Day of Reckoning for Banks in Italy, Spain, & Portugal Kicked Down the Road (Elegantly) for 18 Months

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Past a messy Brexit & elections in France and Germany

By Don Quijones, Spain & Mexico, editor at WOLF STREET.

Senior bankers in Spain and Italy can breathe a collective sigh of relief after Europe’s finance and economic ministers decided on Friday to postpone, for at least 18 months, a decision on setting a limit on the government bonds some banks can hold as eligible “risk-free” capital. It was one of four things keeping Spanish senior bankers awake at night. Now, they can sleep a little sounder.

The initiative, initially proposed by the German government and supported by other fiscally hawkish governments such as Finland and the Netherlands, was intended to limit the purchase of public debt by banks, in order to break the vicious cycle of co-dependence that now exists between sovereign and bank risk.

If allowed to happen, the move could have posed a very serious threat to the balance sheets of many banks on the Eurozone periphery. According to European Central Bank data, euro-area sovereign bonds accounted for over 10% of banks’ assets in the Eurozone, or €2.73 trillion ($3 trillion), at the end of 2015 — over €300 billion more than at the end of 2014, on the eve of the ECB’s launch of its negative interest rate policy (NIRP).

This trend is particularly acute in countries like Portugal, Spain, and Italy, where banks’ balance sheets are filled to the gills with bonds of their individual sovereigns — all considered “risk free” for regulatory reporting. Just the merest suggestion of loosening the chains of interdependence between sovereigns and banks was enough to set off shrieks of panic in the halls of government and banking C-suites of Madrid, Rome, and Lisbon.

“Let’s be very careful about translating into practice rules that look nice on paper,” Italian Finance Minister Pier Carlo Padoan warned, adding that any such rules could lead to a sell-off and “instability”. Padoan’s sentiments were echoed by Santiago Fernandez de Liz, the chief economist for financial systems and regulation at Spain’s second biggest lender, BBVA, who cautioned that applying a proposal of this kind in the Eurozone would “reignite the fragmentation” of Europe’s financial markets.

The threats appear to have worked, prompting Ecofin to announce that it would first wait for the findings of the Basil Committee, to be held in 2017, before reaching any definitive decision regarding the regulatory treatment of sovereign debt. None of this should come as a surprise, with the Fed, the Bank of Japan, and the Bank of England all vehemently opposed to Germany’s proposal.

The price to be paid is another 18 months of dysfunctional co-dependence between European banks and sovereigns as well as entrenched inaction on Europe’s decidedly incomplete banking union, which still lacks even the most basic financial security mechanism: a deposit insurance scheme. For that to happen, the Germans continue to demand a decoupling of sovereign and private risk, plans for which have now been scuppered until at least 2018.



But Italy and Spain — two of the countries keenest on securing a cross-continental deposit insurance scheme, not to mention the two biggest recipients of ECB refinancing loans to banks — are in no position to ween their governments or their banks off the bank-sovereign mutual support system.

Italy’s public debt is now a staggering 123% of its GDP, much of which is gathering dust on the cluttered balance sheets of Italy’s banks — banks which are so fragile that Bank of Italy Governor Ignazio Visco recently begged the European Union to backtrack on new bail-in rules aimed at protecting taxpayers from having to prop up ailing banks, warning that it may be impossible to stop contagion in a crisis.

The fact that Eurozone finance ministers have once again caved to concerted pressure from both banks and the Italian and Spanish governments is hardly any surprise. Kicking the can down the road is now an official sport in Brussels. Putting off the decision for another 18 months would allow the EU to avoid any inconvenient clashes with the Brexit referendum, not to mention the French and German elections in 2017.

Once again, short-term political expedience trumps the need for long-term economic prudence. The result, as Ambrose Evans Pritchard writes in The Telegraph (in an article on why he has decided to vote for Brexit), is that six years into the Eurozone crisis, “there is not a flicker of fiscal union”:

No eurobonds, no Hamiltonian redemption fund, no pooling of debt, and no budget transfers. The banking union belies its name. Germany and the creditor states have dug in their heels.

That will be the state of play for at least the next 18 months. According to diplomatic sources cited by the Spanish financial daily Cinco Dias, this was the plan all along. Germany never had any intention of helping set up a cross-continental deposit insurance fund, which would make its taxpayers jointly responsible for the debts of all the banks in the Eurozone; its calls to set a limit on the sovereign bonds that banks can hold as eligible “risk-free” capital were merely a stalling tactic.

True or not, one thing that is abundantly clear is that, Brexit or no Brexit, the Eurozone is destined to languish in economic limbo for at least another year and a half, assuming it lasts that long. Meanwhile, the race is on to get as much sovereign debt as possible off the balance sheets of peripheral banks and onto the ECB’s already bloated books. Take it away, Mario! By Don Quijones, Raging Bull-Shit.

But the broader European banking crisis is getting impatient. Read…  Brexit Chaos to Serve as Cover for ECB Bank Bailouts



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  31 comments for “Day of Reckoning for Banks in Italy, Spain, & Portugal Kicked Down the Road (Elegantly) for 18 Months

  1. Gee
    Jun 18, 2016 at 10:29 am

    The can kicking knows no limits!

    When TINA becomes TINES!

    Unfortunately, the more you do act as if there is no alternative, the more it becomes clear that there is no exit strategy.

    I’m looking at you Ben, Janet and (not to be left out) SuperMario.

  2. EVENT HORIZON
    Jun 18, 2016 at 11:16 am

    Some day their can kicking will run out of road.

  3. Yoshua
    Jun 18, 2016 at 11:55 am

    Ponzi finance is the only thing that keep Europe alive.

    Finland talks about fiscal prudence… while we live on ECB’s printing press. The public sector counts for 60 percent of our spending… and no they cannot raise that money from taxes and dividends.

    Germany needs the Ponzi financing to continue to keep their export industry alive. When Germany collapses…

    It’s all just political theatre.

    • EVENT HORIZON
      Jun 18, 2016 at 12:17 pm

      With GOLD COIN none of this can happen.

      • frederick
        Jun 18, 2016 at 1:19 pm

        Amen to that Horizon İm loading up the truck presently Silver too and waiting impatiently for the explosion

        • as
          Jun 19, 2016 at 3:37 am

          You don’t won’t the explosion. You think your life will be better just because you have a truck load of silver? You may be better off than you neighbour but life will be worse. Picture The Road, 1984, and any other apocalyptic movie. Riots over food and medicine, tyrannical governments, wars.
          The central banks are leading us to all this. I am just hoping the can kick the can down the road a few more years

    • OutLookingIn
      Jun 18, 2016 at 1:26 pm

      “Ponzi finance is the only thing that keep[s] Europe alive”.

      DEBT is at EVERY level of the global system. Energy, education, transport, corporate, real estate, commercial, housing, personal and credit card debt, along with sovereign debt.

      The entire system is backed by technically bankrupt governments, run by corrupt politicians who serve as well paid human puppets, for the banking and corporate interests who control them.

      What little central banker credibility that existed across the globe has now been lost. They have tried every trick in the book. All have failed. “It’s all just political [theater]”.

      The majority of the “unwashed” may enjoy this current interlude before reality slaps them in the face, throws them under the nearest bus, then kicks them down the cellar stairs. Coming soon to a theater near you!

  4. Sound of the Suburbs
    Jun 18, 2016 at 12:28 pm

    The doom loop is a design feature of the Euro.

    The Euro was designed in the days when Neo-Liberal economic ideas were all the rage and their problems had not come home to roost.

    Most nations can borrow from their Central Banks at low rates and use this facility in times of trouble for fiscal stimulus.

    The new Neo-Liberal thinking thought that Governments were reckless and inefficient and the private sector was sensible and efficient.

    Governments naturally take on too much debt to engage in wasteful spending to bribe voters.

    With this thinking in mind, it would be better if Governments were forced to borrow off private sector banks that would ensure that Government borrowing and spending was carried out efficiently under the watchful eye of the prudent private sector.

    In 2008, we discovered it was the private banking sector that was wild and reckless and that strong and robust Governments were needed to bail the banks out.

    The thinking behind the design of the Euro was already unravelling rapidly.

    As private banks held all the Government debt and the banks themselves were found to be reckless, a doom loop was set up where Governments had to borrow off private banks to bail out those very same banks that had recklessly taken on bad debt in housing booms; bad assets buying US sub-prime mortgage backed securities; etc ……

    Policy makers have shown since 2008 that they have no confidence in the private sector to get things going again in a downturn. The private sector is there to make a profit and not risk potential losses in difficult times.

    Policy makers first looked to Central Banks to use monetary policy to get things going again. After eight years this has run out of steam.

    Policy makers then looked to fiscal policy from Governments to get things going again, Governments that had been dismissed as reckless and inefficient in the design of the Euro.

    Unfortunately, the Euro was designed in the days when the private sector was thought to be the answer to all problems and is not designed to allow Governments much latitude with fiscal policy.

    Oh dear, hundreds of millions of people left to the mercy of bad Neo-Liberal ideas.

    • EVENT HORIZON
      Jun 18, 2016 at 12:48 pm

      Or, maybe the Euro system was designed to fail? Let the Governments borrow as much as they want, knowing they can’t pay it back some day, because that is the intention?

      Where does this “money” come from? First of all, it is not “money”. It is “credit” issued by either the private banks or the Euro Central Bank. There is no money involved. The Government issue bonds, pieces of paper, and these are bought by the banks with “credit” issued to the account of the Government. It is all done on little computers today. Just like the one you are using right now. There is no money involved.

      So, the Governments take this credit and spend it. Take on more debt, called credit, and spend it, to the point it can NOT be paid back with taxes on the people. Then what?

      (Ever ask why the Governments did not issue their own credit? Why do they have to pay interest on a electronic entry into an electronic account? Just ask Abraham Lincoln how that turned out).

      Then, the Euro elite force all the “bankrupt” countries to sign on to the real objective: One Europe Order. One currency, One Europe Tax Plan, One Europe Parliament, and one government, all controlled by those in control now.

      A brilliant, clever, and perfect plan. It is so clear. It is so obvious. It is awesome, so amazing that the public will turn their eyes from it to avoid what fear they may feel upon realization of the Plan. The shame and fear of realizing they have been played, and they VOTED for their own enslavement, is too much to bear. So they will deny, deny, deny and pray for a salvation they don’t deserve.

      • Sound of the Suburbs
        Jun 18, 2016 at 1:13 pm

        As my Dad says these things are usually 1% conspiracy theory and 99% incompetence.

        People aren’t that clever.

        There is usually a short term clever, long term stupid.

        Short term clever:
        Let’s train Muslim extremists to fight the Russians in Afghanistan.

        Long term stupid:
        Osama bin Laden started off fighting the Russians in Afghanistan.
        9/11 came in the long term.

        Short term clever:
        “The putative “father of the Euro”, economist Robert Mundell is reported to have explained to one of his university of Chicago students, Greg Palast: “the Euro is the easy way in which Congresses and Parliaments can be stripped of all power over monetary and fiscal policy. Bothersome democracy is removed from the economic system” Michael Hudson “Killing the Host”

        Long term stupid:
        Doom loops and one crisis after another

        • EVENT HORIZON
          Jun 18, 2016 at 1:44 pm

          Ah, who financed the University of Chicago?

          Also, your Mr. Robert Mundell just admitted to what I had wrote. The plan was One Europe and the “free” Euro money was the bait. That just proves the point.

          And the concept of not caring about Parliaments or Congresses but caring ONLY about who shall issue the currency for a nation was expressed a long time ago by a member of one of Europe’s oldest and richest family.

          “Let me issue and control a nation’s money and I care not who writes the laws.” Mayer Amschel Rothschild (1744-1812), founder of the House of Rothschild.

          You prove my point. Also, don’t forget this quote:

          Quote from James Paul Warburg (banker – 1896 to 1969), son of Paul Warburg (banker, persuasive advocate for and founding member of the Federal Reserve Board in 1913, and who also became a director of the Council on Foreign Relations at its founding in 1921): “We shall have World Government, whether or not you like it. The only question is whether World Government will be achieved by conquest or consent.” This was said on February 17, 1950, to the United States Senate Committee on Foreign Relations.

        • Sound of the Suburbs
          Jun 18, 2016 at 5:15 pm

          You know what bankers are like …… delusional psychopaths.

          It wasn’t so long ago they thought they were “Masters of the Universe”.

          In 2008 we discovered they were incompetent idiots.

          I am sure global Government was the plan and the Euro and EU were stepping stones, but at the end of the day they are delusional psychopaths and their grand plans never come to fruition because they are actually morons.

      • Dan Romig
        Jun 20, 2016 at 6:07 am

        Favorite Lincoln quote was when he was addressing Congress in 1865 shortly before his assassination on 15 April: “I have two great enemies, the Southern Army in front of me, and the financial institutions in the rear. Of the two, the one in the rear is my greatest foe.”

        • Dan Romig
          Jun 20, 2016 at 6:11 am

          14 April is when he got shot

        • Dan Romig
          Jun 20, 2016 at 6:22 am

          To EVENT HORIZON, Another quote from Mayer Amschel Rothschild which was stated in 1774 at a meeting of a dozen elites in Frankfurt: “Wars should be directed so that the nations on both sides should be further in our debt. Panics and financial depression would ultimately result in World Government, a new order of one world government.”

          Of course, Rothschild wanted to be the banker for the new world order!

    • robt
      Jun 19, 2016 at 8:41 am

      It used to be Marxism vs Capitalism, then/now Marxism vs NeoLiberalism (the supposed half-way point, the ‘third way’), but now it’s better described as NeoMarxism, purportedly halfway between NeoLiberalism and Marxism – but every society/economic structure seems to gravitate toward centralism until it collapses.

      • nick kelly
        Jun 19, 2016 at 11:26 am

        No one who has lived in a Marxist economy has any desire to see it be half of a half- way point.
        There is a surprising (to me) amount of neo-Marxism and anti-capitalism present in many, if not most of the comments on WS.
        Ironically EVERYONE commenting is using computing power that would have cost a million dollars 30 years ago- delivered today for next to nothing courtesy of capitalism.

        • EVENT HORIZON
          Jun 20, 2016 at 2:33 pm

          Not Capitalism, but Free Enterprise.

          Capitalism is nothing more than the accumulation of “Capital” (money) to fund an enterprise, be it a steel mill or coal mine.

          FREE ENTERPRISE is when people, specifically INDIVIDUALS, can open and run their own business, be it a steel mill or coal mine.

          Every country on Earth is Capitalist. Cube, North Korea and China are Pure Capitalist. They collect funds and finance companies. They just don’t let YOU or the individual do it. They do it. They are Capitalist Dictatorship.

          America was, originally, a Capitalist Free Enterprise country. A person, Carnegie, Rockefeller, Ford, etc, could borrow money or sell stock to other INDIVIDUALS, and open a factory and make things. That is why in less than 35 years, America became the wealthiest nation on Earth (1865 to 1900).

          Carnegie, an INDIVIDUAL, allowed to perform FREE ENTERPRISE, was producing in his own, three, private mills, MORE steel than the entire nation of England. No magic. No government policy, no “social” theory……just freedom is all it took.

          Th “Golden Age” of Greece, the time the Parthenon was built, etc, lasted only 35 years. Did you know that? One leader of Greece lowered taxes and regulations and allowed the people/farmers to flourish. That was the Golden Age. One leader (whose name I can not remember) freed up the people (Free Enterprise of the Individual) and the glory and wealth of Greece exploded.

          No Government can produce. They can only prevent.

  5. Robert
    Jun 18, 2016 at 12:37 pm

    “[Europe] still lacks even the most basic financial security mechanism: a deposit insurance scheme. For that to happen, the Germans continue to demand a decoupling of sovereign and private risk.” And good for them, too- apparently some of them read about the Savings and Loan Scandal, where crooked bankers, knowing the public would be on the hook for billions of bad loans, made just such loans to their crony buddies, and then went bankrupt.

    • robt
      Jun 19, 2016 at 9:19 am

      The ‘deregulation’ of the Savings and Loans also entailed a cap on mortgage rates and 30 year terms, but no cap on interest paid on deposits – when there was an explosion in interest rates and high interest was necessary to attract deposits to sustain lending, a mathematical recipe for inevitable disaster.
      This was a government fiasco, not a crooked banker scandal.
      Also, the deposit ‘insurance’ program offers a superficial measure of security, but is not viable because in times of great stress it places infinite demand on finite resources which can only be solved by hyperinflation. Another obvious fault is that responsible financial institutions, who pay lower deposit interest and remain solvent, must compete with irresponsible banks, who pay higher interest to attract ignorant depositors who chase higher interest, the moral hazard defect which affects investor prudence and which contributes to banking failures, an unintended consequence of such ‘insurance’.

      • nick kelly
        Jun 19, 2016 at 11:33 am

        ‘This was a government fiasco- not a crooked banker scandal.’

        Read up on Charles Keating- an S&L kingpin sentenced to many years.
        Sure the government screwed up by creating the loop hole, and it didn’t take long for Keating and others to see it.
        McDougal the Clinton’s partner in White Water their two bit real estate venture, was one of the very few bankers put on trial who was found not guilty by a jury.

      • Sound of the Suburbs
        Jun 20, 2016 at 4:38 am

        We really need to get a grip of the biggest danger the world faces today, banking.

        The trail of destruction left behind by the bankers should make us think about each excuse they provide after each event and put it into a larger context.

        First the debt inflated asset bubble that was wrought carnage around the world:

        1929 – US (margin lending into US stocks)
        1989 – Japan, UK (real estate)
        1999 – US (margin lending into US stocks)
        2008 – US (real estate bubble leveraged up with derivatives for global contagion)
        2010 – Ireland (real estate)
        2012 – Spain (real estate)

        Coming soon – Australia, Canada (real estate).

        The bankers make their excuses and learn nothing.

        Since 1929 each event has been bailed out ensuring they learn nothing from their mistakes.

        The bankers lending into the Australian and Canadian housing markets have no idea what they are doing.

        The Central Bankers in Australia and Canada have no idea what is going on.

        The Bank of International Settlements (BIS) has no idea what is going on as one of their directors is the head of the Canadian Central bank.

        Other countries also have housing booms that will go the way of all debt inflated asset bubbles.

        This is just one trail of destruction, re-reading Nomi Prins’s “All the Presidents Bankers” we see another trail of destruction emanating from Wall Street.

        Excessive loans into Africa and South America, destroying nations with austerity, privatising previously public companies and reducing public spending so the bankers can get their money back.

        The S&L crisis where Wall Street was already packaging up toxic assets and selling them onto S&L companies to blow up later.

        Excessive loans into Russia and Asia, destroying nations with austerity, privatising previously public companies and reducing public spending so the bankers can get their money back.

        Long Term Capital Management blew up and posed a systemic threat to the system through the use of highly leveraged complex derivatives.

        The dot.com boom (as above).

        2008 (as above, they cut their teeth with toxic assets during the S&L Crisis)

        Excessive loans into Europe, destroying nations with austerity, privatising previously public companies and reducing public spending so the bankers can get their money back (European banks were the main culprits here).

  6. Thomas Malthus
    Jun 18, 2016 at 5:32 pm

    Off topic …. a manager in our office in China informed me on Friday that her husband had been laid off from a tech business whose biggest client by far is — Apple.

    15% of all employees at their company were let go.

    • Jun 18, 2016 at 5:55 pm

      Wow!!!

      Thanks for sharing!

      • Thomas Aquinas
        Jun 19, 2016 at 1:23 am

        Wolf – you can’t short on that … we’ll both get done for insider trading :)

  7. Thomas Malthus
    Jun 19, 2016 at 1:24 am
  8. nick kelly
    Jun 19, 2016 at 11:49 am

    DQ: ever see an old British show “Yes Minister”

    When the senior civil servant Sir Humphrey is forced by the Minister Hacker to actually do something he always promises to have it ready in 18 months. For some reason it sounds better than a year and a half.

    • Don Quijones
      Jun 19, 2016 at 1:09 pm

      Yes Minister was one of my favourite British comedies when I was growing up. One of the best and certainly most entertaining crash course on politics 101 there is out there, though the more recent BBC sitcom The Thick of It ain’t half bad either.

      Thanks for the reminder, Nick :-)

      • d'Cynic
        Jun 19, 2016 at 10:08 pm

        Also my all time favourite TV comedies. The difference between the two: Yes, Minister has a laugh track while The Thick of It has a swear track . :)

  9. d
    Jun 20, 2016 at 6:58 am

    “a deposit insurance scheme. ”

    In the current Euro banking landscape.

    With all those huge declared and undeclared NPL Bundles in Club med. Is a get out of jail free card for the club med States, and their bank’s. Funded by German Taxpayers which is why Germany will not play in the current environment.

    I totally agree with the Germans, on this.

    I live in a country part time, that used to have a deposit insurance scheme, and now dosent.

    Which made a lot of people look at money in the “Bank” very differently.

    A lot of that money, is no longer in those Bank’s.

    Banks these days, are places you keep minimum liquidity in, to maintain your financial services facility’s. and get Mortgages/ loans from.

    NOT Somewhere you keep your excess Liquidity. These days that is safer, in a hole in the ground, than in a “Bank”.

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