Brexit Chaos to Serve as Cover for ECB Bank Bailouts

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

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  38 comments for “Brexit Chaos to Serve as Cover for ECB Bank Bailouts

  1. nick kelly says:

    Mostly true, and as the author hints here and there, due to government and public overspending covered up with credit creation.
    If you want to call living within your means something besides ‘austerity’, fine, but it won’t make the rose have fewer thorns.

    But if the nettle had been grasped earlier it would have been better.
    In hindsight it’s obvious France would have been better off going with Hollande’s opposition. Now Hollande must make a sharper right turn, having made a nonsensical move to stimulate the economy by more hires in France’s bloated public sector.

    France’s and Italy’s and etc. tragedy is they never had a Thatcher. Just a bunch of glad- handers who wanted to be liked and re-elected.
    Yes it was tough, closing down unprofitable coal mines ( a debate that seems quaint today. Like, coal? ) Or telling the Fleet Street press unions that they weren’t going to be able to stop a guy (Eddie Shaw) from using modern equipment.
    But who today would trade the UK’s economy, warts and all, for France’s or Italy’s?
    The really scary thing is that, as Greece discovered when the cash machines ran dry- there is no net. At that time the Red Cross and others were scrambling to arrange basic medicines like insulin.
    Some suppliers said they’d deliver for IOUs.
    Switzerland’s CIBA? Cash.

  2. Chip Javert says:

    Watching the EU react to a whole bunch of “other people’s money” (the UK’s) walking away from the “European project” will be a hoot!

    Yea, there’s some uncertainty associated with this, but I SERIOUSLY doubt it equals the end of western civilization.

    If Greece has done this 1-2 years ago they would probably be well down the (admittedly rough) path to recovery. But they didn’t and they’re still arguing about whats the proper pensions for a retired 50 year-old who never really produced anything of value in their amazingly brief “careers”. The discovery of the logical answer ($0.00) is still years away.

  3. ML says:

    You place too much emphasis on stock/share prices. The latter are a function of the stock market and the pricing of risk. Since most shareholders would be second- hand, and have possibly overpaid it is modtly their look-out that is in difficulty, not the companies themselves.

  4. MC says:

    I find really telling any discussion about banks has been completely erased from Italian media which, very much like the wartime ancestors, only focus on success stories, which usually means massaging some data and ignoring others.

    Of particular interest is that €6 billion rescue fund. Ostensibly set up to solve that little NPL issue, in reality its sole scope is to bail out bondholders of four minor, local banks which went belly up late last year. Why the special treatment? Simple: first of all a minister’s family is mired neck deep in the whole scandal (she was obviously shielded from calls to resign). Second, three of these banks were chiefly active in areas where Italy’s ruling party (PD, successor to the old Communist Party) has held sway since the 50’s. It’s a political imperative the bondholders are at least partly reimbursed, and EU rules be damned.

    Except when they’ll be needed to solve the true NPL issue. Let’s be wholly honest here: nobody, not even the Italian government or ABI (Italy’s banking association) has a clue of how big this NPL “problem” is. When it first surfaced it was quoted at “€160 billion at very most”. We are already at over €300 billion and counting.
    Apart from zombie business, a core component are loans extended to local governments (chiefly provinces and municipalities) without too much thought been given, especially in the building booms years of 2003-2009. Italy’s local governments have long long been bad debtors, invariably settling their bills late (90 days after coming due is the norm) if ever, and they’ve become worse as their old ways have caught up with them. MPS, Italy’s fourth bank, was crippled by loans it extended to munis without caring too much about, say, if loans will ever be repaid.

    As bad as Spain’s banking system is, Italy’s is far worse. My money is actually on the latter as the catalyst for a major crisis: despite the cronyism, the corruption and everything else, at very least Spain acknowledged its banking system had problems, and lots of it. Italy, true to its tradition, has completely ignored the issue. Even as MPS was heading towards a cliff, political capital was expended by the cartload to convince everybody, from EU authorities to foreign investors, Italy’s banking system was solid and this just a small accident. Accidents happen all the time, right?

    • Wolf Richter says:

      Thanks, MC, for the detailed look into the Italian banking problem, particularly the politics involved.

    • Petunia says:

      There was another dead banker story this past week with claims that several dead bankers had ties to the Italian banking world and scandals.

    • nhz says:

      Italy’s banking system may be bad, but unlike most of northern Europe they don’t have mountains of mortgage debt (that will implode as soon as rates start to rise in earnest) and Italians are on average among the richest citizens of Europe (capital several times the average for e.g. Germany).

      All EU countries have their own serious financial flaws and hidden troubles. The Netherlands is backstopping 150 billion or so in mortgages (most of them 100-110% mortages, so no skin in the game for any of the ‘homeowners’) with a 0.2 billion warranty fund (that is backed by taxpayers in case it proves insufficient). Although there has been some discussion with EU authorities, this type of deceit continues without any serious changes.

      I guess after a few cosmetic changes the 6 billion rescue fund in Italy will be deemed fine by EU authorities, nobody wants to rock the boat.

      • nick kelly says:

        Unfortunately ( or maybe bad luck isn’t a factor) the 6 billion fund is to treat about 300 billion of bad loans.
        I’m puzzled by the other statement that Italy is more prosperous than Germany. Germany for many of the last few years is in dollar terms, the world’s leading exporter. It’s not China everyone’s first guess.
        Germany has three auto groups. Daimler, BMW, and VW (Porsche, Audi) any of which is larger than FCA.
        And that is just scratching the surface- most German exports of machinery are invisible to the consumer- they have little in Walmart. And they are not cost competitors.
        So where does Italy acquire this extra wealth ( after deducting 300 billion for bad loans)

        • nhz says:

          there’s nothing puzzling, it is simply the facts that you could look up from e.g. Eurostat statistics. I’m not saying that Italy is more prosperous, I’m talking about the average Italian citizen which is something completely different (from the top of my head something like average German household capital around 75K euros and average Italian household capital around 250K euros). In general most of the German financial gains have accumulated with the 1% and the biggest multinationals, while in Italy the gains have spread out far more (probably thanks to more small to medium sized businesses).

          If you look at financial situation of larger companies or public finances it may be the other way round than with private finances.

          Export volume doesn’t say anything about profits, just like income doesn’t say anything about wealth. There is some relation but it can vary strongly between and within countries.

        • Wolf Richter says:

          Nick, I think nhz might refer to an ECB study of household wealth and income by country in the Eurozone … a huge enterprise that took years to do. Results were partially published in early 2013. I wrote about it at the time. Turns out, Italians are big savers and have lots of money in the bank. And they own their homes. Germany is more of a renter-landlord country.

          Here’s the article, including links to the study. There was quite a bit of controversy around this at the time because the results were so surprising and some of the info was suppressed or at least delayed.

  5. Debravity says:

    Sir Don, if you had over €50k in a 3% Irish bank, would you change it to pounds and save it in England? My question goes to the core of your premise. In your opinion, is the weakness European financial system likely to crash the Euro anytime soon? Or, like, should I be buying gold instead of £ or €? lol love your work

  6. Debravity.. says:

    Sir Don, if you had over €50k in a 3% Irish bank, would you change it to pounds and save it in England? My question goes to the core of your premise. In your opinion, is the weakness European financial system likely to crash the Euro anytime soon? Or, like, should I be buying gold instead of £ or €? lol love your work

    • Don Quijones says:

      Tbh, Debravity, I hate giving investment advice.

      That said, the one thing I’d never do — especially at a time like today, with huge financial risks gathering all over the place — is have all my eggs in one basket, whether an Irish or British one. Right now, if you’re like me (a British ex-pat living on the continent, or for that matter a “continental” living in Blighty), owning a bit of both makes a lot of sense. As for gold, its 5,000-year history of serving as money pretty much speaks for itself.

  7. Yoshua says:

    The Italian banks are collapsing since they are connected to an economy that is dying. Italian industries are dying and can longer generate a profit. They are over indebted and need new loans to stay alive. The ECB is printing money, lending it to Italian banks and the banks lend it to the industries to keep them alive.

    A de-industrialization of Italy would lead to massive unemployment’s, collapsing banks and a bankruptcy of Italy.

    So how to defuse this time bomb ?

  8. nhz says:

    ” not only could it spell the beginning of the end for the 28-nation bloc but also for western political civilization “in its entirety.”

    EU politicians are working very hard at ending western civilization as we know it anyway, by importing millions of people from Middle East, Asia and Africa that have an extremely hostile attitude towards the west and no intention to contribute to our society, by engineering a massive wealth transfer from the middle class to the bankers and other parasites and killing small businesses, by making the finance sector the only yardstick for economic policy, by blowing ever bigger bubbles together with the ECB, by putting criminal bankers and politicians above the law, by continuously prodding the Russian bear (through NATO, political coups and financial blackmail) instead of helping both economic blocks by trading with the Russians, etc. etc.

    The end of EU POLITICAL civilization could solve a lot of the current
    European problems, the only ones who should be fearful are the elites themselves. Can’t wait to see it happen :-)

  9. EVENT HORIZON says:

    Help me here:

    Greece can’t pay their bills.
    Italy can’t pay their bills
    France can’t pay their bills
    Spain can’t pay their bills….

    Yet, they each have BILLIONS of Euros to import Millions of “immigrants”.

    These countries can not pay for medicines. Can’t pay for food for their own children. Can’t pay the pensions they promised.

    Yet, they each have BILLIONS of Euros to import Millions of “immigrants” and house them, feed them and buy supplies for them.

    • Wolf Richter says:

      They can pay their bills just fine. They borrow at record low rates – below zero for some of the countries on your list. As long as the ECB keeps buying bonds and repressing rates, these countries will be able to pay their bills, just like Japan is still able to pay its bills. Printing money works – for a while.

      Greece is the exception. The ECB doesn’t buy Greek bonds. It already owns a shitload of Greek bonds via the bailouts. But that too will change. I think it will eventually buy Greek bonds and then Greek yields too will drop below zero and Greece can borrow all it wants and let its pandemic corruption suck it all out again.

      • Robert says:

        “Greek yields too will drop below zero and Greece can borrow all it wants” Where did the crazy idea come from that Utopia comes out of a printing press? If you recall, Greece got into trouble because it did not adhere to the rule that no Eurozone member was to run a budget deficit of over 3%. To suggest that they can run any deficit they want by not having to pay any interest on new debt is…Weimarian!

        • Wolf Richter says:

          You misquoted me!!!

          Here is what I wrote in my comment: “I think it [the ECB] will eventually buy Greek bonds and then Greek yields too will drop below zero and Greece can borrow all it wants and let its pandemic corruption suck it all out again.”

          Once the ECB starts buying Greek bonds, the floodgates will open, and yield chasers will go after them. Even Japan can borrow all it wants though it’s in much worse fiscal shape than Greece. Why? Because the BOJ is buying the bonds. So watch what the ECB will do … every single fiscal rule in the EU has been and will be violated with impunity.

      • nick kelly says:

        I don’t see how it is logically possible to support the demise of the EU and the ECB and also support continued aid for Greece. Who is supposed to backstop their bonds etc.

        As for the Italian wealth, I wonder ( i don’t know ) if it has ever had its real estate correction, or is it like Spain where banks just pretend that RE is worth double? Also if the wealth is saved in Italian banks, how much of it actually exists and how much is book keeping entries.

  10. chris Hauser says:

    more and more i think of the giant sucking sound of nafta, but the distance of china masks the roaring sound of their deflationary mania. they just don’t know any better, no check that, their internal polity is on a path it can’t get off.

  11. wratfink says:

    I was under the impression that this vote is a non-binding referendum.

    Meaning , Parliament would ALSO need to up or down vote a BREXIT.

    Parliament will do as the Square Mile tells them or there will be “tanks in the street”.

    • nhz says:

      in that case, just look at the Netherlands what politicians do with a non-binding referendum. They totally ignored the clear NO vote against the new EU constitution in 2005, and they sure are going to ignore the clear NO vote from earlier this year against the EU-Ukraine treaty (although our lying PM and his friends still pretend they will honor the vote …)

    • Konstantin KS says:

      I feel that a brexit will not happen despite a clear yes to it. Of course they will capitalise on the temporary turbulence to accelerate a decade of measures inside a month. I just remind you that the Greek referendum was ignored as well by the same party that held it. But the “No” was masterfully used to impose the either way inevitable harshest 4th memorandum.

    • nick kelly says:

      Sir: you are talking about the UK- English law is the foundation of the US legal system and goes back to the 13 century and Magna Carta.
      During the Nixon pre-impeachment hearings, English law was invoked as powerful Senate voices tried to maintain that the courts ‘couldn’t tell the President to do anything.’

      I had the misfortune to hear Professor Dershowitz (sp?) on TV expounding on habeas corpus: ‘Habeas corpus is a feature of the American Constitution’ …!
      Of course habeas originates in England some centuries before the US existed.
      The UK has no written constitution- it is governed by legal precedent.
      There is no possibility of the government holding a referendum (a very rare event) and not carrying out the decision. There are still a lot of pitch forks in England. They executed one King, then they hung the guy (Cromwell) who executed him, but they had to dig up Cromwell first.
      Of course, the actual procedure could be fudged- the UK could withdraw in name but in some practices remain.
      But there will be no more EU daring to interfere with the British banger, (the nerve of bloody Jerry trying to tell us that sausage shouldn’t contain bread crumbs)
      Something like this has to happen after a leave vote anyway because transactions can’t be halted in mid- air.
      I assume some notice is required but I don’t know.

  12. Petunia says:


    Writing about Italian banking without mentioning the biggest hedge fund in the world, the Vatican, seems a bit incomplete. What’s up with those guys?

    • Don Quijones says:

      Thanks for the suggestion, Petunia, but I doubt there’s enough space in a typical WOLF STREET article (or even a thousand) to do justice to such an epic, twisted saga.

      In the meantime, here’s a bite-sized taste of Mario Puzo and Francis Ford Coppola’s take on the subject, which includes the great line, “It seems that in today’s world the power to absolve debt is greater than the power of forgiveness.” Enjoy:

  13. The old lament “I cut it off twice, and its still too short” applies here. If after 8 years of Z/NIRP, QEI…, etc. it is obviously time to try something else.

    It is not clear what the “something else” should be, and it may well be that several iterations of “something else” will be required to re-invigorate the economies of the world. What is clear is that the old folk remedies, potions, spells, incantations, etc. are no longer working in the “brave new world order” of global corporationism, and something else must be tried.

    One of the basic requirements appears to be the need to minimize tax evasion to both increase governmental revenues and to “level the playing field” for the various economic sectors and strata [SMEs] in this new economic epoch.

    A few suggestions (there are many others) are:

    * Imposition of unitary taxation such that a companies gross revenues are allocated across taxing jurisdictions/countries pro rata to their sales. For example, if company X has 60% of its sales in the U. S. then 60% of their gross income should be considered to be earned in the U. S. and subject to U. S. tax law. This is specifically intended to eliminate tax evasion by “transfer pricing.”

    * Imposition of a small financial transaction or Tobin, tax both to generate revenue and to discourage high speed/high volume speculation. [Foreign exchange speculation is of particular concern.]

    * Imposition of a gross capital or wealth levy on all entities including trusts and charitable institutions/funds, with a high threshold [ 20X median family income?], possibly progressive, high enough to minimize and possibly reduce the concentration of wealth. The high threshold is indicated because the major assets of most people are their homes and vehicles, which are already heavily taxed, albeit at the state/local levels. Where exemption from the capital levy appears to be in the public interest, the levy can be refunded/rebated, but this will allow easy tracking of the loss of revenue by the “exemption” to permit cost:benefit calculation, and public oversight.

    • nhz says:

      you can be sure that the politicians will formulate any new tax law in such a way that there are giant loopholes for multinationals and the 0.1%. The plunder of small companies and the middle class will continue until there is nothing left and then the system will implode.

      Here again Netherlands is an interesting case. They pretend to have honest taxes but in reality they are one of the biggest tax paradises worldwide, both for multinationals (over 10% of all company turnover worldwide flows through the tiny Netherlands, so they can pay almost zero taxes) and for high income individuals (on the condition that you buy a way overpriced Dutch home, or have so much capital that you qualify for the extremely low tax brackets that are reserved for the real elite).

      For the Tobin tax we have already seen the proposals: the big speculators that produce 95% of the transaction volume through HFT etc. will be exempt or taxed at much lower level, while most of the tax will come from the little people who try to put their money in stocks instead of seeing it slowly disappear on a ‘savings’ account.

      P.S.: I’m totally AGAINST a high treshhold for own homes or vehicles; RE isn’t heavily taxed everywhere, several EU countries have very low RE taxes. Not taxing private homes is punishing renters and savers compared to people who put their capital in their home (even more so if they have a huge mortgage which is heavily tax-subsidized like in my country). Government should not interfere with what people spend their money on or how they want to save their money; every exemption will create just more distortion (and potential for fraud and evasion).

      • RE: Government should not interfere with what people spend their money on or how they want to save their money; every exemption will create just more distortion (and potential for fraud and evasion).
        While this scans well, and I sympathize, the hard, cold truth is that government *IS* distortion and coercion. The only real choice is what [small] areas are to be “free,” and what types of [and how much] coercion/distortion are to be applied to which economic sectors/strata. [Distortion/coercion can be either favorable or unfavorable.]

        The three [Populist] suggestions were made to distort/coerce the socioeconomy in the direction I feel to be better for the *LARGE* [>99%] majority and away from the reactionary/rentier model, which has proven to be highly unstable, and prone to violent correction in not only the economic but also social/cultural areas. A key metric, with high correlation with economic and social upheavals is the GINI index or coefficient, which continues to climb in the U. S. and is indeed the highest of any of the OECD countries.

  14. Robert says:

    Dear U.K.: Please tell those EU fetter-fitters to just f-off, please. You know, the part where “Britons never never never will be slaves.”

  15. Wayne Jeanneret says:

    Regardless of the leaders fear mongering, all residents of EU and Britain will still want to eat 3 meals a day, wear warm clothes and sleep in a dry comfy bed. This means 500 million people will continue to spend their weekly family income …………………. on basic living needs. There in lies the real economy. Champagne, caviar and bullshit is what sustains the 1% at the top.

  16. bill says:

    the trouble with capitalism is we have not had any for along time good busiiness thrive bad should be allowed to fail that includes banks. perhaps the forthcoming. Shemeta will straiten things out

  17. Jeff says:

    “The biggest problem is the over €300 billion of non-performing loans (NPLs) putrefying on the banks’ balance sheets.”

    Beautiful wordsmithing.

    I think we should use “putrefying” more often to describe some of the most ridiculous securities littering balance sheets across the financial sector.

    Thanks again for the exquisite word choice.

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