Photo: Patrick Feller on Flickr
We’ve reported on various signs that funding problems in European banks could bring about economic disaster.But are things really as bad as they seem?
That’s unclear. FT Alphaville points out that cash assets of European banks held in U.S. branches diminished by 11% from June 30 to August when seasonally adjusted data is used (otherwise the drop is more pronounced). H8 data to be released later today could provide new insight in assessing whether this is due to funding problems.
But let’s consider two points here: 1) European banks — particularly in the periphery — have huge exposure to the PIIGS, and 2) The equity flowing out of banks right now does not help the situation.
Let’s see how significantly shares in major European banks have fallen in the last month (via Bloomberg data):
- Societe Generale: 42%
- Credit Agricole: 34%
- BNP Paribas: 30%
- Unicredit SpA: 31%
- Intesa Sanpaolo SpA: 35%
- UBI Banca: 30%
- Commerzbank: 21%
- Deutsche Bank: 28%
Regardless of the actual liabilities of these banks, it is doubtful any of them could have planned for this sudden drop in equity. At the same time, earnings aren’t picking up the slack. Add that to new fears that the Greek bailout will not go through quickly enough to save Greece from a full-blown default (no selectivity) and the ensuing contagion risks.
The real wild card here is the European Central Bank. It could provide virtually unlimited funds to these banks, but their balance sheets have to be strong enough to qualify for lending. This should not be a problem in France and Germany, but the longer it takes to come out with a viable solution to this crisis, the more likely this problem could be.
None of the various signals we’ve reported over the last week are sufficient to indicate that a credit crunch is at hand, but there is no denying that we are certainly approaching that reality. As experts have been advocating all week, a more coherent, forward-looking proposal — as well as passage of the second Greek bailout — needs to be implemented quickly in order to stave off a much more severe crisis.