Worst Day for Italian & Spanish stocks. Banks massacred.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
The prophets of Project Fear reaped what they’d sown, as financial carnage spread across global markets on news that a slim majority of British voters had done the unthinkable by drowning out the relentless doomsaying and voting to leave the European Union.
The pound sterling plunged 8% against the dollar, to $1.37, its lowest level in three decades. The euro fell 1.93%, in itself a huge one-day move for a major currency. UK stocks surrendered over 3% of their value. But that was nothing compared to the havoc unleashed in other European stock markets.
Germany’s DAX plummeted 7%; France’s CAC 40 over 8%. But even that pales compared to what happened in Spain and Italy: the IBEX 35 plummeted 12.3% and the FTSE MIB 12.5%. It was their worst day on record.
The UK economy may be in for a hellishly bumpy ride in the months and years ahead, but the fact that London’s FTSE 100 was Europe’s least worst performing stock market on this day of all days suggests that Europe’s biggest financial risks probably lie elsewhere. And that is in euro land, in particular on its southern flank.
The unpalatable truth, as even the former governor of the Federal Reserve, Alan Greenspan, conceded today, is that the euro “is failing”:
It is a very serious problem in that the southern part of the euro zone is being funded by the northern part and the European Central Bank.
Another serious problem (on which Greenspan was somewhat less forthcoming) is Europe’s swelling ranks of heavily leveraged, scantily capitalized, bad-loan bedeviled, zombified banks. It was they whose stocks plunged the most today. Despite the fact that central bankers around the world, led by the Bank of England’s Mark Carney, the ECB’s Mario Draghi and the Federal Reserve’s Janet Yellen, had pledged to print into existence countless billions of pounds, euros and dollars in a last-ditch attempt to backstop Europe’s crumbling financial system, the EU Stoxx 600 Banking index plummeted 14.5%.
By far the worst of the fallout hit Italy and Spain’s financial sectors, where the banks saw their market capitalization decimated by roughly a fifth. For Italy’s biggest banks, many of which are filled to the gills with slowly putrefying non-performing loans (NPLs), it was their worst day in what is fast proving to be their worst year, ever. If the current trend continues — and there’s no reason to suspect it won’t — some are unlikely to even make it to Christmas in one piece.
The shares of Italy’s biggest bank (and global systemically important institution), Unicredit, slid more than 23% on Friday. They are down 59% since January. The stock of Banco Populare, Italy’s fifth biggest bank, also lost 23% on Friday and is down over 80% 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, fell by 16.5%.
In Spain, the financial sector hit new yearly lows as €23 billion was wiped off their combined market cap. It was the worst rout the sector had ever experienced. Bankia lost 20% of its share value. So, too, did too-big-to-fail Santander and Sabadell, two of the four European banks singled out by JP Morgan analysts as the most exposed to a Brexit fallout. Spain’s other biggest banks — BBVA, Caixabank and Popular — weren’t far behind despite their lesser exposure to the UK market.
Santander and Sabadell both have a major presence in the UK. Close to a third of Santander’s operations are in the UK while for Sabadell, Spain’s fifth biggest bank, the UK represents just over 20% of its operations, thanks to its purchase last year of UK-based TSB. It is also one of the biggest sources of the two banks’ operating profits, but if the sterling continues to fall and the UK enters into recession, those profits could be decimated. For Spain’s biggest bank, Santander, the timing could not have been worse, with profits from its other key international market, Brazil, also shrinking at an alarming rate.
Clearly, many of the banks in the Eurozone’s third and fourth biggest economies are going to need some serious palliative care in the coming weeks and months. As WOLF STREET warned last week, in the event of a Brexit, the ECB is unlikely to let such an opportune crisis go to waste. It will almost certainly use the resulting chaos as cover for stealth bailouts of Italian and Spanish banks, which together are already gobbling up more than half of the funds the ECB provides in its regular refinancing operations. As Bloomberg reported today, they are also by far the biggest participants in the European Central Bank’s latest new loan program, TLTRO II:
UniCredit’s total borrowing in Friday’s auction amounted to 26.6 billion euros including 18.2 billion related to Italy, while Intesa took 36 billion euros. BBVA borrowed 24 billion euros, the person said. Banca Monte Paschi di Siena SpA, Unione di Banche Italiane SpA and Banca Popolare dell’Emilia Romagna SC also increased their net borrowings, while Banco Popolare SC, Bankia SA, Banco de Sabadell SA and Banco Popular Espanol SA rolled over previous loans into a new program…
However much money the ECB will conjure out of nothingness in the coming days under the pretext of warding off Brexit-induced chaos, it won’t be enough to undo the gargantuan problems plaguing the Eurozone’s banking system. By Don Quijones, Raging Bull-Shit.
With a possibly messy Brexit playing out, and with elections in France and Germany coming up, a handful of European finance ministers, led by Germany, did banks a huge last-minute favor. Read… Day of Reckoning for Banks in Italy, Spain, & Portugal Kicked Down the Road (Elegantly) for 18 Months