“Europe is caught in a trap.”
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
In Europe, banks are beginning to feel the side effects from the ECB’s negative interest rate policy (NIRP), which (among other things) is meant to weaken the euro, fuel inflation, force banks into riskier lending, and prevent Eurozone economies from buckling under the sheer weight of their sovereign debt.
But it doesn’t work. Inflation remains much lower than the ECB’s target headline rate of 2%, European sovereign debt continues to grow at an alarming rate, and bank lending remains anemic in most countries. And it could actually end up killing the patient, Europe’s biggest banks.
That’s what Francisco González, Executive Chairman of Spain’s number-two financial institution, BBVA, just warned in a speech at the Spring Membership Meeting of the world’s most powerful financial lobby organization, the Institute of International Finance (IIF).
“Europe is caught in a trap,” he said. “It has to do something to boost its growth potential. But expansive monetary policy has led to negative interest rates, which are killing us.”
For BBVA, like most other European banks, the main problem with NIRP is the shrinking effect it has on its operating margins, which in turn puts unbearable pressure on its balance sheets. For example, when the Euribor is at zero, interest rates on variable rate mortgages are at next to zero. And these variable-rate Euribor-linked mortgages predominate in Spain’s mortgage market.
Until not so long ago, Spanish banks were insulated from this problem by the floor clauses they discreetly inserted into their mortgage contracts. These set a minimum interest rate — typically of between 3% and 4.5% — for variable-rate mortgages, even if the Euribor dropped far below that figure. That meant the banks enjoyed all the benefits of low-interest rate living with none of the drawbacks, which were exclusively reserved for Spanish mortgage holders.
All that changed in April when a Spanish judge ruled that the clauses were both abusive and lack transparency. The 40 banks implicated, including BBVA, now must reimburse clients all the money they’ve overcharged them since May 2013, and perhaps even since 2009. That could be as much as €10 billion. Also, as WOLF STREET reported at the time, in a delicious irony, all the banks that applied the floor clauses will now have to learn to survive without the one mechanism that protected them from the profit-shrinking effects of the ECB’s NIRP — just when the Euribor goes negative!
Cue Gonzalez’s public meltdown!
But BBVA’s problems are not just a result of ECB policy. The bank also has an unwieldy €16 billion exposure to the beleaguered global energy industry, making it the 8th most exposed bank to the sector in Europe after BNP, ING, HSBC, Credit Agricole, Barclays, Société Générale and Deutsche Bank. Unlike BBVA, however, these banks are all global systemically important financial institutions, meaning they’ll get bailed out (assuming they can get bailed out), and perhaps their stockholders and some of their creditors get bailed in, if things get really sticky.
Just as ominous for BBVA is the fact that 43% of its current reported exposure to the energy sector is in the form of junk bonds — compared to just 11% for Spain’s biggest bank, Santander.
BBVA obtains 68% of its profits from countries where oil and other commodities are vital for the economy. Through its subsidiary BBVA Bancomer, BBVA is the second biggest bank operating in Mexico, which accounts for 40% of the group’s profits. And in Mexico, things are looking decidedly grim for the state-owned, debt-laden oil giant Pemex. Bank of America-Merrill Lynch points out that BBVA has not divulged how much of the €30 billion it holds in Mexican corporate bonds or the €11 billion it holds in U.S. corporate bonds are concentrated in the energy industry.
Besides its acute exposure to the energy industry, BBVA has other problems to contend with, including heavy presence in emerging markets with struggling currencies, in particular Latin America and Turkey. Another serious threat it and most other Spanish banks face is the planned introduction of new rules in Europe that would set a limit on the sovereign bonds some banks can hold as eligible “risk-free” capital.
According to European Central Bank data, euro-area sovereign bonds accounted for just over 10% of banks’ assets in the Eurozone, or €2.73 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. This trend is particularly acute in countries on the periphery, where banks’ balance sheets are overflowing with bonds of their individual sovereigns.
The rule change is being demanded by fiscally hawkish Eurozone countries such as the Netherlands, Finland and Germany, which want the system overhauled before forging ahead with a closer banking union, to the barely concealed horror of southern European bankers and politicians.
They include Santiago Fernandez de Liz, the chief economist for financial systems and regulation at BBVA, who cautioned earlier this year that applying a proposal of this kind in the Eurozone would risk “reigniting the fragmentation” of Europe’s financial markets, which just a few years ago almost put an end to the single currency.
Clearly BBVA has serious issues. But now its Executive Chairman has come out publicly against NIRP. Other bankers have also mumbled things to that effect. From a German banker, it’s one thing. But from a Spanish banker, whose bank is supposed to be one of the ECB’s prime constituency, it’s quite another. Banks like BBVA are the reason for QE, LTRO, and all the rest of the ECB’s alphabet soup creations. But now they are unhappy that they too — not just consumers, savers, and taxpayers — are having to pay the price for Europe’s failing financial system. By Don Quijones, Raging Bull-Shit
“Markets say the ECB is done, their box is empty. But we are magic people,” said ECB Governing Council Member Vitas Vasiliauskas. “Each time we take something and give to the markets — a rabbit out of the hat.” Read… ECB Prepares to Expand its Racket, Markets Salivate
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
Interestingly, I just got an email from my 401(k) plan that said that soon I will be expecting negative interest rates on my money market funds. thank you helicopter Ben!
Already? That’s brutal. I know big companies have been getting those notices. But retail money-market funds!?! Can you tell us who manages the fund? (you can email me if you prefer, via the Contact tab)
Has anyone else among our readers and commenters gotten this type of notice?
I am not familiar with 401 structuring.
I have been expecting this for any retail fund the holder can not instantly demand their liquidity from, with no serious Penalty/loss.
A lot of those Insurance/Endowment/Annuity policy’s will head in the same direction if NIRP continues.
As they simply can not garner the returns to cover their exorbitant costs (Top tier Salary’s) and the promised returns to the “Investor’s policy holder’s”.
2/3 of the dying retail malls globally, are owned by those fund’s, and they are not returning a profit to the “Investor’s policy holder’s”.
These notices are an early harbinger of what awaits probably all pension funds including mine.
There are few other options:
1. Cutting benefits to later collectors to this legal Ponzi scheme (i.e. those blessed with longevity).
2. Government bailout (unlikely).
3. Inflate away the nominal amount so it buys zilch when you come to collect.
In my neck of the wood, it is already happening with hyperinflation in housing prices.
4. Some combination of all previous.
And these are the predictable factors, i.e. can be mathematically modelled.
There are unpredictable ones:
1. Stock market crash (pension funds are now deep in equities, and all kinds of risky investments).
2. Social strife as clueless bureaucrats try to solve the problems with uncontrolled immigration. (And I will leave out the environmental impact of this nature Ponzi for some other time).
And of course the end game – which is the total collapse of civilization as we know it.
A very notable quote was made today on RT’s Boom Bust regarding the Brexit vote and Greece’s situation by Marshall Auerback.
“There’s no compelling case being made to champion the European Union in the sense that it’s become a roach motel full of austerians.”
There was a rumor a few months ago that all pensions would be forced to buy a high percentage of treasury bonds. That was before the Eurozone crisis hit tho. It had something to do with banking stability tests.
A friend wanted to change her account in tiaa creff to gold or silver. It was impossible as far as I could tell.
There are advertisements saying that 401k can be moved over to at-home storage(I have seen it here, I think). But many government employees and teachers are not in a 401 k and have no control. The best they can do is sign up for less of their pension and move that income into an account that can be in silver and gold(I believe they have to be Eagles).
At a used bookstore I find it amusing to take a book and look at the price and the date published. Generally silver has maintained purchasing power parity.
d comment about reo is true in my neck of the woods: A friend was going to sell insurance and assured me it was all in income-producing real-estate. But later they said it was all in gov’t bonds(got out of bad smelly situation).
1. All the clever financial experts, economists and bankers who have been running Western economies for decades are fools, who completely fail to understand their own fields of “expertise”;
2. The wonderful capitalist free-market free-enterprise system, which we have been told for decades is Nature’s supreme achievement, so perfect that it could never require any changes, leads directly to destruction and poverty for all.
Of course, both might be true.
How about when the leftist in group 1
Unfairly and excessivly Interfere with those in group 2. So that the leftist from group 1.
Can get a free ride on group 2. Via legislative Extortion.
Finacial Chaos then ensues.
As theLeftist from 1 keep on extorting and regulating to extract more and mopre from Group 2.
To fund their ever expanding extortion and regulation enterprises. AKA Socialist and Leftist employing, Government Bureaucracies.
Sing it Brother! I am definitely biased because the abovementioned cycle put my small-businesman Dad out of business. And he at one time had been the largest employer in his (admittedly small) county.
How small is small? The entire county had zero gasoline stations at the time.
FACT: Capitalism requires a source of cheap to extract oil.
FACT: We have run out of cheap to extract oil (we are NOT out of oil – plenty remains)
FACT: expensive to extract oil destroys growth.
HOW HIGH OIL PRICES WILL PERMANENTLY CAP ECONOMIC GROWTH
For most of the last century, cheap oil powered global economic growth. But in the last decade, the price of oil production has quadrupled, and that shift will permanently shackle the growth potential of the world’s economies. http://www.bloomberg.com/news/articles/2012-09-23/how-high-oil-prices-will-permanently-cap-economic-growth
In response to your question, the men in control are not incompetent – they are aware of the above — and they are do everything possible to keep the global economy from collapsing…
‘Whatever it takes’ … anything goes… if it buys us a month or a year … or a day….
They will of course fail.
Well clearly it’s not option 2 as we sure as h Lo do not have a free market capability system. That is only possible under zero regulation.
2. The wonderful capitalist free-market free-enterprise system, which we have been told for decades is Nature’s supreme achievement, so perfect that it could never require any changes, leads directly to destruction and poverty for all. Tom Welsh
What is free market about a system in which the poor, the least so-called creditworthy, are forced* to lend to banks to lower the borrowing costs of the rich, the most so-called credit worthy?
*Example: Since US Social Security payments can only be received by direct deposit with very few if any exceptions and since a deposit is legally a loan then SS recipients are FORCED to lend to depository institutions with accounts at the Federal Reserve, aka “banks”.
You can not breed a religion, only indoctrinate it.
“But now they are unhappy that they too — not just consumers, savers, and taxpayers — are having to pay the price for Europe’s failing financial system. ”
But if the banks get squeezed too, there must be people who benefit (in addition to Wall Street that always wins …). Like the many ‘homeowners’ who are laughing all the way to the bank thanks to the lowest cost ever for ‘owning’ a home that they normally would never be able to afford in the first place. I know several of people both in Spain and Netherlands who pay just 100-150 euros a month for very nice homes, while renting a similar home would cost 1000-2000 euros a month.
And of course, these people (who see this as an entitlement for their extremely clever bet in the housing market) are a big chunk of the voters. They are also counting on politicians to bail them out or forgive the debt once home prices start declining in earnest – which may never happen, given the ‘all-in’ policy of Mario and his mob.
Anyway, even without a bailout these people are winning because most of them simply spend all the money they get, so there is nothing to collect from them when things go wrong. This will probably continue until most of the middle class, savers and renters have been obliterated.
They dont see (And perhaps you dont) That they and their brothers in Italy and greece are what is making the Euro Banking system fail.
Too many sick bank’s (and to many bank’s in the Eu full stop) with too many NPL’S.
If you have a farm full of sick animals you do what you have to do expediently.
Dig a hole, and then shoot and bury all those, that are to sick to be easily and quickly cured.
Clubmed and particularly Spain Italy and greece is the section of the farm full of very sick animals that will never recover. Yet the farmer will not do what must be done, so all the animals on the farm are being further infected.
Perhaps (I have not thought on this deeply yet) The ECB is trying to use NRIP (long term a bad policy) to force consolidation in the clubmed banking sector?