A Bad Situation Likely to Get Still Worse
The International Financing Review has published an excellent article chronicling the near-collapse of the euro area banking system that was temporarily halted by the ECB's mega-LTROs and other easing measures (let us not forget the lowering of reserve requirements to a paltry 1% and the frequent lowering of collateral eligibility criteria). It is entitled „Back from the brink: How Europe saved its banks from meltdown (for now)“ and we think the 'for now' should be strongly emphasized. We highly recommend this chronic of the banking crisis as a weekend read, whereby our regular readers will likely be familiar with most of the events the report describes.
Here is how the Euro-Stoxx Bank Index looks as of Thursday – it seems our prediction that the support level that has been tested so many times - it was first visited in 2009 - would fall is coming true:
Euro-Stoxx Banks: good-bye long term support? - click chart for better resolution.
Needless to say, this is not good. One paragraph from the IFR report is worth excerpting on this occasion:
„The impending disaster at Dexia was the fourth item on the agenda of the October EBA meeting, and the organisation’s handling of the bank was cause for acute embarrassment. The EBA had concluded that, even under stress, the bank’s capital cushion would be sufficient to withstand any real bother – in fact, it said Dexia had double the minimum required. Yet even as the EBA was convening in London, Dexia was reaching the end of its rope.
Non-voting members and observers were asked to leave the EBA meeting room while an inner circle discussed the bank’s troubles in confidence. Five days later, the French and Belgian governments announced a joint bailout of the stricken bank that included €90bn in state guarantees and a €4bn capital injection. Dexia, given a clean bill of health by the authority just three months before, had collapsed.
Among other things, that failure meant there were legitimate questions to be asked about whether the EBA, a brand-new institution created to oversee Europe’s banks – and one advising the ECB on how to steer through Europe’s worst financial mess in decades – would be able to find a practical solution to the situation. Dexia, after all, was merely the first victim of the liquidity crisis – it was just the tip of the iceberg.
Dozens of banks were on the edge of disaster, as the EBA knew only too well – its stress tests had forced banks across Europe to open their books for the first time, and those findings made for decidedly grim reading. Most worrisome of all was the size of bank holdings in sovereign debt. Even after the initial bailout of Greece, few in the market seemed to believe that sovereigns were anything but rock solid. BNP Paribas, then the largest bank in Europe, was discovered to have €235bn of government debt on its books at the end of 2010 – five times the value of its common equity. Almost every bank in Europe, it would soon emerge, was in the same boat.
Well, that particular boat has in the meantime taken on more water, with Italy's and Spain's banks buying up the debt of their sovereigns by the wagon-load ever since the ECB's LTRO funding rounds in December and February.
Assets of European banks – slightly dated by now, as the 2012 gorging on sovereign debt by Italy's and Spain's banks is not yet included - click chart for better resolution.
Italian and Spanish banks have bought even more government securities following the ECB's LTRO's (chart by CLSA) - click chart for better resolution.
The Silent Bank Run Becomes Louder
On Thursday the markets were rattled by a report in the Spanish media that Bankia had experienced withdrawals of more than € 1 billion. As a reminder, Bankia is Spain's third largest bank and has just been nationalized as it has become insolvent. The bank is the result of the merger of seven cajas, and has become a kind of extra-bad bank. The Bank of Spain said on the day of the nationalization that 'depositors have nothing to fear', but some of them apparently thought, 'he who panics first won't have to wait in a long queue' and came for their money anyway.
„Shares in Bankia, the recently nationalized Spanish bank, are plunging by more than 20 percent on a local report that customers have withdrawn more than €1 billion ($1.27 billion) since the state took it over last week.
The shares were off 16 percent Thursday at €1.39 after falling as much as 27 per cent during the morning. The newspaper El Mundo reported it had obtained access to data presented at a Bankia board meeting Wednesday which said depositors had withdrawn €1 billion since last Wednesday, the day the nationalization was announced. The bank is Spain's fourth largest and is heavily exposed to Spain's collapsed property market.“
Based on the principle that one should never believe anything until it's been officially denied, we would point out that :
„The Spanish government moved Thursday to quell fears of massive deposit withdrawals in Bankia SA (BKIA.MC) as its shares were pummeled by an unconfirmed local media report that depositors were withdrawing savings after the government rescued the ailing lender last week.
"It is not true that there's a deposit flight," Deputy Finance Minister Fernando Jimenez Latorre told a news conference to discuss the country's economic outlook.
Jose Ignacio Goirigolzarri, Bankia's recently appointed chairman, said in a statement that Bankia depositors "can be absolutely confident about the safety of the savings they have entrusted" to the bank.
Bankia also said the deposit movements so far in May had been normal for that time of year and that it didn't expect any major changes in deposits in the coming days.
Still, despite reassurances, any reports of withdrawals–whether substantiated or not–are troubling amid fears that they could cause self-fulfilling prophecies of contagion following data indicating that depositors in crisis-hit Greece have been taking their money out of local banks.
Local daily El Mundo reported Thursday that Bankia's clients had withdrawn more than EUR1 billion after the government last week took a 45% stake in Bankia SA.
The government is also planning to inject billions of euros into Spain's third-largest lender by assets in an effort to stabilize it.
"Depositors are safer now than they were a couple of weeks ago," Deputy Finance Minister Latorre said.
Are depositors really safer now? And why is Mr. Latorre only telling people now that 'a few weeks ago' their deposits were not as safe as they appeared to be? In the face of such a flurry of official assurances we would be at the gate of the local Bankia branch first thing in the morning if we were a depositor.
Let us not forget, the government that is 'guaranteeing' these deposits is close to losing its access to market funding as well. Although about 53% of this year's medium to long term funding has been accomplished, the most recent round of bond sales once again took place at yields Spain's government can ill afford.
“Spain sold 2.49 billion euros ($3.2 billion) of debt as the yield on notes maturing in July 2015 rose to 4.876 percent from 4.037 percent when they were last auctioned two weeks ago. Spanish 10-year bond yields eased after the auction to 6.334 percent, remaining near the 7 percent mark that pushed Greece, Ireland and Portugal toward European rescue packages.
Prime Minister Mariano Rajoy said yesterday that Spain faces the “serious risk” of losing access to debt markets and called on European institutions for support. The Treasury is trying to sell bonds after foreign investors’ share of the nation’s debt fell to the lowest since 2003. Spanish banks picked up the slack with the help of emergency funding from the European Central Bank.
“Spain is potentially the biggest euro-zone accident waiting to happen,” said Neil Williams, chief economist at Hermes Fund Management in London. “Unless there is a sudden and sustainable improvement in Spain’s underlying competitiveness, the next round of euro-zone governments’ support will have to stretch beyond the debtor nations currently on investors’ radars.”
Meanwhile, it is clear from the continued increase in borrowing from the ECB on the part of Spain's banks that they are forced to replace deposits that are being withdrawn:
Spanish banks' borrowing from the ECB – a new record high (via CLSA) - click chart for better resolution.
To make matters worse, Moody's has just downgraded 16 Spanish banks as well as four Spanish regions. The reasoning behind the downgrade of the banks is interesting – especially for the freshly reassured depositors at Bankia and elsewhere:
“The credit rating agency Moody's has downgraded 16 Spanish banks along with Santander's UK arm, citing the Spanish government's reduced ability to shore up the banks.”
Oops. The same article also mentions that Spanish retail investors got royally shafted in the bank merger that created Bankia not so long ago. Also, some depositors have made quite clear what their feelings regarding the danger of losing money with the bank are.
Bankia said operations at its branches had "been within normal parameters" during a fortnight of what it called "a highly seasonal nature". It also predicted that "the level of deposits will not suffer any major changes over the coming days".
That was little consolation to 400,000 Spanish investors who were last year persuaded to buy shares in the new bank, which was created by the amalgamation of seven savings banks. The shares have lost 70% of their value since the flotation in the summer.
This [the report about withdrawals, ed.] appears to have sparked jitters among investors and some clients, though there was no sign of panic in branches. "If they take my money away, I'll kill," one Bankia client spat at budget minister Cristóbal Montoro after approaching him on the street, according to El Mundo.
People can and do get emotional over threats to their hard-earned savings. Getting shafted in bank recapitalization exercises is bad enough after all. As to Spain's regions, here is an interesting article on the fight over regional debt the central government is facing. Valencia, which represents 10% of Spain's economy and is a Rajoy stronghold has seen the yield on its 2013 bonds rise to 16.48% yesterday.
As Reuters reports, the 'Greeks are not alone in bank savings exodus'.
“Greek savers may be gripped by a "great fear that could develop into panic" in the words of President Karolos Papoulias, but many Greeks shifted their money to safer havens in Britain, Switzerland, Germany and Nordic countries long ago.
Worries about a run on Greek banks has rattled Athens this week, after savers withdrew at least 700 million euros on Monday alone, according to minutes of Papoulias's comments to political leaders posted on the presidency's website.
It is not only Greeks who are worried about their savings. Data shows depositors have also taken flight from banks in Belgium, France and Italy. And on Thursday, Spain's Bankia (BKIA.MC) was reported to have seen more than 1 billion euros drained by its customers in the past week.
Greeks are afraid they could be hit by rapid devaluation if the country leaves the European single currency, while customers at Bankia have been rattled by the government's takeover of the recently floated bank on May 9 and growing uncertainty about the final cost of Spain's banking reforms.
In Greece, sources at two banks told Reuters that withdrawals on Tuesday had taken place at about the same rate as on Monday.
"The entire Greek banking system is in danger: the banks are now facing the worst of all outcomes, deposit flight," said Arnaud Poutier, deputy CEO of IG Markets France.
Deposits shifted around Europe dramatically last year, analysis of data from more than 120 listed European banks show.
More than 120 billion euros was taken from two banks in Belgium alone, including an exodus of customer deposits from Dexia (DEXI.BR) which had to be bailed out and restructured. KBC (KBC.BR) also saw a big outflow.
Some 90 billion euros was taken from France's banks, including around 30 billion each from Credit Agricole (CAGR.PA) and BNP Paribas (BNPP.PA). French banks were hit last year by their heavy exposure to Greece and concerns about their liquidity that forced them to accelerate plans to shrink.
Worries the euro zone crisis would spread also saw about 30 billion euros in deposits leave Italian banks, although inflows to BBVA (BBVA.MC) helped limit the net outflow from Spain.
Cash flooded into Britain; more than 140 billion euros was deposited in four big banks alone. The UK benefits from its position outside the euro zone and its Asia-focused banks HSBC (HSBA.L) and Standard Chartered (STAN.L) are seen as particular safe-havens.
Other banks to see big inflows included Barclays (BARC.L), Germany's Deutsche Bank (DBKGn.DE), Switzerland's Credit Suisse (CSGN.VX) and UBS (UBSN.VX) and Russia's Sberbank (SBER.MM) and VTB (VTBR.MM).
Deposit money fleeing from European banks into Russian ones! Good grief! Saints preserve us! If anyone had predicted this a decade or even five years ago, he would have been branded a slavering lunatic.
It is interesting that deposit money is also fleeing from French banks – we think these are mostly institutional deposits, as it has for instance become known last year that Siemens withdrew some €6.5 billion from one of the 'Big Three' in France and rather deposited the money at a bank it owns.
Looking at our proprietary euro-land bank CDS index below, one must fear that the 'silent flight' of deposits could soon become a not-so-silent one:
Our proprietary unweighted index of 5 year CDS on eight major European banks (BBVA, Banca Monte dei Paschi di Siena, Societe Generale, BNP Paribas, Deutsche Bank, UBS, Intesa Sanpaolo and Unicredito) – say hello to yet another new high for the move. Still about 70 basis points away from last November's all time panic high, but these moves have a tendency to accelerate in their latter stages - click chart for better resolution.
All these recent development have evidently alarmed the IMF, which has called on the ECB to 'do something', namely something 'unconventional' (i.e., to get those printing presses into gear).
“The European Central Bank should cut rates to help the euro-zone economy and further unconventional policies may also be needed, an IMF spokesman said Thursday. "In our view, the ECB has room for further monetary easing," said David Hawley, the deputy director of the IMF press office. He noted that inflation is expected to drop well below 2%. "Further unconventional policy measures may also be needed,' Hawley said. The ECB's unconventional policy has taken the form of long-term refinancing operations, which started in December and provided liquidity to the euro-zone banking sector. The purchases were credited with easing debt worries at the beginning of the year.”
Sounds like the chairman of Santander will soon get his wish – he was reportedly overheard pleading with Mario Draghi for 'LTRO 3'.
Meanwhile, never fear pilgrims, even Obama is on the case.
“Senior U.S. officials say President Obama will use his time with G8 leaders at Camp David this weekend to urge Europe to use the tools it has created to handle its financial crisis and to use them aggressively.”
If that's so, what can possibly go wrong?
Credit Market Charts
Below is our customary update of credit market charts, including the usual suspects: CDS on various sovereign debtors and banks, bond yields, euro basis swaps and a few other charts. Charts and price scales are color coded (readers should keep the different price scales in mind when assessing 4-in-1 charts). Where necessary we have provided a legend for the color coding below the charts. Prices are as of Thursday's close.
We had new all time highs for CDS spreads on Spain, and new highs for the move practically in all others. The markets remain extremely tense.
5 year CDS on Portugal, Italy, Greece and Spain - click chart for better resolution.
5 year CDS on Bulgaria , Croatia , Hungary and Austria - click chart for better resolution.
5 year CDS on Latvia, Lithuania, Slovenia and Slovakia - click chart for better resolution.
5 year CDS on Romania , Poland , the Ukraine and Estonia - click chart for better resolution.
5 year CDS on Germany, the US and the Markit SovX index of CDS on 19 Western European sovereigns - click chart for better resolution.
5 year CDS on Bahrain, Saudi Arabia, Morocco and Turkey - click chart for better resolution.
Three month, one year, three year and five year euro basis swaps – the plunge in the longer dated swaps continues - click chart for better resolution.
10 year government bond yields of Italy, Greece, Portugal and Spain - click chart for better resolution.
Austria's 10 year government bond yield (green), Ireland's 9 year yield (white), UK gilts (yellow) and the Greek two year note yield (orange) - click chart for better resolution.
5 year CDS on Australia's 'Big Four' banks – the 'risk off' move has become bigger - click chart for better resolution.
Addendum 1: Monti's Tax Gatherers Under Attack
Apparently , which are increasingly under attack from the two-legged turnips they have been sent to squeeze blood from:
“Italy acted on Thursday to step up security against a resurgence of politically inspired violence driven by its economic crisis and Prime Minister Mario Monti voiced "unconditional support" to tax officials who have come under repeated attack.
The measures underscore the growing attention Italian authorities are paying to the threat of violence, either from individuals struggling to make ends meet or from radical groups seeking to exploit a spreading mood of discontent.”
The hostility directed at Equitalia, which collects fines and taxes and which is widely criticized in Italy for heavy handed methods, has increased sharply as businesses already struggling to raise bank loans have been hit by big tax bills.
Equitalia officials have been assaulted and insulted repeatedly in recent weeks, amid accusations they have been partly responsible for a wave of suicides by small business owners in financial difficulty.
Italy has one of the heaviest overall tax burdens in the developed world, behind only Belgium, Sweden and Denmark in the 34-member OECD and, at the same time, struggles with chronic and widespread tax evasion that Monti has promised to crack down on.
Well, if not to its tax officials, who else would the government voice it's 'unconditional support' for?
Of course sporting one of the 'heaviest tax burdens in the developed world' is a major reason why tax evasion is so popular. People don't like to be robbed by their government – 150 years ago, heads would have rolled if anyone had dared to raise taxes above 10%.
Today's democratic welfare state governments have managed to boil the frog slowly, but in Italy he seems to have had enough anyway.
The growing violence is also a sign of how quickly the social mood in Italy is deteriorating - something indirectly confirmed by its stock market.
The Milan stock index: firmly embarked on the road to Zool – click chart for better resolution.
Addendum 2: Morgan Stanley Hit by Euro Area Worries, JPM Loss Grows by 50%
In the US banking/brokerage sector, Morgan Stanley has been hit the most recently, as its exposure to euro-land is thought to be quite significant.
“At the end of March, Morgan Stanley’s net exposure to troubled Euro nations (Greece, Ireland, Italy, Portugal and Spain) was $2.4 billion. It’s exposure before hedges was $4 billion.
Its exposure to Greece is the smallest (with the exception of Portugal where the firm has a net short position of $137 million) with a net exposure of $95 million there. Before hedges its exposure in to Greece was $159 million at the end of the first quarter,according to company filings.”
There seems to be some worry that the 'hedges won't work' if the euro area banking system gets into big enough trouble.
Meanwhile, the loss on JP Morgan's positions held at its Central Investment Office in London (CIO) has allegedly grown to $3 billion. It took just five trading days for the loss to balloon from $2 billion to $3 billion, so one must assume that there is a considerable black hole lurking at the CIO. Hopefully it won't swallow JPM whole.
Charts by: Bloomberg, CLSA, IFR, BigCharts
Thank you for your support!
In case you prefer to donate bitcoins, the address is: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
Follow us on Facebook!