European banking crisis gets impatient.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
Over the course of the last few months, Brexit has become one of the biggest catch-all preemptive scapegoats of recorded human history. Even far beyond the old continent’s porous borders, politicians, central bankers, and economists are warning their respective populations to brace for a serious aftershock if the people of Britain vote to leave the EU.
This is is a remarkable feat given that the UK has its own perfectly functioning currency, and as such decoupling from the EU, while bumpy, should not pose an immediate financial threat either to the UK or the EU, let alone the world at large. But try telling that to the eurocrats, politicians, and central bankers whose long cherished dream of creating a seamlessly interconnected, interdependent European superstate appears to be in the process of unraveling.
With no feel-good stories to tell the people of Britain, the only tack they have left is to ramp up Project Fear, which yesterday reached new levels of hyperbole when European Council President Donald Tusk warned that if Britons vote to leave the European Union on June 23, not only could it spell the beginning of the end for the 28-nation bloc but also for western political civilization “in its entirety.”
Even by recent standards, it is an audaciously outlandish claim that serves little purpose but to remind Britain’s wearied voters just how fearful the establishment is of losing control [read: Who’s Really Most Afraid of Brexit? And Why?].
There is also a cynical, opportunistic edge to the pro-EU establishment’s rampant fear mongering. By creating heightened expectations of post-Brexit chaos, if chaos does ensue, it will be able to take advantage of it by plowing even more desperately needed funds into Europe’s ailing banks. Just today, unnamed ECB “officials” leaked to Reuters that the ECB would “backstop financial markets in tandem with the Bank of England should Britain vote to leave the European Union” (emphasis added):
Such an announcement from the ECB would come on June 24 if an early-morning result showed that British voters had chosen to leave the EU, according to the sources. The aim is to underpin investor confidence across Europe and contain further market jitters.
“There will be a statement to do whatever it takes to maintain adequate market liquidity,” said one senior central bank official, who spoke on condition of anonymity.
The ECB’s pledge would involve opening so-called swap lines with the Bank of England, allowing euros and sterling to be exchanged and effectively making unlimited funding in both currencies available to European banks, the sources said.
Granted, if there is a Brexit — and for the moment, that’s still a fairly large “IF” — some form of additional support may well be necessary to calm jittery markets. But if recent history has taught us anything, it is that whenever a central banker uses the words “whatever it takes,” most normal people who are not intimately connected with the central bank in question should be very worried.
The ECB has every reason — or at least believes it has every reason — to unleash yet another tsunami of liquidity across Europe’s financial sector. After a brief respite, Europe’s banking shares are once again slip-sliding toward record depths. The Stoxx Europe 600 banks index is down already over 10% this week alone, 27% year to date, and 37% since June last year.
The most affected institutions include some of Europe’s biggest hitters, from Deutsche Bank and Credit Suisse, both of which hit new record lows today, to HSBC, which hit a new five-year trough this week, and Santander, which is on the verge of breaking through its lowest point since the 1990s.
If Europe’s biggest banks are in trouble, it’s safe to say that Europe’s financial system is too.
The main reason for that is that many of the problems that were caused by the last financial crisis have not been resolved. As the financial journalist and former investment banker Nomi Prins says, “in Europe (and in the U.S.) there still exist massive amounts of trades (on banks’ balance sheets) that are underwater and going wrong every day.”
There is no better example of this than Europe’s fourth biggest economy, Italy, whose banking sector is once again looking extremely fragile. The shares of the country’s biggest bank (and global systemically important institution), Unicredit, are down more than 20% this month, 57% since January, and 64% over the last year. The stock of Banco Populare, Italy’s fifth biggest bank, has lost 35% of its value this month alone and a staggering 75% since the beginning of this year. The fourth biggest institution, the perpetually failing Banca Monte dei Paschi di Siena whose loss-making derivatives bets were made under Mario Draghi’s watch as Bank of Italy’s governor, is in the same leaky boat.
So serious are Italy’s financial problems that in April the IMF singled out the country as Europe’s “weakest link.” The biggest problem is the over €300 billion of non-performing loans (NPLs) putrefying on the banks’ balance sheets. That’s supposedly more than a third of all of Europe’s NPLs put together. Italy’s bad loan ratio is estimated to be close to 20% and still rising, and unlike Spain’s bad loans, which resulted from a popped housing bubble, most of Italy’s NPLs are owed by zombie businesses.
Rome is now trying to fix — or at least conceal — a €300-billion problem with a €6-billion rescue fund. As you can imagine, it’s woefully inadequate. At the end of May Bank of Italy Governor Ignazio Visco begged the European Union to backtrack on new bail-in rules aimed at protecting taxpayers from having to prop up ailing banks, warning authorities may be unable to stop contagion in a crisis. But to no avail.
In the meantime, Spanish and Italian banks are gobbling up more than half of the funds the ECB provides in its regular refinancing operations, reports Bloomberg. But even that’s not enough: in addition to the weekly and three-months operations, the ECB will begin offering targeted longer-term loans next week that’ll mature in 2020.
That will almost certainly not be enough either, which is why the ECB is once again talking about doing “whatever it takes,” this time in the event of a Brexit. But don’t be fooled: this has very little to do with Brexit and everything to do with keeping Europe’s biggest, most bankrupt banks afloat just a little longer, while Draghi and his ilk shuffle guaranteed profits to their banking and hedge fund cronies on the inside. By Don Quijones, Raging Bull-Shit.
But a majority of the French want out of the EU too! Read… Fearful of EU Disintegration and Mired in Crisis, France Wants Britain Punished for Brexit Revolt