Brexit Blowback Hits Italian and Spanish Banks

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

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.

  21 comments for “Brexit Blowback Hits Italian and Spanish Banks

  1. Joe says:

    The EU accuses Brexit have causes the lost of billions of these banks. I say these banks are loaded with junk bonds and inflated share prices anyway. Dropping 20% is nothing.

    • Sander boss says:

      Right? The whole show is so propped, house of cards. What did they think was going to happen – Chronic overspending relative to productivity? Ouch. Just print some more. Gotta love it.

  2. Petunia says:

    The media in the US is going out of its way to say as little as possible about what’s going on in Europe. This is more news than I have heard in the last two days of watching the financial news. I really need to cancel my cable subscription.

    • d'Cynic says:

      I cut the cable a while ago. I miss a limited set of sports events, but everything else half decent will come out on DVD, eventually. I also listen to internet music channels.

      But I digress. What you might have missed is the improvised press conference that Trump gave on his “chance” visit to Scotland. IMHO, he was very presidential, and did not need a teleprompter to do so:

      A good part of the questions from the so called financial press were focussed on Brexit’s impact on financial markets, and of course all of them are very worried about retirement funds. Funny, this crowd never issues a beep when NIRP or ZIRP is hammering them, and the fact that they have become dependent on equities, private or public.
      The asset class that should be the bed rock of such funds, government bonds, actually gained.

      • Petunia says:

        You give the talking heads too much credit. Even the financial press isn’t that good. Remember how stunned they were in 2008. I was only surprised that it took that long to crash.

        • d'Cynic says:

          What I said about the financial press was with a fair bit of sarcasm. Cutting this “expertise” out of your life is an additional bonus of cutting the cable. :)

    • Thomas Malthus says:

      I’d recommend throwing your tee vee out the window. I have not had a tee vee in 10 years now – best thing i ever did

  3. michael says:

    I am stunned by the obvious fraud of the ECB and the FED.

  4. David Calder says:

    Clearly we are all headed for a crash and a big one.. Brexit was just the spark because that fuse was laid a long time ago; even before 2008. It shouldn’t be surprising because with all of the shenanigans of QE, ZIRP, NIRP, the common person was left out of the equation. Helicopter money only landed on the roofs of the big banks.. Nothing has changed.

  5. ML says:

    I think Brexit volality has been / is being used as a good excuse / opportunity to sell riskier investments, such as Spanish and Italian stocks, banks etc. Not everything that happens when a market falls is a direct consequence of the primary reason for the fall.

  6. Mark says:

    DO YOU KNOW that the assholes want a SECOND VOTE on BREXIT cause they say the people didn’t REALLY UNDERSTAND WHAT WAS BEING ASKED OF THEM!!!
    WHAT TOTAL H***S**t!
    IM outraged and in live in the USA

    • Wolf Richter says:

      We predicted that – well, we suggested the possibility. Other referendums that turned against the EU were also brushed under the rug, one after the other. We listed some of them.

      • d says:

        Yes cameron has already put a 90 + day hold on an article 50 Notice.

        There is a demand for a new referendum and a potential british election looms which moves the whole article 50 thing to 2017.

        How many Club-med banks will no longer exist by then and how sick will the Euro be, should the ECB bail out the Club-med banks directly or through stealth.

        The ECB may fool the taxpayers of Europe, but the can not fool the international market for much longer.

        Weather England finally exercises article 50 or not. Brussels has been put on notice, the current EU model of immigration, both internal and external, with dictatorship from an unelected European Commission in Brussels, is effectively dead.

        Tusk and Merkel are already on a different page to Junker. Merjkel is even “quietly there may not actually be a Brexit, just a lot of useful destabilization.”

        The only happy people in this, are the french left, as they and france, gain from it, the one thing they relish above all else. Political EU POWER.

        The stock values of Club-med banks are too low something has to give in several of them, basically now. Can the EU actually afford to loose England. Now.

        Interesting times, may in fact, now be upon us.

      • polecat says:

        How many fingers does Brussels, London, and NYC have to plug the ‘exit’ holes now appearing in the dike from hell??

    • Petunia says:

      Do you know that the GOP wants to chose another candidate because the people didn’t know what they were voting for as well. I heard someone call the system the elites are going for “Voterless Democracy”. It would be funny if it wasn’t so real.

  7. Chris from Dallas says:

    TPTB will now “appear” to care about the common people. Look for lots of bread and circuses everywhere that will make Bernie Sanders’ giveaways look tame in comparison.

    Brussels/Merkel will do something “serious” about immigration but it won’t have any real effect.

    The MSM will continue to flood us with horror stories and lying statistics about how bad Brexit will be.

    Mini-wars and “police actions” will break out, Putin will seize upon the EU/NATO distractions, and China/US confrontations will accelerate.

    Islamic extremism will become commonplace almost everywhere there are open societies, leading to more rules and tracking of us to “protect” us.

  8. mh505 says:

    “… news that a slim majority of British voters had done the unthinkable … ”

    Slim only if you discount the manipulation factor. There can be little doubt that the true pro-Brexit count was closer to 55% or even higher

    • Robert says:

      I’m not sure how one quantifies the manipulation factor, but the British people get full marks for demanding paper ballots with none of the electronic three-card-monty trickery that Americans have allowed themselves to be scammed with. (and while everyone in the U.S. was engrossed with Brexit, Congress was busy putting another nail in the coffin of the right to privacy and the sanctity of freedom from government prying into electronic communications in the U.S.. The idea that we should have no expectation of privacy because a few bad people exist is really monstrous. Perhaps medical research funding could be directed to locating the Peeping Tom gene in the human genome and extirpating it.

      • mh505 says:

        For sure, Robert; with electronic balloting the leave-vote would not have made it. And there is indeed no way to truly gauge the manipulation factor.

        But there were stories of people demanding pens to put their mark, which gives reason to assume that many were using pencils. Also, ballot stuffing has not been unheard of, as well as the other side of the coin – loosing them.

        Too much was – and is – at stake for the establishment to not have tried their very worst.

        • d says:

          “Too much was – and is – at stake for the establishment to not have tried their very worst.”

          Pah England is not America, Europe, or even New Zealand. All places where ballots are regularly fixed.

          If they wanted to fix it ,they would have Properly, they have been doing it on and off for a very long time.

          Remeber elected English “Parliaments” predate agreed European “Discovery” of America by over 230 Years.

Comments are closed.