Big Trouble in Emerging Markets.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
Banking stocks in Europe continue to benefit from the gravitational pull exerted by the so-called Trump effect. But the effects have not been felt universally. Monte dei Paschi di Siena, which is at the center of Italy’s banking crisis, has been reduced to a penny stock. The shares of Italy’s other large banks continue to trend downwards. And the problems in other national banking sectors have not gone away; they’ve just been consigned to the background. Such is the case in Spain, where the risks and challenges in the country’s banking system continue to bloom.
Spain’s Very Own Homegrown Monte dei Paschi.
The multiyear decline of Banco Popular, Spain’s sixth biggest bank, has been no less spectacular than Monte dei Paschi’s, having lost over 90% of its stock value in the last nine years. The shares are now worth just €0.85 (compared to over €15 in 2008) and continue to shed value. Over 7% of its shares are being shorted by London and Connecticut-based hedge funds.
The biggest cause of concern is Popular’s plan to spin off €6 billion of impaired property assets into a vehicle optimistically christened “Sunrise,” which might not go far enough given the bank is estimated to have €30 billion of toxic assets festering on its balance sheets. In its latest report, S&P declined to downgrade Popular’s rating, though its choice of words at times, including “moderate solvency” and “ambitious plan” (to describe Sunrise), hardly inspire confidence.
To make matters worse, a bitter power struggle is being waged between Popular’s long-serving president, Ángel Ron, who has occupied the top spot since 2006, just a year before the rot began to set in, and a cluster of board members led by Mexican billionaire Antonio del Valle who, together with his associates, owns 4.25% of Popular. Del Valle has already made a name for himself in the banking business by turning around Chicago-based Metropolitan Bank Group, after acquiring the business for a fraction of its book value. Now he appears to have his sights set on a much larger prize.
Big Trouble in Emerging Markets.
Since Trump’s election, Spain’s two biggest banks, Santander and BBVA, have seen their shares slide, by 3% and 11% respectively. The simple reason for this is their bloated exposure to emerging markets, whose assets are cascading in response to a strengthening dollar.
Santander’s biggest emerging market, accounting for 20% of its global profits, is Brazil, a country that has been mired in recession for over two years, its longest for decades. Earlier this year, President Dilma Rousseff was deposed and replaced by her vice president, Michel Temer, a backstage wheeler-dealer who hadn’t won an election of his own for over 10 years. He’s now facing calls for impeachment after revelations of corrupt business practices. And the economy continues to languish.
Santander’s second biggest emerging market is Mexico, a country that is bearing the brunt of the negative fallout from Trump’s election and which accounts for 6% of Santander’s global profits. For Santander’s rival, BBVA, the risk of exposure to Mexico is seven times greater.
Mexico accounts for two-fifths of BBVA’s global profits. BBVA’s second biggest foreign market is Turkey, via its 40% ownership of the Turkish bank Garanti. Months ago, Turkey was the scene of a botched coup d’état and is now toiling under a prolonged state of emergency, a massive purge, and dark clouds of economic uncertainty.
Even in the tumultuous first quarter of 2016, BBVA received 21% of its operating income and 13% of its net profits from Garanti’s operations. The country also accounts for roughly 5% of the group’s loans. Under government pressure, Garanti has had to cut rates on loans to small companies and consumers twice since the coup attempt.
For the moment earnings are just about holding up in both countries but it’s in the currency markets where the real pain is showing, and that eventually is going to have an impact on the bank’s margins. The Turkish lira is the third worst-performer among emerging-market currencies this year, losing 11% against the euro. The European Parliament’s unanimous vote yesterday to freeze EU membership hardly helped matters, spurring a fresh round of losses.
But the dubious title of worst performing emerging market currency in 2016 goes to the Mexican peso, which took its biggest two-day tumble in more than 20 years following Trump’s victory. Year to date, the currency has lost just over 20% of its value against the dollar and 18% against the euro. As Reuters reports Trump’s presidential win has smashed Mexican assets, prompting analysts to lower their forecasts for Mexico’s economic performance.
None of this bodes well for BBVA’s most profitable global subsidiary. The bank is reportedly hedging 40% of next year’s expected net attributable profit from its Mexican unit, the lender said in a statement.
For Santander, the problems are not contained to emerging markets. Besides Spain, its two most profitable mature markets are the UK and the U.S., the two countries at the heart of the global populist backlash. The market risks for the bank — from the plunging pound to the stagnating automotive sector in the U.S., where Santander holds a sizable share of outstanding subprime auto loan securitizations, on which the losses are rising — are legion.
The irony in all this is that the one factor that helped insulate both Santander and BBVA from the worst effects of Spain’s property crash — their geographic diversification — has now left them acutely vulnerable to the political and economic shocks reverberating around the globe. As for Banco Popular, much like Monte dei Paschi, it needs a market miracle. By Don Quijones, Raging Bull-Shit.
Italy’s crisis is becoming ever larger and reaches far beyond the banks. Read… Italy’s Crisis Turns into a Multi-Headed Hydra
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Much of this makes me wonder how far the absurdity can last.
With the Roman Empire, you had hundreds of years of currency manipulations, but it didn’t have to deal with an empire debt as we do today.
The Roman empire transformed into fuedalism, as people voluntarily gave up citizenry to escape massive taxation to become serfs. One of the dreaded forms of punishment was the consignment of the title “tax collector”.
This of course is jist the tip of the ice burg, and is drastically different from what is taught in school, but offers an explanation as to to why civilizations devolve, rather than suddenly collapse. The collapses do eventually happen, but usually after long periods of regressive economic management.
The same thing could be said about the Soviet Union.
How was the Roman empire cut in half? A few pairs of Ceasars…
The new bank for problem assets should be called ‘Sunset’
Great Article Thanks
You know for sure things are dire when the currency of a country is losing value against the euro, a currency that is held hostage by the biggest collection of crooks and idiots on the planet (ECB, EC and EP).
When Trump sends the million odd illegals back to Mexico .. will the Mexican government retaliate by expelling the US retirees who have chosen to take their all & retire in the less expensive country of Mexico ?
I don’t envision it in quite this way, it’s more Trump’s style to find a motivation that compels.
Turkey used to be one of the top two markets as far as risks/profits went, together with Poland.
I am not very familiar with the present situation on the ground, but the country’s monetary affairs don’t look too good: in October the official inflation rate was 7.2%, well above the 5% target the central planners in Ankara had set.
To counter this “unexpected event”, the Central Bank of Turkey has raised interest rates to 8%, which seems an awful lot by Western standards but is still well below interest rates in the 2000-2006 timeframe.
Apart from a brief time frame between 2007 and 2010, interest rates in Turkey have always been above 7%. This has led to a gaggle of European banks including but not limited to BBVA, Intesa-San Paolo and Santander, opening shop in Turkey to take advantage of the euro carry trade. Inflation may be high, but when leveraging (Euribor has been negative throughout its whole range for longer than I care to remember) is taken into account, profits can be handsome indeed: see how BBVA gets 13% of its profits from the Turkish market alone.
Yes, this is just what Thai and Malaysian banks did in the 90’s and consequences were catastrophic.
As the Turkish lira continues to slide, those handsome profits will start shrinking when sent back to the headquarters in Santander or Turin to be converted in euro.
Why I am so sure the Turkish lira will continue sliding? Because the window of opportunity to get into the EU or at least of getting a favorable deal short term has closed. The political situation in the EU is in state of flux and, with most EU voters not being very keen to further expansions, European politicians will look at their survival first. Erdogan may fume as much as he wants but his threats only jeopardize any future treaty with the EU: it took Switzerland a single diplomat carrying a single diplomatic suitcase to put an end to the bid (started in other economic and political times) to enter the EU.
Italy’s economy hasn’t expanded in two decades. Does this ring any bells?
Santander and BBVA scour the world in search of disastrous investments. Can I invest?
Sure thing mate!
Just sign on the dotted line and don’t pay attention to the fine print saying if things turn sour it’s bail-in time.
will the crisis in the Italian,Spanish, Greek and French banks be used to devalue the Euro; making German Exports even more competative and cheaper? Also the Debt generating Austerity used to loot the Southern European nation`s Assets?