Euro Area

     

 

 

Panic Pause

The sudden panic about a potentially imminent Italian banking sector collapse back in July has somewhat subsided for now, but sooner or later the issue will inevitably rear its ugly head again.

 

monte-dei-paschi-hq, photo by Stefano Rellandini / Reuters The impressive headquarters of the world’s oldest surviving bank, Monte dei Paschi di Siena, Piazza Salimbeni

Photo credit: Stefano Rellandini / Reuters

 

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Landfall of a “Told You So” Moment…

Late last year and early this year, we wrote extensively about the problems we thought were coming down the pike for European banks. Very little attention was paid to the topic at the time, but we felt it was a typical example of a “gray swan” – a problem everybody knows about on some level, but naively thinks won’t erupt if only it is studiously ignored. This actually worked for a while, but as Clouseau would say: “Not anymeure!

 

FIRENZE, 12/11/2011 EVENTO "TED X FIRENZE: INNOVAZIONE E OTTIMISMO", IDEATA DALL'ORGANIZZAZIONE NO-PROFIT AMERICANA TED. - NELLA FOTO: IL SINDACO DI FIRENZE MATTEO RENZI.Italy’s prime minister Matteo Renzi, indicating how much capital is left in Italian banks…

Photo credit: Giacomo Morini / INFOPHOTO

 

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A Whiff of Panic

Ahead of Thursday’s ECB meeting, there was a widespread consensus that Europe’s chief printing press supervisor would make up for the alleged “mistake” of under-delivering on monetary lunacy last time around. Therefore, a sizable dose of fresh absurdities had to be expected, with only small disagreements on the details. It is fair to say the man didn’t disappoint.

 

Draghobert the TerribleDraghobert the Terrible, trying to assault the euro again

Photo credit: Michael Probst / AP Photo

 

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Greece vs. Austria: Non-Friendly Acts

Two days ago we came across a headline at Reuters, informing us that Greece rages at neighbors as fears migrants could be halted”. Say what? What the hell is this supposed to mean? Is this even English? Possibly Reuters employs the same headline editor as Bloomberg….he or she is definitely equally bad.

 

Kotzias, enragedNikos Kotzias (νίκοσ κοτζιάσ), a former member of the Central Committee of the Greek Communist Party. Nowadays, oddly enough, he is Greece’s foreign minister. Here seen enraged.

Photo credit: Simela Pantzartzi

 

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A Curious Collapse

 

wizard bank 2

 

Ever since the ECB has begun to implement its assorted money printing programs in recent years – lately culminating in an outright QE program involving government bonds, agency bonds, ABS and covered bonds – bank reserves and the euro area money supply have soared. Bank reserves deposited with the central bank can be seen as equivalent to the cash assets of banks. The greater the proportion of such reserves (plus vault cash) relative to their outstanding deposit liabilities, the more of the outstanding deposit money is in fact represented by “covered” money substitutes as opposed to fiduciary media.

 

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Dovish Cooing from the Desolation of Draghi

As Reuters informs us, on the heels of Mr. Draghi’s somewhat “disappointing” attempt to assassinate the euro on occasion of the previous ECB meeting, the chief European printing press supervisor and certified monetary crank has decided to assure everyone of his ultra-dovish stance again on Thursday, by announcing that even more monetary insanity must be expected soon:

 

Fading growth and inflation prospects will force the European Central Bank to review its policy stance in March, President Mario Draghi said on Thursday, a strong signal that more easing could be coming within months.”

 

bruning_euro_08.25.2014_largeThe economy isn’t doing well? Let us set fire to the currency then, maybe that will help.

 

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Portugal’s Rickety Banking System

After the unseemly bankruptcy of the Espirito Santo Group and the associated bank, then Portugal’s second biggest (likely a result of not praying enough, see: “Big Portuguese Bank Gets Into Trouble” and “Fears Over Banco Espirito Santo Escalate” for the gory details), Portugal’s state-run deposit insurance fund basically ran out of money.

It turns out that Europe’s new Bank Recovery and Resolution Directive (BRRD for short) came just in time for Portugal. At the end of 2015, another Portuguese bank bit the dust, the country’s seventh largest lender by assets, Banif. Portugal’s government once again decided to bail the bank out, but with strings attached. Subordinated bondholders and shareholders were essentially wiped out, which is as it should be.

 

Banif, weeklyBanif SA, weekly. Although this is hard to see on this linear chart, the stock rose by 40% today, to €0.002. Shareholders are allegedly planning to throw a wild party in Lisbon over the weekend (we were unable to confirm this rumor) – click to enlarge.

 

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A Historically Unique Event

We keep watching what is happening in Cyprus with morbid fascination. As a reminder, the unhappy island was the first major “haircut” victim in Europe. Its bankers, who had flagrantly over-traded their capital and won prizes for running “the best banks in Europe” along the way, erroneously believed the repeated promises of assorted EU commissars that Greece would never – never! – be allowed to go bankrupt. Consequently they stuffed their balance sheets to the gills with supposedly risk-free Greek government bonds, only to eventually see them get “haircut” twice in a row.

 

Laiki-Bank_People-smDesperate depositors queuing in front of Laiki Bank, the second largest Cypriot bank,

which was eventually wound up

 Photo credit: Yorgos Karahalis / Reuters

 

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A “Major Concern”

The European Banking Authority EBA, which (we guess) is fighting for its survival after the ECB has become the sole supervisor of Europe’s “systemically relevant” banks, has recently issued a comprehensive report on the European banking system (this included the unintended revelation that its employees have yet to master the intricacies of Exel).

As an aside, we have little doubt that this bureaucracy will survive. Has there ever been a case of an EU bureaucracy not surviving and thriving? We don’t recall one off the cuff, but perhaps we are mistaken. We’re sure some reason will be found to preserve this particular zombie sinecure as well.

 

eba_2Hey guys! We’re still issuing reports! See how important it is to keep us well-funded?

 

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Greece – Ground Zero in the War on Cash?

We believe it was our friend Claudio Grass of Global Gold in Switzerland who first mentioned that the eurocracy may possibly have plans to use the Greek crisis as an opportunity to expand the ongoing war on cash. It stands to reason: Greece is well known for its extremely large “shadow economy” (the name for economic activity that flies under the radar of the greedy grasp of the State). Greece’s citizens not unreasonably regard the State as akin to a mafia organization which they are trying to avoid as much as possible (unless it promises them free goodies to buy their votes – they do of course gladly accept those).

We vividly recall an interview with a Greek shipping magnate about the constitutional provision that has relieved the country’s shipping industry from income tax. The interviewer asked (we are paraphrasing) whether the magnate thought it “fair” that this was so, and if he wasn’t troubled by his conscience in light of the Greek government debt crisis. The shipping magnate replied (again paraphrasing) along the lines of: “Just look at the government in Athens. They’re nothing but a bunch of crooks. Would you hand over your money voluntarily to Al Capone? Surely not. Well, neither do I.”

 

al caponeNot someone you want to hand your money to…

Photo credit: Bettmann / Corbis

 

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A Sharp Turn in Swedish Politics

When we recently discussed Europe’s refugee crisis, we mentioned that a sizable political backlash was to be expected and that unfortunately, extreme nationalist parties were likely to be among the main beneficiaries. We also mentioned the situation of Sweden, where the mainstream political parties in an ongoing fit of political correctness bordering on lunacy have apparently decided to transform Sweden into a province of Mesopotamia.

 

Jimmie_+àkessonLeader of the nationalist Sweden Democrats, Jimmie Akesson

Photo credit: Frankie Fouganthin / CC

 

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The Walking Dead

Now that Europe’s fractionally reserved banking system has been regulated into complete inertia, it is a good time to assess the current bottom line, so to speak. We should mention here that there are essentially two ways of dealing with the banking system. One is to introduce an unhampered free market banking system based on strong property rights and nothing else. Such a system would work best if it were based on sound money, i.e., a market-chosen medium of exchange. The regulations governing such a system would fit on a napkin.

 

zombie bank2

Image credit: Warner Bros, processing fmh

 

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