Tuesday, February 23, 2016

Move Over Greece, It's Italy's Turn......Sounding the Alarm on a European Banking Crisis

Move Over Greece, It's Italy's Turn......Sounding the Alarm on a European Banking Crisis

Greece was not an outlier. It was a forerunner, and a lot of the battles that were fought in Greece were precursors to a much larger one, which is now occurring in 

The Italians have non-performing loans at 17% officially—that's a very flexible number and you can go up or down—but since most of the non-performing loans are corporate loans, we'll say that about a quarter of the assets of banks are at risk and it's the largest ones that are most at risk.

And that makes perfect sense because Europe has been in a massive recession; the Italians have been constrained in putting stimulus into their economy and southern Italy has 20-22% unemployment, which is catastrophic. So something had to give and what is beginning to give is the numbers are starting to be published.

We are now at the next phase of this as it becomes clear that there's this massive problems with these banks and depositors are pulling their money out. And in pulling their money out, they contract the asset base, they force them to have higher reserves, banks cut back on lending and it becomes a nasty spiral.

Now the question has become, how safe are deposits in Italian banks? And the European Union came out with a very interesting claim, which basically categorized depositors as investors. That's wild because you put your money into a bank because you don't want to make an investment in the stock market or cattle or whatever—it's supposed to be safe.

And the Europeans had this concept of not bail-outs but bail-ins. And with bail-ins they basically said that the depositors and investors in the bank deal with the problem. That's what happened in Cyprus.

In Cyprus if you remember, they had a bad problem, and what they did was they seized the deposits of all depositors above 100,000 euros. For a week or so they seized everybody and they returned some, but everybody over 100,000 euros took a haircut. That means retirees, that means the hotels in Cyprus couldn't pay salaries… And the Europeans, basically the Germans, said, 'we are not going to help you—you are going to have to do it yourself' and it caused a catastrophe.

Now, if you do the same thing to Italy, you are going to massively undermine the European economies and the banking system because Italy constitutes 11% of the GDP of Europe—it's the fourth largest economy in Europe, 8th in the world. This is a massive economy. And there is no bank in Europe not exposed to Italian paper.

So the Europeans are desperately trying to find a way to bail out the banks without bailing out the banks. The Germans are absolutely opposed to any sort of plan that requires German money to guarantee these loans. They also are opposed to the ECB printing money doing a TARP so-to-speak.

So you have Germany holding the line against any help for the Italian banks, the Italian government getting permission from Brussels—it didn't have the right—to create some sort of deposit guarantee program, and you've got this horrific fight between Renzi who is looking at his banking system coming apart. You also have other European bankers who say we must have some sort of intervention here and the Germans who are holding tight—they are trying to create another Cyprus, because even mighty Germany can't put this Humpty Dumpty back together again.

So we are heading…to a political showdown that could tear the EU apart, and the global economy won't be far behind.  Spain should be next.

Stepping back a bit, here's a key question: What caused the depositors to flee their banks in the first place?

The answer is fear of bail-ins, confiscations, capital controls, and bank failures like we have seen in Greece and Cyprus.

Money continues to pour out of Italian and Spanish banks for safer havens. 

A huge amount of money went into French banks instead of German banks. 

The following table shows the winners and losers.

Target2 Imbalances in Billions of Euros
CountrySymbolDec Target2 BalanceNov Target2 BalanceMonth-Over-Month ChangeComment
SpainES-254.1-241.8-12.3Highest Since 2012
ItalyIT-248.9-229.6-19.3Highest Ever
GreeceGR-94.4-97.32.9Lowest Since 2014 Q4
ECBECB-83.8-73.8-10Highest Ever
FranceFR-29.2-73.544.3Remarkable Comeback
GermanyDE584.2592.5-8.3Second Highest Since 2012
LuxembourgLU147.6140.47.2Highest Ever
NetherlandsNL54.749.45.3Highest Since 2002
FinlandFI20.131.8-11.7Lowest Since 2014 Q4
CyprusCY2.42.40Second Highest Ever

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