx Bank Index remains way below its old high just below the
500 level, it has recently convincingly overcome a strong short term resistance
level at 120:
Euro-Stoxx Bank index: moving above resistance.
Welcome to the
Barbershop?
The question is whether this
lack of concern is actually appropriate in view of the risks. Reuters
continues:
Before the ECB takes over as supervisor late
next year, it will conduct health checks of the roughly 130 banks under its
watch. This is the nub of the problem facing finance ministers at the two-day
talks.
With the euro zone barely out of recession, a
failure to put aside money to deal with the problems revealed could rattle
fragile investor confidence and compound borrowing difficulties for companies,
potentially killing off the meek recovery.
In turn, that raises the question about who pays for the holes that are
found in balance sheets in countries such as Spain and Italy. While Rome and
Madrid would like easy access to the euro zone's permanent bailout fund, the
European Stability Mechanism, Germany, Finland and other strong countries say
each country should pay for its own clean-ups.
This time around, the task of cleaning up banks
should not be quite as daunting as five years ago because shareholders,
bondholders and wealthy depositors can expect to take some of the losses, as
happened in the bailout of Cyprus in March. But if that is not enough, it will
fall to governments to pick up the tab.
Although technical, talks about banking union have sparked an acrimonious
debate touching on fundamental questions such as rewriting basic EU law that
risk dividing the European Union.”
(emphasis added)
Judging from the state of the
debate as of the Cyprus bailout, the new rule is that not only bondholders and
shareholders, but also large depositors of failing banks must expect
'haircuts'. Depending on how big such haircuts eventually become, they could
actually end up shrinking the euro area's money supply. Moreover, any bank that
comes under suspicion of hiding large losses must expect a run on its deposits.
All of this is actually as it
should be – and it is only possible because the interests of the paymasters are
not congruent with the interests of those hoping for bailouts. We don't expect
this principle to change, but on the other hand, the possibility that politicians
in the euro area might get cold feet and opt for bailouts instead of haircuts
cannot be ruled out. The trick will be in selling such a policy to the already
overburdened tax cows.
Political
Risks
Said tax cows have lately
become rather restless, as inter alia shown by the municipal
by-election that wasrecently won by Marine Le Pen's Front National in
France. If you read Mish's assessment which we have linked to, he is quite
correct when he states that the whole EU and euro project could easily be
derailed by political developments. Populist parties continue to gain support
amid euro-land's economic decline, to the point where they represent a real
threat to the EU.
We would add that Ms. Le Pen's
FN, although it has received a 'face-lift' to rid it of the more obviously
objectionable parts of its far-right image, still pursues an economic agenda
that closely resembles the autarkic economic program of the German national
socialists of yore. The FN is not just another version of UKIP, with its far
more libertarian streak. Although we sympathize with Ms. Le Pen's anti-Brussels
technocracy stance, her protectionist mercantilistic agenda is just as doomed
to failure as Mr. Hollande's milder version thereof (note that the differences
between socialist and national socialist economic programs are only of a
cosmetic nature; not surprisingly, the FN's gains have largely come at the
expense of the socialist party). In spite of the intellectual bankruptcy of
France's political mainstream, it is a bit disconcerting that the FN actually
leads in national polls at present. France's voters seem eager to “chasser
les démons par Belzébuth“, i.e., to replace one evil with an even
worse evil.
This brings us back to the
banks, which have incidentally become quite a popular target of Europe's
populist political parties. They are quite correct in objecting to bailouts of
course. The point we want to make is merely that any upcoming revelations of
additional large losses hidden at European banks have a political dimension
that could go well beyond the current 'banking union' related discussions.
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