This Could Sink Banks in Greece, Portugal, Spain, and Italy

Not that much has changed in Spain since the climax of the debt crisis during which its collapsing banks were bailed out. Some of them were recombined into a bank with a new name – Bankia – and sold to the public via an IPO that immediately sank into red ink and scandal. Spanish government debt sported yields that reflected the risks of owning it. At this time in 2012, six-month T-bills yielded over 3.2%.

But that part has changed. In this absurd era when risks no longer exist in a quantifiable manner, the Spanish government today joined a growing club: it issued its first debt – 6-month T-bills – with a negative yield. Spain!

But the European Commission is now contemplating pulling the rug out from under the banking miracles in Spain, Portugal, Greece, and Italy.

Turns out, these four countries have been smart in how they propped up their rickety banks. They and their banks have declared something a “high quality” asset even though it has a dubious value, no market price, and can’t be sold. And they have included this totally illiquid asset of dubious value in the “core capital” of the banks. This asset significantly increases the “capital buffers” and makes the bank more resistant to shock and collapse, on paper. That’s how they solved their banking crisis.

Under the rules of Basel III, these kinds of assets need to be phased out from core capital. And the banking union’s top regulator, the ECB, is trying to crack down on national exceptions to European capital rules. To get around these issues, the governments in those countries have made some legislative changes to where each government effectively guarantees those dubious assets in their banks’ core capital.

In theory, if a bank with this sort of core capital gets in trouble, the government would have to pay up for those dubious assets, which would be a taxpayer bailout through the back door. But even the guarantee itself is a bailout, because it creates core capital out of a dubious asset. And because banks in other countries supposedly don’t have access to the same state guarantees, it might be illegal “state aid” in violation of European fair competition rules.

And now, according to information obtained by the Financial Times, the European Commission is gathering up evidence to determine if these guarantees by Spain, Greece, Portugal, and Italy are illegal state aid. A full probe of this issue could rattle the banks. And if the Commission declared these guarantees illegal, the banks would lose a big part of their core capital.

A cascading wave of toppling banks, from small ones in Greece to the megabanks in Italy, would be just the sort of thing Europe’s new banking union needs.

These assets of dubious value are “deferred tax assets.” Banks (as other companies) can carry forward their bountiful losses of prior years to offset their tax liabilities, if any, in the future. Deferred tax assets are the theoretical value of potential future tax savings, should the banks ever have enough taxable profits, and therefore enough tax liabilities, to use them.

In total, there are €40 billion in deferred tax assets dressed up as core capital in the banks of these four countries. That’s how precarious these banks are. At one unnamed bank in Greece, these deferred tax assets account for 30% to 40% of its core capital. Without Greece’s special state guarantee, these deferred tax assets could not be part of the core capital, and without this additional “capital,” the bank would be toast.

But on paper, these crummy sorts of assets do a nice job of propping up these banks. And that’s why these four countries have bent over backwards to make it happen. Why bail out rotten banks with real money when fake assets can accomplish the same?

But it’s these state guarantees that are now in the cross hairs of the European Commission’s competition authorities as illegal state aid to banks that are supposed to compete fairly on level ground with banks in other countries.

Interestingly, it is not the EU’s top bank regulator, the ECB, that is trying to put a stop to it, or the European Banking Authority – the previous top but toothless bank regulator – that should have stopped this practice a long time ago. They might shake their head in despair, but they’re not really going to crack down on their own banks and make them clean up their own mess with recapitalizations that might wipe out stockholders and some bondholders under the new banking rules.

But no. It’s the competition folks at the Commission that have gotten wind of this insidious deal between government and bank for which, in the end, taxpayers are always held accountable. It’s these competition folks that are raising a stink. And they have teeth. Let’s see how long it will be before the ECB puts the kibosh on the investigation.

As you would expect, when the Financial Times reached out to the governments of Greece, Spain, Portugal, and Italy, they wisely declined to comment.

Greece needs to make some smallish payments in April. But it might not be able to. That’s how broke it is. So it’s using its own methods to negotiate with its creditors. But it just backfired. Read… Greece Brandishes Drachma, Threatens Euro Exit

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  13 comments for “This Could Sink Banks in Greece, Portugal, Spain, and Italy

  1. Vespa P200E says:

    Maybe Bankia and give away AKA throw in more beach towels (forget toasters) to coax deposit again? I mean last time it was Spiderman themed towels so maybe this time it will be Batman or something?

    I think the realities are setting in that the bank systems in the PIIGS are well like pig manures? Sure they tried the darndest to spray liquidity perfume but its temporary at best and now overflowing with piigs manures?

  2. NotSoSure says:

    Why would they willingly sink the banks? This too would be swept under the carpet without a doubt.

  3. Wealthy Man says:

    I Believe all the bank systems are corrupted !

  4. Al Tinfoil says:

    This is serious comedy. The financial world of the EU has truly gone “through the looking glass”. Negative yields for Spain’s T-bills! That can make sense only in an upside-down, reverse-logic universe.

    Anyone want a haircut?

  5. Tomas says:

    $40 billion in fraudulent assets?
    Please check your figures!

    Even 400 billion would be CHUMP-CHANGE compared to the debt heaped upon us amurricans, by OUR government.

  6. Petunia says:

    If the cost of money is less than zero than the market is telling you the money is worthless. Basically, the Euro and the Euro Zone have collapsed. Considering that this is also going on in other countries the game is over. They can’t fix it.

    • Dead at 18, Buried at 65. says:

      Here! Here! Petunia.
      Not only are they stating that money has no value, they are really stating publicly, is that these governments can no longer afford any principle interest on loans. In other words: –

      “We have come to the end of *money”! *(Fiat currency! – For the purists out there).

      This also implies that the war on “inflation” by sovereign governments has been “lost”!

      Seeing that Switzerland has also just offered negative rates on Swiss Bonds, and
      how the Eu Central Bank is now buying €60 billion Euros a month to buy “Sovereign Bonds”

      “In January, the ECB decided that the programme will consist of monthly asset purchases of €60 billion. ” – (Page 2 of

      Should tell us all that the “game is over”. The EU is post-humorously – DEAD!

      It is like a medical team who is trying everything they can to revive a long dead patient. -Refusing to accept that the patient is dead.

      The problem is Wolf, the EU quantitative easing program is illegal anyway. So we are about to see what illegal bailout program is going to be considered, well – “really illegal”!

  7. Vespa P200E says:

    Ah the follies of FIAT money where any sovereign entities can print it by the bundles as “legal tender” decree…

    The world was flooded with the FIAT since 1971 demise of the Bretton Woods system which tied USD to gold to an end and rendering the dollar a FIAT de factor global currency.

  8. Julian the Apostate says:

    I have often wondered why so many restaurants (the ones still in business) have these nostalgia themes, with 19th and early 20th century pictures, oil cans, Standard Oil signs, metal toys etc. Now I begin to understand it – it’s a sort of escape from the present chaos. The people who actually lived back then looked forward with eagerness to the future. Meanwhile, we eat our overpriced meals, surrounded by their relics and gaze back at them. We’re stuck in some kind closed circle do loop.

    • NotSoSure says:

      Well, the other explanation is that people’s memories are short and they tend to selectively remember the good part of the old days. Good, usable toilets are an advancement no matter what. In fact, that and ATM machines are the only worthy improvements in the last 50 years I’d think. The rest including tech (I am an IT guy and nowadays I think IT work is simply a matter of invading other people’s lives) are better left unsaid.

  9. Randy Garcia says:

    Banks in Europe are starting to get competitive and this can cause a lot of problem for them.. I feel like they are corrupted in a way!

  10. Julian the Apostate says:

    Well actually, NotSoSure, I was speaking of the zeitgeist, not the tech of the day B-) Nothing I learned in college about computers translates to today, but you don’t miss what you don’t have. I would add the VCR to your list. On demand viewing was really cool.

    • Dead at 18, Buried at 65. says:

      Hi Wolf! Can I ask you, do you think in your estimation that the EU quantitative easing is really a bail out of Switzerland? – Seeing that Switzerland pegged itself to the Euro and then bailed out Europe by buying an estimated €800 Billion Euros, then used that money to buy European Bonds?

      It is possible that the EU Central Bank is buying the Swiss held bonds back?

      If so, then what would the Swiss Bank do with all that cash?

      Austrian Economist would probably say, Switzerland should: –

      1. Buy its currency back.
      2. Buy gold.
      3. Purchase any outstanding bonds.

      Now, we know that the Swiss Bank is not going to do anything sensible like that. So, what would you predict?

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