Is that Desperation Hanging Over Europe’s Banking System?

Turns out, Italy’s banking crisis is not fixed.

By Don Quijones, Spain & Mexico, editor at WOLF STREET.

Many of Europe’s and America’s biggest banks have begun begging, cap in hand, for a new, innovative way of raising vast sums of dirt-cheap debt on Europe’s financial markets.

The Association for Financial Markets in Europe (AFMA), an organization that prides itself on serving as “the voice of Europe’s wholesale financial markets,” just sent a strongly worded letter to the European Central Bank, urging for the prompt creation of EU-wide regulation allowing banks to sell a newfangled class of bail-in-able debt called “senior non-preferred bonds.”

“A swift agreement is essential to enable banks to continue increasing their loss-absorbing cushions and improve their resolution capacity,” says the letter (translated from Spanish).

In its own words, the AFMA represents “leading global and European banks and other significant capital market players.” Its board includes representatives of the biggest banks, from US megabanks like Citi, Goldman, JP Morgan Chase, Morgan Stanley, Bank of America Merrill Lynch and BNY Mellon to European behemoths like Deutsche Bank, HSBC, Lloyds TSB, Barclays, Unicredit, ING, BNP Paribas, Credit Agrcole, Crédit Agircole, and Credit Suisse.

Many of these banks and a few others not directly represented on AFMA’s board (such as Spain’s Santander) are facing heightened regulatory pressure, both at the regional and global level, to issue increasingly more bail-in-able debt so as to ensure that the next time a banking disaster strikes, part or all of the debt can be used to “bail in” those investors before taxpayers are called upon to cough up the rest.

It’s the way it should have been from the very inception of this global banking crisis. Instead, governments and central banks have injected trillions of dollars, euros, pounds, yen, and yuan of public funds into banks to keep the banks upright and make most bondholders whole, including those holding subordinated, or junior, debt, which is theoretically designed to bear losses in times of stress.

The “senior non-preferred bond” is the financial system’s latest effort to finally change all of that. Also known as senior junior, senior subordinated or Tier 3, this newfangled class of bank debt is a hybrid creation that combines the biggest drawback (for investors) of senior debt (i.e. low yields) with the biggest drawback (once again, for investors) of subordinate debt (i.e. virtually no protection in the event of a banking collapse).

It’s what makes senior non-preferred bonds so attractive to capital-starved TBTF banks: the bonds pretend to be simultaneously one thing (senior), in order to keep the yield (and the cost for the bank) down, and another (junior) in order to qualify as bail-in-able. It’s a way for big banks to bamboozle bondholders – usually institutional investors like pension funds – into buying something with other people’s money that doesn’t yield nearly enough to compensate them for the risks they’re taking. But that hasn’t stopped yield-starved institutional investors from gobbling them up.

The European Commission has already endorsed the financial instrument, rating agencies have also lent their approval, and the ECB can’t wait to come up with “a common framework at Union level.” However, the legislation permitting its issuance, both at the regional and national level, is taking a long time to complete. And one thing many of the banks appear to be rather short of is time.

The only jurisdiction where big banks can issue, 100% legally, senior non-preferred debt is France, where the debt instrument was initially created as a means of helping the country’s big four banks (BNP Paribas, Crédit Agricole, Groupe BPCE, and Société Générale) spruce up their balance sheets at minimal cost.

Elsewhere in Europe there is no legal framework for issuance of the new debt instrument but that hasn’t stopped some banks, including Holland’s ING and Spain’s Santander, from issuing senior non-preferred bonds. Spain’s second biggest bank, BBVA, which is not even officially too big to fail, is also expected to dip its toes in the non-quite-legal market in the coming months.

Santander, BBVA and Spain’s third biggest bank, La Caixa, have been on a spectacular debt binge since this fledgling year began, issuing more combined debt in the first six weeks of 2017 than at any other time since 2007, the year that Spain’s spectacular real estate bubble reached its climactic peak.

Even more ominous, Italy’s fragile megabank, Unicredit, has also expressed an interest in issuing non-preferred bonds, though it will probably have to wait for Italy’s banking crisis, in which it is has a major role, to blow over (assuming it actually can) before joining the party. That could be a long time coming: there continues to be widespread disagreement between the ECB and the European Commission over whether to allow Italy to go ahead with its more or less illegal bailout of the banking sector.

In the meantime, Italy’s Target2 imbalance continues to grow. The Banca d’Italia now owes a record €364 billion to the ECB – the equivalent of 22% of GDP, its highest point since the creation of the euro, and the figure keeps rising. It’s testament to an ongoing — and accelerating — capital flight out of Italy’s banking system, as investors lose faith not only in the possibility of a workable solution being found to Europe’s most serious and arguably most complex financial threat but in the long-term viability of the single currency itself.

If Italian and European authorities don’t soon find a workable solution to Italy’s intractable banking problem — and preferably one that is more or less palatable for the German electorate, which is already up in arms at the latest Target2 imbalances — there is a very real risk that Italy will suffer sudden bank runs and disorderly failures, at which point the chances of Unicredit raising €13 billion of new capital by its June deadline will fade to zero. And at that point, as even the FT has admitted (behind paywall), it will probably be game over. By Don Quijones.

The law finally catches up with some big bankers. Read…  Two Former Bank CEOs and Dozens of Former Bank Execs Just Got Sentenced to Jail in Spain

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  41 comments for “Is that Desperation Hanging Over Europe’s Banking System?

  1. anthony hall says:

    If “The Market” was a free ,honest and independant market ,the Western Banking Cartel would be “Shorting” every European Bank; including Deutsche Bank to destruction. Most Spanish, Italian, Portugese, Greek and Irish Banks are Bankrupt . Where`s Soros?

    • Nik says:

      He is too Busy…trying to turn-over Trumps ‘apple-cart’ in America…lolol

    • Frederick says:

      Where’s Soros? Why he’s at his office planning his American Spring that’s where

    • Spanky Bernanke says:

      I think he is getting double eye lid botox injections? He probably has euros in those banks–not in his best interests to see them fail, yes?

  2. OutLookingIn says:

    Guess who “owns” the vast majority of this debt that not only includes Italy but Greece also? Germany. Thats right, if these bonds go up in smoke, so does all that “asset value” that is using these bonds as collateral for.
    Somewhere, in some small financial boiler room, a call is made for payment or surrender of collateral, that can’t be performed.
    The caller has a gun to his head demanding payment, and is told “so sorry no can do”! Bang. End of story. This is the butter flies wing beat that ends up being a category 5 hurricane on the other side of the world.
    The global financial system is fast approaching terminally critical fragility.

    • andy says:

      What is one to do, OLI?

      • OutLookingIn says:

        If you are asking from a personal financial standpoint, remember that the road to perdition is paved with “good” advice!
        Common sense rules. Have no debt. Be part of a supportive, solid community foundation. Live away from big centers of population. Educate yourself in an occupation or skill that will be valuable. Above all, be situational aware at all times.

  3. Si says:

    I have been watching this horror show for so long now and there is always a ‘this is it’ which is going to blow the whole thing to bits. When casinos are rigged to fleece the players, it is only some authority which shuts them down to end it. With no agency to intervene (because they are part of the corruption), then the casino can continue to operate with impunity. So it is with the banks.

    We are in for a long road of more games and manipulation.

    • In and Out says:

      Look at the stock prices of Italian Banks. Its like an exponential decay. In non math terms it halves every so often. So, it could go on for a long time because the decrease slows down.

      There is math joke.

      A mathematician and an engineer are put into a room with a beautiful girl. They are told you can only move half the distance closer to the girl each time. The mathematician storms away saying it is impossible to reach her. The engineer says, “close enough!”

      Any how…… I have been looking at Unicredit bank in Italia. They sold a bunch of new shares after writing down loans to rebuild capital. They plan to sell loans to Pimco, of the United States. So that is raising money outside of the Euro printing area! Interesting. So, Italy might not be Euro constrained.

  4. Bruce Adlam says:

    There will come time when enough people will say enoughs enough and that day is coming

  5. Yoshua says:

    The global economy is being energy starved due to falling net energy from energy production. The banks are lending money to a contracting economy.

    • d says:

      “The banks are lending money to a contracting economy.”


      The bank’s are borrowing money, at low interest, with very high, unsecured risk. From investors in a contracting economy, desperate for yield.

      The bank’s lent into an expanding bubble economy, at high interest, and those loans became the NPL mountain’s, they now hold as assets.

      In Europe in particular. Bank’s are only lending to people, who dont need Loan’s, AKA, NO RISK Investment’s..

      • In and Out says:


        So, banks are borrowing at low interest and they have NPL assets.

        So, are they increasing the credit money supply if they borrow from banks? And, not increasing it if they borrow from individuals? Effecting the liquidity for entities to service the NPLs.

        Italy’s Unicredit is working on selling loans to the U.S.’ Pimco. Liquidity from abroad.

        • d says:

          “So, are they increasing the credit money supply if they borrow from banks? And, not increasing it if they borrow from individuals? Effecting the liquidity for entities to service the NPLs.

          Banks are simply making vig, they borrow low and lend high.

          They can only increase the money supply when demand meets their no risk conditions which it currently dosent.

          They loan, share and bond market however isn’t completely freezing as there are so many second tier lenders will to take risk’s good bank’s wont.

          The days are gone when only bank’s or sovereign’s created money.

          “Italy’s Unicredit is working on selling loans to the U.S.’ Pimco. Liquidity from abroad.”

          It might happen, how many seconds before Pimco starts foreclosing, as Pimco will only buy foreclosable loans with a proven hard asset base. All the italian bank’s are doing there, is moving the blame for the pain caused by resolution of those loans outside Italy.

          Pimco can also liquidate entity’s, the “friend’s” and “uncles”, stop the local Italian bank’s liquidating.

  6. Hkan says:

    This will probably hit the European tax cattle after German election. Wonder what will happen next election round in Europe when pension funds and savings are confiscated.

    Payback voting anti-EU is likely to end the fragile EU?

    History book is providing answer of the future. Rise and fall…over and over again.

    • JR says:

      The pension funds are the dumbmoney that snaps up the Collateral Lite Junk to get more yield. That crap will go POOF so I guess you could say it will get confiscated…

  7. Dan Romig says:

    “… Italy’s intractable banking problem -…”, can be summed up bluntly with the medical definition of intractable being ‘unstoppable’.

    Yes, Italy’s banking problem is unstoppable. What is happening to the Italian banks is similar to a patient on life-support in an iron lung in hospice care. Neither one can do much except wait to die.

    My living will states that if I am in this condition, the plug should be pulled. Unicredit needs its electricity switched off, or it’s simply a waste of amps and volts.

  8. RD Blakeslee says:

    This article is another to point out the situation in contemporary banking: It has become a Ponzi scheme.

    Big-money players are betting how long they can stay in and milk the system (including the rest of the populace) before getting out and into “hard” assets.

  9. JR says:

    Awesome Ambrose (Telegraph UK) has written up the Euro debt situation – and it is more scary in the Eurozone experiment than I had expected. Worth a (free) registration to read all of it. Here is the link. A MUST READ for monetary earthquake monitors – you know the BIG ONE is coming; the question is when and how much:

    • RD Blakeslee says:

      From the article: “Alarm bells are starting to ring again. Our flow data is picking up serious capital flight into German safe-haven assets.”

      My contention is that, when the cascade starts, there will be no “safe haven” in money; Germany’s or any and all others.

      Big “capital” will try to ride the Ponzi pyramid as long as possible, then bail into hard assets.

      • Frederick says:

        They had better be nimble or they may not get out that very small exit door once the fun begins in earnest Better to play it safe and start the transition to hard assets now

        • In and Out says:

          Some one suggested brokerage accounts are safer than bank accounts. The reason is that a deposit into a brokerage account is segregated, not lent out or multiplied. (Unless they put it into a bank.)

          But, bank accounts are insured. I read a description of the system. That the accounts above the limit are the ones that fund most of the shortfall. Ingenious.

      • In and Out says:

        What about a safe haven in London?

        Swiss banks? U.S.? Asia?

    • d says:

      That article dosent tell us anything we don’t know.

      It simply iterates something else we know.

      The criminal after the fact rating agencies, and the MSM, are deliberately avoiding those issues, and topic. AGAIN.

  10. NotSoSure says:

    LOL. Given what has transpired over the last few years, next year we’ll be at the same place reading a similar article.

    As long as muppets can wait for an election to occur, it signifies that the situation is not that urgent.

    It’s like that old line about the Credit Crisis: “If you still can get a 5% loan with excellent credit, it’s not a credit crisis!!”

    The muppets, the muppets!!!

  11. Justme says:

    >>enable banks to continue increasing their loss-absorbing cushions and improve their resolution capacity

    That’s some quite fancy words for saying “foisting bank losses upon naive and unsuspecting bond investors”.

  12. Bruce Adlam says:

    You can bet the bankers the ECB ,multinationals and the super rich will be huddled together right now planning how they can screw the general public (thieve ) and do legally by deception. But this time it will be much bigger why in Europe because it not democratic the biggest theft in history and it will take to long for the general public to stop it although the wheels in motion are already happening

  13. cdr says:

    I’m just learning about Target2. It appears to be kind of accumulated trade surplus / trade deficit, only it’s among Euro Nations and not sovereign nations. Apparently, it’s shocking if, for example, Germany holds a vast surplus of Euros that originated from Italy.

    To me, this look like people are fussing about something like dollars from Alabama flowing to NY in excess.

    To me it looks like ‘So, what?’ It’s all the same currency and the ECB prints it up nonstop in unimaginable amounts.

    If Italy or any other country in deficit were to exit the Eurozone, they could replace all the ‘Italian Euros’ being held by Germans and others with fresh Lira or whatever the new currency is. If they chose to continue using Euros, only call them Italian Euros, then they could devalue them immediately and life goes on. No fuss except for the shrieks and blue faces from the bleachers exclaiming ‘You Can’t Do That!’. Any ‘invoice’ sent from Germany or the ECB would be an object of curiosity and internet humor. How would / could they collect on it? Serious name calling?

    • Wolf Richter says:

      When you compare the relationship between Eurozone countries, such as between Italy and Germany, to the relationship between US states, such as Alabama and New York, you’re missing something very big. The states in the US are within one country; Eurozone members are sovereign counties trying to exist within a currency union.

      Oh, and that fragile currency union is at risk of being broken up.

      • cdr says:

        I completely understand your point but don’t see why it applies. It’s a common currency flowing among countries. Swapping currencies is a wash transaction. The EU shrieks about everything it can’t control. The Euro / Eurozone is just another thing to fuss about.

        If Italy runs out of Euros because Germany has them all, then that’s a design flaw in the system. If the ECB wants to print more up and pass them around under one pretense or another to keep the plate spinning a while longer, just say Thanks. Then swap out the junk euros for Lira with value (never thought I’d say that)

        So many things that seemed impossible or unimaginable are common now. Negative rates, unstoppable printing presses, bogus economic theories that say things like ‘you can only fail if you don’t go big enough for long enough’ or ‘cash is evil because criminals use it’ are examples, and this is not an exhaustive list.

        Laws are just ideas written on paper. If a law says ‘This’ you can bet dollars to doughnuts the EU will say ‘THAT’ and pass it as a law if needed if ‘This’ involved an actual cost.

        Thus, my original wonderment about why not ignore EU bleats if there are Target2 imbalances and a country wants to split from the Eurozone?

    • d says:

      “How would / could they collect on it? Serious name calling?”

      Although you are still learning you have observed this major problem.

      The POS little mafiosi at the ECB, wrote his tough guy letter.

      “Pay your target 2 in Euro, that you did not just print (Something you need to look into) before you leave”

      How does he intend to get it enforced.

      The french, italians, and greeks in particular, think they can print a whole load of toilet paper, say it is worth 1 Eur equivalent, clear their target 2 with it, then devalue it by 75% the next day.

      The ECB, the other Euro nation’s, and Germany. WILL NOT, allow that to happen.

      Target 2 must be settled, in Eur, not printed, in the withdrawing state.

      Claiming England must pay 60 Billion to leave the Eu, is a joke. The British can and probably will laugh and walk away, unless they get the trade and immigration deal they want.

      Claiming Target 2 must be settled, in Eur, not printed by the withdrawing state, is a serious, and factual, reality.

      • cdr says:

        d, thanks for responding.

        I disagree with ‘must be paid off in Euros’. I would suggest they really want Euros and will scream bloody murder if not offered Euros. If the law says Euros are necessary, the law will change immediately if Germany is in a position that will cause it to incur a liability that requires an actual payment of real money.

        For example, if by not using Euros, the ECB goes into capital deficit and sends Germany a bill to cover its share, a new will pass that changes the rules and absolves all members of ECB capital repair. Some new kick the can creative effort will allow the ECB to continue to exist and recapitalization will appear out of nowhere.

        Screaming bloody murder will continue until the end of time. That’s about as far as it will go.

        • d says:

          Germany dosent have a target 2 Liability, it cant fund, unlike france and club-med. Germany in fact has a MASSIVE target 2 surplus. So has no target 2 settlement issues

          A point you see to have missed.


          Bias destroys objectivity.

          The main reason I dont trade the euro, as it is not in connection with its fundamentals, yet.

          Your bias against Germany, is not helping you view this situation objectively.

          If Germany left the Eur everybody would want to trade Eur, for Mark’s.

          The Bund. did not destroy all the old Mark’s it withdrew, when entering the Eur. Germany can easily leave the Eur, over any holiday weekend it chooses, as it does not need to print a new currency, simply reissue the old one.

          If Italy or greece leave the leave the Eur, who wants lira or drachma????

          So who do they borrow Eur from to settle their target ???

          A what horrendous interest rate???

          That loan would also have to be settled in Eur or nobody would lend to them.

          For france and most club med states. Leaving the Eur would be followed by international default, and massive internal financial chaos.

          Equalling another 10m plus years of imf controll and self imposed Austerity. Much worse than they have ever faced as their own currency’s would be complete worthless on the international market. As they are not producers of much, a large part of their problem.

          Nobody with half a brain, would want that club-med toilet paper.

        • cdr says:


          I didn’t miss Germany’s surplus. In fact, to me at my level of understanding, it appears to be a gigantic flaw in the system that it has such a massive surplus. And, since it’s all the common currency, it implies deflation caused by lack of liquidity in deficit countries. If Italy could gin up some Lira, it would cause a devaluation, but stop any resultant recessions that start with a reduction of liquidity. The balance of trade might even reverse in the deficit country’s favor.

          It look like the ECB manages this liquidity problem via some kind of loan system that uses printed money. Thus, it does not fix the problem, it extends and pretends. Perhaps this is another reason for ECB QE, the first being monetization of public debt to avoid people actually paying their own way?

          At some point, the ECB will have to accept Lira or Drachma for Euros and the eurozone will pass a law that says ‘great idea’. If not, the ECB will have a NPL problem, and probably a capital deficit. ECB members must proportionally make up the deficit, thus my belief that the kick the can people will pass a new law that makes it OK and ECB recapitalization will appear out of thin air.

        • d says:

          “I didn’t miss Germany’s surplus. In fact, to me at my level of understanding, it appears to be a gigantic flaw in the system that it has such a massive surplus. And, since it’s all the common currency, it implies deflation caused by lack of liquidity in deficit countries.”

          Greek banks are still underfunded, so have huge NPL ratios, after they have been bailed out and consolidated.

          WHY when greek’s as a whole are a wealthy nation????

          Simple, in the Euro system the greek people can do something they could never do before. Put their money, in banks beyond the reach of the Ggreek state so the greek’s have German and Swiss bank accounts among others stuffed with Euro’s.

          The greek people have more money in bank’s outside greece than the greek national debt in total.

          Italians and Spaniards also do this this is where a large part of the target 2 imbalance comes from and why in Germany, it is growing rapidly.

          The ECB will not have to accept lira or drachma for Eur debts at all. let alone at the exchange rate the lira and drachma countries will claim.

          What the ECB can not enforce, is the. “Pay before you go” segment, of the tough guy letter.

          The rating agency’s have already stated they would view failure to pay target 2 on leaving the Eur, as a national default.

          So any country leaving and not paying, is going to have big problems.

          ” If Italy could gin up some Lira, it would cause a devaluation, but stop any resultant recessions that start with a reduction of liquidity.”

          And start one that begins with hyper inflation.

          You are looking at devaluations over 30% against the Euro.

          Before you make any allowance for the Euro rising as it sheds the deadbeat nation’s that are holdong its value down. So 50 % + in a short period which means anything imported goes up (Inflates ) by at least 100% +. Basically OVERNIGHT.

          The Argentine model of the supermarkets announcing price increases over the PA continuously, would be child’s play compare to what will happen in a country like greece or italy, leaving the Eur and trying to devalue and or print it’s way out of the problem.

          A period of hyperinflation would be good for those nations, then they might finally understand the German fear of hyperinflation.

          And what causes it, excessive deficits spending, and money printing, BY SOCIALISTS.

          World trade is sluggish as we are coming to the end of the credit/money printing cycle.

          The answer to the Oil glut, is not more Oil.

          So how can the answer to Credit Oversupply, be more Credit/Money printing.

          As to the target 2 imbalance. china has capital flight it shows in its reserves.

          france and club-med have varying degrees of capital flight, it shows in their target 2 imbalances.

          The problem is getting serious, as other Eur banks are stopping lending to club-med Eur banks.

          The Eu can not do what Modi did. lie about the reason to withdraw the cash, and force the people to put their money in indias undercapitalised bank’s, short term recapitalising them.

          As in the Eur system, the money will end up in the wrong countries. Making the Target 2 problem worse.

          The Eur as a currency and zone would be Better of without some, or all of the french, greek, and other Club-Med, deadbeat economies.

          I wouldn’t want to be a working/needing to work citicen, of one of those economies , for 15 + years, after that happens though.

          Brake up The Eur zone and you will get huge unemployment in France and club med. Making the current unemployment situation child’s play.

          Then watch freedom of movement, get throw out the window, faster than lightning, in the norther stable Eur economies.

          Junker wants the Eu super state, it’s why he forced the situation that lead to the brexit vote. What club med hasn’t realized, and the east has. Is that Junker wants a North western Eu super state, as that is the only part of the Eu that is close to ready for it.

          The East knows, that in the process, most of the subsidy flow will be cut off, and the east mostly joined, to get those subsidy’s.

    • Chris Wagner says:

      You got that wrong, mate. Hope someone else can explain it to you…

      • cdr says:

        Extend and pretend – variations on a theme. aka ‘kick the can’. Given the magnitude of the eventual loss, lots of people thinking up lots of ways to play hot potato and screw your buddy. All wrapped in the lingo of high finance.

  14. Thunderstruck says:

    “Senior Non-Preferred Bonds”.
    That sounds just so …… unpalatable.

    Anyone who buys that crap deserves what they get.

    I can only liken the offering as to one entering a steakhouse and finding the available grades of beef are Prime, Choice, Select, and “Non-Preferred”.

    I bet it would be stunning to see the final grade of beef being offered at or near the other prices.

  15. R Davis says:

    The late George Soros .. alas .. is no more .. RIP George.
    REUTERS “accidentally” published his obituary .. his people were not pleased so they pulled it & apologized .. never the less Poor Old George is no more .. RIP Georgey Boy & we miss you heaps.

    The EU is made up of 28 member nations .. Germany seems to be the boss of it all .. Mutti Merkel & her backbone Jean-Claude Junkerbond are calling the shots.
    Is it not irresponsible of the EU to invite & embrace millions of immigrants .. after all it is not like they can afford them.
    Is it not foolhardy to throw open your borders to all manner of opportunistic, crook & shyster that will wander into your domain.

    Is it possible that the banks of the EU still have clientele ?
    Personally I wouldn’t touch them with a barge pole.

    The population of planet earth has decreased .. it will never make it to 9 billion .. Hans Rosling at Gapminder would have us believe that the planet is still full to overflowing & it is not .. why do the Swiss want us to believe this lie.
    If the population of planet earth has decreased dramatically & it has .. do we therefore not have way too many banks .. yes we do .. therefore is it not prudent that a good proportion of these banks be closed down .. yes.
    Therefore is it possible that the 9 billion population lie is being told so as to avoid the inevitable ?

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