9/12/2011 7:53 PM ET|
Get ready for the next crash
European leaders may stave off a banking crisis for a few more weeks. Markets may even stage a relief rally as Greek debt worries abate. But make no mistake -- a deeper crisis in foreign banks is coming.
Financial markets are behaving as if they expect a European banking crisis that would require the bailout or nationalization of some European banks. That would feel like a replay of the financial crisis that followed the bankruptcy of Lehman Brothers in the fall of 2008. Only this time, the epicenter would be Europe instead of the United States, and the ripples would expand from the eurozone outward into global financial markets.
How realistic is that fear? Very, I'm afraid. European banks are facing a very real liquidity and capital crisis that could lead to the need for a government rescue of some globally significant banks.
But the crisis isn't an exact replay of the 2008 crisis. The effects of the crisis would not be limited to Europe, but the likelihood that a European crisis would take down a major U.S. bank -- in a mirror image of the 2008 crisis where problems originating in the United States did lead to the bailouts of banks in the United Kingdom, Germany and Belgium -- is relatively small. On the other hand, the crisis is potentially worse this time around because the European Central Bank is much less able to intervene as a lender of last resort than the U.S. Federal Reserve was in 2008.
Understanding this crisis
The current European banking crisis is rooted in the Greek, Italian, Spanish, Portuguese and Irish debt crises. But the repeated collapse-bailout-collapse-again pattern of the prices of bonds of those countries wouldn't have produced the current mess without a series of missteps by banks, bank regulators and central banks.
European banks hold a huge amount of government debt from the countries involved in the crisis. German banks, for example, held $22 billion in Greek government debt at the end of 2010, according to the Bank for International Settlements. If you add holdings of Greek government debt to holdings of private-sector Greek debt, the exposure gets much higher. For example, in May, Fitch Ratings said that French bank Credit Agricole (CRARY, news) had $35 billion in exposure to Greek government and private debt. BNP Paribas (BNPQY, news) and Société Générale (SCGLY, news) had exposure of about $11 billion each.
The exposure of European banks to Greece, however, is small souvlaki compared with exposure to the much larger Italian economy. BNP Paribas, for example, has an estimated $31 billion in exposure to Italian government and private-sector debt. Even where the total for Italy is not as high as for Greece, the additional exposure is big enough to add to worries. Credit Agricole has an estimated $17 billion in Italian exposure.
But the current banking crisis owes as much to the reaction of banks and bank regulators to the problem as to the size of this exposure. Nobody now expects that Greece will be able to avoid a default in the end. Even Sunday's announcement of new measures to close a $3 billion budget gap just served to convince financial markets that the more Greece cuts, the more the economy will slow, and the fewer taxes the government will collect. Like last year's rescue package, this year's deal, if ultimately approved, only buys time.
Banks were wasting time
But instead of using that time to get Europe's financial house in order, banks and bank regulators have spent the time dreaming that everything would somehow turn out all right. So, for example, banks have avoided marking to market their portfolios of Greek, Italian and other troubled debt securities.
The arguments have been varied and ingenious. Banks have argued that since the Greek II rescue package asked bondholders to take a 21% haircut on the value of their bonds, banks should value their debt at that same 21% discount -- even though the debt instruments were trading much lower. Banks have also argued that since it has become difficult to trade some of this debt, there is no market price that they can use to value it. Instead, they're marking this debt to the values calculated by financial models. Remember how well that turned out in the financial crisis of 2008?
And regulators, especially those in France, have let them get away with it. Regulators have pointed to the latest bank stress test and said, "See, our banks passed." But having a 6.5% Tier 1 capital ratio when 5% was the benchmark to earn a pass in the test was not enough. A 6.5% shouldn't earn applause when many countries are urging their banks toward a 10% standard.
You can probably predict the reaction in the financial markets. Because non-European banks can't trust the books at European banks to accurately state risk, they've stopped lending to European banks.
U.S. money market funds, a key source of short-term capital for European banks, have cut back their short-term lending. An August survey by Fitch Ratings found that 43% of the total prime money market funds reduced their exposure to European banks by 9% or more. Where money market funds have kept lending, they've cut the length of their loans. Fitch found that 20% of the money market fund lending to French banks was for maturities of a week or less. That's three times greater than just a month earlier. Money market fund exposure to Spanish and Italian banks has fallen even faster. It was effectively zero, Fitch found, by the end of July.
Markets don't trust the banks
This is a big deal, especially for French banks, which are particularly reliant on short-term funds from wholesale sources, such as money market funds. For example, French banks rely on short-term funding even for long-term lending. Credit Agricole, for instance, relies on short-term funding for 23% of lending for long-term mortgages. A reliance on short-term funding makes a bank extremely vulnerable to exactly the kind of squeeze that threatened the banking system after the collapse of Lehman Brothers.
And in the current market there's not a whole lot of long-term capital looking for a home at a European bank. Across the eurozone, banks have managed to sell $4.5 billion in debt this year, but almost all of that came in the first half of the year. For the past three months, banks have redeemed more in maturing debt than they've managed to sell in new debt.
According to Dealogic, net issues of bank debt in the region -- excluding covered bonds, which are secured against pools of existing loans -- are a negative $41 billion. Covered bonds can't fill the gap indefinitely, because new issues face limits imposed by the need to find existing loans to use as collateral and by national banking regulations. And it's not as if these banks can go to the equity markets to raise capital, except at a crushing cost. Shares of Société Générale are down 55% since June 15, and shares of Credit Agricole are down 45%.
The math gets pretty daunting if you look at the amount of debt that eurozone banks need to roll over in the next few years. And that doesn't even consider any new money they need to raise to expand their business (in case their economies have, you know, ideas about growing), or to meet new capital requirements. According to Deutsche Bank, eurozone banks need to finance nearly $2 trillion over the next five years.
Where will that money come from? Nowhere, without some kind of guarantee from either national governments or the European Central Bank. The ECB has done an astounding job of eating into its own credibility over the past year and of convincing everyone that its policies are as steady as the wind in Pomerania. Nobody is absolutely certain that the central bank stands ready to supply all the liquidity that eurozone banks might need. The past year has also highlighted the ECB's limitations as a lender of last resort. The ECB is dependent on member central banks for its funding, and it's by no means clear that those banks stand behind the eurozone banking system as a whole.
In fact, one big fear is that some national governments may be preparing to save their own banks while letting those in the rest of the eurozone twist in the wind. So, for example, when the rumors swept through the financial markets last week that Germany was preparing contingency plans to support its banks in the event of a Greek default, the market as a whole found the news chilling.
VIDEO ON MSN MONEY
The truth hurts. The debt is real, the size of a mountain range, and ultimately belongs to someone. Thanks to the centralization and interlinking of world economies, currencies, and banking, that someone is all of us. No matter how we keep trying to pass the blame and hot potato to the next guy, it keeps coming back at us. The frantic behavior of the markets in response is no surprise. Major market indices are swinging wildly (2-5% in less than an hour) on rumors, hearsay, and sweeping comments by central banking and finance elite. Entire markets are freezing up with no liquidity whatsoever for hours and days. This is not market capitulation, floor building, or strengthening of any kind. This is like a bird that’s been hit by a car flapping its broken wings, still thinking it will eventually fly again. It’s painful, even when watching from a safe distance. Wait a minute, is that a bus I hear behind m……….
If I understand correctly, American banks are sitting on mountains of debt that the Fed is not requiring mark to market. If the US wasn't the world's reserve currency, we'd have been down the tubes long ago.
As far as negative news, reality is a bitch which is why, almost, all US news is "happy news". Don't want to alarm the masses. Why do you think the banks were bailed out, nearly zero interest rates, cash for clunkers and all the other "save the country" programs. All of which were done with borrowed money which we are so graciously leaving to our children to pay off. There's nothing like leaving your off spring something to remember you by.
For those of you who like only "happy news", avoid reading or listening to anything you don't like.
The real problem is central banking creating "money" out of thin air. The banksters have also made it impossible fro Greece or any other country from paying off this debt.
Just so you know, Bernanke did "loan" money to foreign banks during the last "bailout". Where did they get the authorization to do so? No one would have known if Ron Paul had not been pressiing for an audit of the Federal Reserve.
The Federal Reserve (central bank) is a private banking cartel. Goldman Sachs, Rothschild and Lazarus are just some of the banks who own the Federal Reserve. Do a little research. Follow the money. This is an intentional collapse to usher in a single world currency courtesy of the IMF. The IMF is also another central bank.
Not sure how true, I hear from many people telling me there are plenty of jobs but Corp. American will not hire until O'bum is out of office? I am not sure how true this is... and they say if he is re-elected, we are doomed, no one will hire, thy just don't trust him.
I work for large corp... did anyone else get killed financially with their 2012 medical. I can't afford, to expensive... how do they expect working class to live. In 10 years I went from upper middle class, middle class, to working class since 9/11... it has been downhill! Now with medical if I get sick, I will be poor. Should I leave the country and come back as an immigrant. So much for working 35 years in American, born American... I will die with 0!
"The feds actually came into the factory to enforce laws that make it illegal for India to import raw materials (wood for the finger boards) and finish the goods outside of the country. This means that if the guitars were assembled in India, there would be no problem at all.
So our government is upset that American labor is finishing the wood that was imported from India? UNREAL! Does anyone see the irony here? I think Stevie Wonder could.
I listened to Gibson CEO Henry Juszkiewicz interviewed on a popular radio show (watch the interview here) shown a day after the raid, and he admitted that he was told that moving to Madagascar would be a "good" idea.
Am I the only one that thinks it's scary when a federal official tells a prominent U.S. business leader to take his business elsewhere?"
Between reading this article and all the devastation the weather has been doing lately I guess we should be preparing for the swarm of locusts!!!
... A baby is born today and receives a Social Security number. In 70 years that baby will receive a retirement check that today is considered an unfunded liability..."
No, the Social Security trust fund has been repeatedly robbed. The government we elected has taken from us, and now they have the nerve to call it an unfunded liability.
Give us our money back! Restore the fund! Congress must be told the liability is their own careers unless they put our stolen money back into our fund.
How did we as a people allow ourselves to get in the position of having our economy dependent of a thieving financial system. We need a banking system that serves instead of rapes our people.
Our big banks with trillions in assets have been getting billions in 0% loans to play the market. Meanwhile, they are driving up the price of oil and gas by manipulating the commodities market. We need real regulation or a new system.
A good move towards sanity would be to make all government loans to qualified buyers directly for a small interest. This would reduce the notes of home buyers and students by half or more and leave trillions in the hands of our people instead of thieving banks. Why should anyone pay a bank 600k for a 200k house when the taxpayer backs the loan?
Banks, wall street, insurance companies, hedge funds and the commodities exchange produce nothing and take mountains. A 1/2% charge on all derivative, stock and commodities trades would put us in surplus and affect mostly giant day traders and market manipulators.
We need to force our public owned corporations by law to pay our minimum wages wherever they go. This would bring back jobs and show a little respect for workers. When the CEO of Disney made 600 million in salary and God knows what in bonuses he had children working in Haiti for 12 cents and hour. We will call this insane greed and coldblooded evil what it is and unite against it or we will soon be in depression and chaos.
It has become obvious that banks, wall street and big corporations run America. It is equally obvious that they own our government, the media and the minds of many. Will we continue to act like pawns and servants to a corrupt corporate and financial system while they destroy our country?
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