Ilargi: I’m under the impression that it’s not all that difficult to see what goes on and why in the financial world these days. Everyone simply keeps talking about what Germany should do, and about eurobonds etc., but a relatively concise overview of a few numbers should be adequate to point out that none of that “solution” talk is based on too much realism.
bbbbb asdf sdf
That’s not to say that it’s impossible that Germany would succumb to the growing pressure to “act”, just that even it it did, not one underlying issue would be solved. Instead, it would mean that the Germans would take the huge risk of taking on enormous losses incurred by other countries and their banks.
Germans may have enjoyed their spot in the safe haven limelight a bit too much to see the mote in their own eyes, but that should not mean they must keep on doing so. All’s not well in Berlin either.
Let’s do a list of where several countries stand at this point (I made a list of 10-year sovereign bond yields at 8.00 AM EST):
- Greece: Will be broke in 3 weeks unless it receives the €8 billion next bailout tranche. It will get this only if the main opposition party sings a letter declaring its support for the EU/CB/IMF troika’s austerity measures and budget cuts, supported by new technocrat PM Papademos. Opposition leader Samaras has so far refused to sign. 10-year bond yields 29.87%.
- Portugal: Downgraded by Fitch to junk status. 2012 GDP expected to fall 3%. Portugal expected to need the same level of bailout as Greece, though a 50% debt writedown has been ruled out by the Greece deal. 10-year bond yields 12.32%.
- Ireland: Nominal gross national product (GNP) has already contracted by 22%. Public wages have fallen 12% on average. There are likely to be further wage cuts in the December budget. 10-year bond yields 8.21% (down from 14% in July)
- Italy: Paid 6.5% this morning for 6 month loan, 2-year is over 8%. Monti needs to speed things up, or else… 10-year bond yields 7.33%.
- Spain: Enormous pressure on the banking system. 10-year bond yields 6.7%.
- Belgium: The Dexia bailout deal struck with France recently is rumoured to be falling apart; Belgium can’t afford the terms of the deal. It wants France to pick up a larger piece of the pie; which France in turn can’t afford to do, for fear of being downgraded. 10-year bond yields 5.84%.
- France” Has been threatened with a downgrade by Moody’s. Analysts have claimed losing its AAA status would be the end of President Sarkozy’s career. Eurozone chief Jean-Claude Juncker has said it would also threaten the credit rating of Europe’s bailout fund, the EFSF. 10-year bond yields 3.67%.
- Austria: Will almost certainly lose its AAA status; Eastern European loans (Hungary) are the main culprit. 10-year bond yields 3.80%.
- Hungary: Downgraded to junk status. 10-year bond yields 8.83%.
- Germany: Had a disastrous bond auction, and its bond yields are creeping up. Has a number of banks with high exposure to PIIGS debt. 10-year bond yields 2.23%.
- Netherlands: Germany’s little brother, but with an impending housing bust. 10-year bond yields 2.72%.
- US: Manages to stay in the shade for now, but a further downgrade is believed to be all but certain. 10-year bond yields 1.92%.
- UK: See US, no downgrade threat announced to date. Still a Bank of England expert said this week that its housing market will NEVER recover. 10-year bond yields 2.27%.
• Recently downgraded to junk : Portugal, Hungary.
• Under threat of an imminent downgrade: US, Japan, Austria, France, Belgium.
• Additional downgrades could be coming fast and furious soon
Simone Foxman at Business Insider presents a nifty little list of 20 European banks that have the worst exposure to the PIIGS. Which means they, too, are under very real downgrade threat.
Here’s an abbreviated version, which focuses on PIIGS Exposure as % of Common Equity:
We took a list of the largest European banks by assets and compared their market cap, common equity, and total exposure to PIIGS debt (thank you for the bank statistics, EBA!). Then we calculated exposure to PIIGS debt (sovereign and private) as a percentage of the banks’ common equity. (Notice that HSBC, ING, and even Societe Generale are all absent from this list.)
So far our track record is pretty good–we predicted that Dexia was the most vulnerable bank outside of the PIIGS back in July. If the eurozone crisis continues to escalate, we will see more and more banks bow to the pressure of exposure and become unable to borrow money.
The worst 20 cutoff for our test ended up being exposure equal to about 175% of common equity, but it really gets out of control once you get to the PIIGS banks (#1-9). But Dexia’s fall suggests that bank vulnerability is already seeping beyond the periphery into the core (#10-20).
20 – Royal Bank of Scotland Group (UK)
- PIIGS Exposure as % of Common Equity: 175%
19 – Landesbank Berlin (Germany)
- PIIGS Exposure as % of Common Equity: 179%
18 – Barclays (UK)
- PIIGS Exposure as % of Common Equity: 189%
17 – Landesbank Baden-Württemberg (Germany)
- PIIGS Exposure as % of Common Equity: 230%
16 – DZ Bank (Germany)
- PIIGS Exposure as % of Common Equity: 239%
15 – KBC Bank (Belgium)
- PIIGS Exposure as % of Equity: 247%
14 – Credit Agricole (France)
- PIIGS Exposure as % of Common Equity: 293%
13 – Deutsche Bank (Germany)
- PIIGS Exposure as % of Common Equity: 327%
12 – BNP Paribas (France)
- PIIGS Exposure as % of Common Equity: 358%
11 – Commerzbank (Germany)
- PIIGS Exposure as % of Common Equity: 462%
10 – Dexia (Belgium)
- PIIGS Exposure as % of Common Equity: 552%
9 – Banco Santander (Spain)
- PIIGS Exposure as % of Common Equity: 953%
8 – Unicredit (Italy)
- PIIGS Exposure as % of Common Equity: 1,070%
7 – Bank of Ireland (Ireland)
- PIIGS Exposure as % of Common Equity: 1,385%
6 – BBVA (Spain)
- PIIGS Exposure as % of Common Equity: 1,566%
5 – EFG Eurobank Ergasias (Greece)
- PIIGS Exposure as % of Common Equity: 1,601%
4 – Intesa Sanpaolo Group (Italy)
- PIIGS Exposure as % of Common Equity: 1,638%
3 – Banco Popular Español (Spain)
- PIIGS Exposure as % of Common Equity: 1,927%
2 – Banca MPS (Italy)
- PIIGS Exposure as % of Common Equity: 4,666%
1 – Allied Irish Banks (Ireland)
- PIIGS Exposure as % of Common Equity: 33,352%
Ilargi: See the full article for exact amounts. I added them up, and these 20 banks alone (No Société Générale, no HSBC yet) have $3916 billion in exposure, almost $4 trillion. Now we all know that the latest Greek bailout talks included the provision for 50% in writedowns, with the specific note that only Greece could do this.
These are amounts too vast for Germany to insure. It would be madness to do so. Many of these banks will soon come knocking for bailouts. Many of the countries too. Just watch their bond yields go up.
As an increasing number of countries gets de facto locked out of credit markets (no country that has to pay 7% -or even close to it- on 10-year debt can do that for long-, so are their banks. European banks try to get rid of trillions of euros worth of “assets”, but can’t find buyers. They even sink as deep as lending the money to potential buyers themselves, see European Banks Get ‘False Deleveraging’ in Seller-Financed Deals.
Inevitably, the discussion of how rigged Libor rates are flares up again as well. Got to restore confidence in the markets, right?! Basically, the banks are stuck. They can only turn to the ECB, but so far it resists. It did lend a whooping €247 billion in short term (one week) loans this week, but that’s not going to help. Says Gareth Gore for the International Financing Review:
“Banks are feeling pain on both sides of the balance sheet,” said Alberto Gallo, head of European credit strategy at RBS. “On the one side you have a funding squeeze with banks unable to raise cash in the capital markets. At the same time, many of the assets they hold are deteriorating in quality.”
“Banks need to reduce their balance sheets as much as €5 trillion in assets over the next three years or so,” he added. “The problem is that there just aren’t enough buyers. Most banks will be forced to hold on to much of this stuff to maturity, which will affect their ability to lend and impact on the real economy.”
Ilargi: Deleveraging, anyone? Gus Lubin at Business Insider writes:
The Western World is just getting started on the second of two lost decades, according to a big report by Citi’s Matt King. While the last lost decade was characterised by boom and bust, the new one will be characterised by deleveraging and slow growth.
We haven’t even begun to erase the massive debt load from the past few decades. The UK particularly stands near the Japanese peaks of the early 1990s.
Ilargi: Nice one for Citi, but please do note that Stoneleigh and I at The Automatic Earth has been warning about this deleveraging since even before the present site existed.
So you have all these bad assets, which lose value a a daily basis. And even today, they don’t sell. Next thing to happen is price discovery, selling them for whatever a potential buyer is willing to pay. Which is less and less, on a daily basis. Without help from the ECB, read Germany, one bank after another will fold.
Unless the US steps in through the Fed and the IMF. But there no longer seems to be any political appetite for this in Washington. Doesn’t mean it can’t happen, but it’ll necessarily be a convoluted affair if it does. America might do better allowing select banks to default.
The last gasp ideas that now float around Europe are 1) Eurobonds, and 2) new Eurozone treaties. Number one is very unlikely. Charles Hawley at Der Spiegel quotes Wolfgang Münchau to explain why:
But euro bonds would be an entirely different case. Wolfgang Münchau, the Financial Times columnist who recently began writing editorials for SPIEGEL ONLINE, points out that they would be everything that the German Constitutional Court finds questionable about bailout programs thus far.
They would have the potential to make Germany liable for debts incurred by other countries in the euro zone, the program would be huge (otherwise there would be no point in introducing them in the first place) and German guarantees could be triggered by the actions of foreign governments. “The court’s verdict leaves me no alternative but to conclude that (euro bonds) are indeed unconstitutional,” Münchau wrote in the Financial Times in September.
Ilargi: Number two, new treaties, suffer from similar problems. Ambrose Evans-Pritchard provides an example why in the Telegraph:
The EU’s new fiscal rules would be legally binding and “justiciable” before the European Court, [Prime Minister Noonan] said. This raises the likelihood that Ireland’s top court would insist on a referendum.
Ilargi: Potential legal challenges in any of the 17 Eurozone countries (or even in the larger 27 country EU) can delay any treaty changes for far longer than the situation can bear.
OK, last of last gasps, China to the rescue. I don’t think Jim Chanos sees this as a realistic option:
“[The Chinese government] doesn’t [have money], and that’s the problem. The banking system in China is extremely fragile, and that’s one of the messages we wanted to get to people.”
“In fact, because what happened the last two crises, in ’99 and ’04, when non-performing loans went crazy in China without even a recession, the Chinese banking system was not re-capitalised like ours was, it was papered over.
Going into this credit expansion, Chinese banks are sitting on lots of bonds from the so-called asset management companies set up in 1999 and 2004, and they are keeping them on the books at par, at full value. In the case of Agricultural Bank of China, which we’re short, those restructuring receivables are equal to over 100% of their tangible book.
The Chinese banking system is built on quicksand, and that’s the one thing a lot of people don’t realise. When they talk about the foreign reserves of $3 trillion, what everybody forgets is there’s liabilities against that.”
“Everybody seems to think it is a free and clear open checkbook. It’s not. That is what we have been trying to tell people. Focus on the lending system over there, because everything occurs through the banking system.”
Ilargi: We need to start allowing both Eurozone countries and European banks to default. Restructuring where possible, bankruptcy where not. The road we’ve been on for the past 3-5 years is a dead end street, always was. The wall at the end of it is now right in front of our faces. Want to risk running forward? Throw another, oh, $10 trillion at it to see if anything sticks? Doesn’t seem wise, does it?
Moreover, Germany can’t afford to risk that sort of money. Neither can the US, or China, or anyone else. Nor can they do it together.
All that’s left to do is writing down debt, and let go under who owns too much if it. Deleveraging. There never was another choice.
This post originally appeared on The Automatic Earth.
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