The Banking Crisis Returns, Centered on Euro-land
And there everybody thought the 2008 crisis (a.k.a. GFC – the 'Great Financial Crisis') was a once in a generation event. As it has now turned out, it appears to be a 'once every three years event' these days. If anyone thought we were exaggerating yesterday when we spoke of a 'system on the brink', you may be inclined to reconsider after reviewing today's article.
As we have noted in one of our recent updates, the sovereign debt crisis in euro-land has taken several strange turns lately, all of which have been a direct result of the various interventions of the eurocracy. These interventions were of course coupled with the usual cacophony of contradictory voices that has reliably added to market jitters every time. One would have expected that during the holiday season we might perhaps be spared this constant public bickering, but you know how it is…no politician will say no to free face time on TV.
The first strange turn was taken when the last great emergency/crisis summit on the rescue of Greece concluded. At the time there were already the first signs of renewed trouble, as the government bond yields of Spain and Italy had begun to break out – an event chronicled here in great detail. Then the market decided that as a result of the decisions taken at the summit, it would indeed be opportune for the crisis to move away from the 'GIP' trio for a while and concentrate fully on new targets. When it became clear last week that the rise in Italian and Spanish yields would not stop, the ECB decided to expand its bond market manipulation program and include bonds issued by these governments as well. That has 'worked', sort of, in that the yields on Italian and Spanish bonds have declined for now. Alas, as we noted previously, it has failed to stop the panic – the crisis has once again simply moved elsewhere.
Among other targets, it has continued to spread to the moribund euro area banks, all of which are naturally greatly exposed to euro-land sovereign debt as well as private sector debt of varying degrees of dubiousness.
Moreover, we would like to remind readers here that the euro area banks that played in the mortgage backed securities arena prior to the 2008 crisis have by no means fully shed the legacy of these assets and the associated losses. Indeed, with the value of collateral underlying MBS from US issuers continuing to plunge, and property values in the former European real estate bubble zones like e.g. Spain or Ireland continuing to head southward as well, this legacy is a gift that keeps giving. We have once named this the 'moving target problem'. A bank might e.g. decide to write off certain losses and revalue the assets associated with them, but as soon as another quarter or two have passed, it becomes clear that the same assets are now worth even less.
For related reasons, the banking crisis is also once again homing in on the US as well. There is obviously a good reason why the stock prices of certain 'TBTF' banks keep collapsing – the housing bubble implosion never ended.
Let us get back to Europe first though. While shareholders in euro-area based banks are by now used to a steady dose of blood-letting, the massacre of banks stocks took on a fresh sense of urgency on Wednesday. Rumors began to swirl about the creditworthiness of one of France's largest banks, Societe Generale (home to that refreshing pair of doomsayers, Albert Edwards and Dylan Grice). These rumors have since been hotly denied, but that couldn't keep the following from happening:
The share price of Societe Generale crashes by almost 15% as rumors about its solvency (or rather, the lack thereof) find believers – click for higher resolution.
5 year credit default swap spreads on SocGen's debt go ballistic – click for higher resolution.
The word you're looking for is 'parbleu!' – that's what they say in France when they see something like this. 'Bon sang!' will do as well. How does this compare to the 'GFC' of 2008? This is where it gets really scary. Below is a longer term version of the above chart.
5 year CDS on SocGen's debt, long term. If there was a banking crisis in 2008, then what do we have now? – click for higher resolution.
Bloomberg reports that:
“Societe Generale (GLE) SA, France’s second-largest bank, denied “all market rumors” and asked the nation’s market watchdog for an investigation after speculation France’s creditworthiness was in doubt sent the shares tumbling.
The lender’s performance in July and early August shows it will be able to post “solid” results in the future, Paris- based Societe Generale said in a statement after the market closed yesterday. The bank asked France’s Autorite des Marches Financiers to open a probe into the origin of speculation that is “extremely harmful to the interests of its shareholders.”
Ah, the 'locusts' strike again (for new readers: 'locusts' is how Italy's prime minister Berlusconi refers to 'speculators', loosely defined as anyone who dares to sell the bonds of dubious sovereign debtors in the euro area). One wonders though, if Wednesday's plunge in SocGen's shares is the work of malicious rumormongers, then why have the CDS on its debts been rising for many weeks already? There is of course an explanation that suggests itself: the bank (together with other French banks) has quite a bit of exposure to the sovereign debt of Greece. Ever since the 'rescue' that 'bailed in' private creditors on a 'voluntary basis', doubts about many banks have been on the rise. In addition, French banks have been the biggest borrowers in the US commercial paper market - a source of funding that has probably dried up now. Fractionally reserved banks are always teetering on the edge of insolvency – that is in their very nature. They could not possibly pay the claims of all, or even a large percentage of their depositors. Hence they can not be regarded as truly solvent, as these deposits constitute claims that should be available on demand. We would guess that perhaps some large depositors who can not rely on being bailed out by deposit insurance schemes are having second thoughts about where they should keep their cash balances. Perhaps the activities of such large depositors are what has given birth to the rumors – admittedly we don't know if this is the case, but it is certainly in the realm of the possible.
Furthermore, as we have pointed out in recent weeks, CDS on France's sovereign debt have taken off like a Saturn rocket. The spread of France's bond yields over Germany's has tripled this year to roughly 90 basis points, the highest since the euro's introduction. Now, France is AAA rated and according to all three major credit rating agencies, this is expected to remain the case Perhaps S&P has been taken aback by what has happened after it downgraded the US? After all, anyone looking at France's fiscal situation and its moribund, hampered economy, riddled with regulations and taxes, must wonder how long that AAA rating can really last. We would normally guess 'a few weeks', given that France is the second largest EFSF guarantor in the euro area.
“Societe Generale led European bank stocks to the lowest since the aftermath of the credit crisis yesterday, tumbling 15 percent to 22.18 euros in Paris, the biggest drop since Oct. 27, 2008. France’s top credit rating was affirmed by all three major rating companies as speculation that Europe’s debt crisis would spread to the region’s second-biggest economy pushed the cost of insuring its government debt against default to a record.
“There is no indication whatsoever that France would waver in its determination to honor its obligations,” Dirk Hoffmann- Becking, an analyst at Sanford C. Bernstein Ltd. in London, said in a report to clients. “The resilience of the French banks against a freeze in the short-term funding market is very high,” he said, predicting that the sell-off in French banking shares “should be short-lived.”
European banks tumbled to the lowest since March 2009, when stocks fell to the weakest since the collapse of Lehman Brothers Holdings Inc. six months earlier. The Euro Stoxx Banks Index fell 8.9 percent to 109.87. BNP Paribas (BNP) SA, France’s largest bank, slid 9.5 percent to 35.61 euros and Credit Agricole SA (ACA) slumped 12 percent to 6.07 euros.”
No-one said that 'France would not honor her obligations', have they? The debate is about the sustainability of the AAA rating. France is one of the most highly indebted countries in the euro area after all. It seems obvious that the markets have grave doubts indeed. As to the 'resilience of French banks against a freeze in the short term funding market', if it is indeed so great, then why did they have to borrow hundreds of billions from US-based money market funds? Is it really not relevant whether this source of funding is no longer as generous as it has been heretofore? We really wonder about that, and so do evidently a great many market participants. We would also remind here that since the BEA's stress test, one can gather all the information one needs to assess the strength of the biggest European banks. The stress test results were not very comforting, considering how easy the BEA made it to pass the test.
France's biggest bank, BNP Paribas, also had a bad hair day on Wednesday, alas it did not complain to regulators about it, at least not publicly. Its shareholders were however mauled as well.
BNP-Paribas, France's largest bank, suffers a fall from grace as well – click for higher resolution.
5 year CDS on BNP Paribas go ballistic too. How can everything by just fine? – click for higher resolution.
5 year CDS on BNP Paribas, long term. Again, this is now a great deal worse than the moves seen in 2007-2009 – click for higher resolution.
We would suggest that all protestations to the contrary, when markets are delivering such crushing verdicts as depicted above, then something is very wrong. It may be something that we don't know about yet, but the markets evidently sense that there is a big problem somewhere and are attempting to discount in advance.
In the wake of the weakness in bank stocks, the French CAC-40 index fell sharply in Wednesday's trading, refusing to mirror the bounce that was seen in the SPX on Tuesday after Heli-Ben delivered his latest 'free money forever and ever' pledge.
The 'GFC 2011' crash in the CAC-40 – click for higher resolution.
Other European banks didn't fare any better. Interestingly, although ECB buying of Italian and Spanish government bonds continued and their yields retreated further, Italian bank stocks were utterly crushed again as well. In the course of every other trading day, the shares of Unicredito and Intesa Sanpaolo (Italy's two largest banks) lately tend to get halted two to three times, on account of hitting limits. What these halts are supposed to achieve we can not say, but they have not stopped the collapse, that much is certain.
Unicredito – down more than 50% over the past year and 84% since May of 2007. Lately it is crashing every other day – click for higher resolution.
5 year CDS on Unicredito – there is evidently a pattern here. Ironically, it hasn't helped the bank that Italian bond yields are now falling – click for higher resolution.
5 year CDS on Unicredito, long term – way past the 2008 highs as well now – click for higher resolution.
Intesa Sanpaolo hits a new low as well. This stock is in similarly bad shape this year as Unicredito's – click for higher resolution.
5 year CDS on Intesa Sanpaolo – click for higher resolution.
5 year CDS on Intesa Sanpaolo, long term – again we see how much worse the current situation is compared to 2008 – click for higher resolution.
The crash in Milano's MIB index – it isn't very far anymore to the lows of early 2009 – click for higher resolution.
Since everybody in the eurocracy keeps saying that 'there is no fundamental problem with Italy that would have justified the rise in Italian yields', we would like to remind that Italy's debt rollovers are heavily front-loaded. This explains inter alia the urgency with which the ECB saw fit to intervene in its bond market. As an aside, a letter the ECB sent to Italy's government that contained the central bank's demands – the preconditions that needed to be fulfilled for it to grant Italy the intervention currently underway – has made a lot of waves in Italy, as it indicates that the country's fiscal sovereignty is hereby revoked. As :
“European Central Bank President Jean-Claude Trichet wrote a secret letter to the Italian government late last week "dictating" what Rome should do by way of economic reforms, Milan daily Corriere della Sera reported Monday.
Bank of Italy Governor Mario Draghi, who will succeed Trichet later this year at the ECB's helm, co-signed the letter, Corriere reported, without citing sources and without citing directly from the alleged letter.
The letter set out to the Italian government what measures it should take and a timetable of their implementation, the paper said, adding that the ECB's suggestions were tantamount to conditions the bank requires in exchange for its purchase of Italian government bonds.
The letter asks for rapid privatization of municipal assets, liberalization of various sectors, and offers "detailed" indications on how to loosen Italy's employment laws, Corriere said.”
This has now led Italian trade unions to threaten a nationwide strike. We see once again how the deteriorating social mood that accompanies the bear market shatters harmony and cooperation in favor of disunity and strife. As the FT reports:
“Italy’s main leftwing trades union federation gave warning on Wednesday of possible strike action following budget crisis talks with the government, which failed to calm fears over planned spending cuts.
Susanna Camusso, head of the CGIL federation, said the meeting with ministers and employers’ representatives had failed to clarify how the government intended to cut its budget deficit as demanded last week by the European Central Bank.
“If the austerity budget hits the usual suspects we will mobilise to change it,” said Ms Camusso. She has repeatedly warned Silvio Berlusconi’s centre-right government not to force lower-income earners and the middle classes to bear the brunt of its austerity programme.
Opposition politicians and union leaders are demanding to know the exact contents of a letter sent to the Italian prime minister last Friday by Jean-Claude Trichet, head of the ECB, and Mario Draghi, his designated successor and governor of the Bank of Italy.”
We believe that as the secular bear market and secular economic contraction progresses, central bankers will find themselves increasingly under fire. Central banks are at the heart of a banking cartel that 'owns' the fractional reserves banking privilege. Their job is to keep this cartel intact – but this is not without economic costs, as one might imagine. Any European housewife can probably tell you more about what that cost is than the official statistics will ever do. All she needs to do is look at her household budget. The average citizen has little understanding of how the modern monetary system works. If such understanding were to become more commonplace, we could soon see mobs with pitchforks thronging the streets.
The maturity spectrum of Italy's government debt – as can be seen, the biggest rollovers are due in the near term. The big 2010 hurdle has been taken, but there is a lot more coming – click for higher resolution.
The Euro-Stoxx Bank Index – one feels reminded of Falstaff ('I have a certain alacrity in falling') – click for higher resolution.
The Euro-Stoxx Bank Index over the past five years. New lows are within hailing distance – click for higher resolution.
In the context of our contention that central bankers are increasingly in danger of vilification, we want to remind readers of the small 'palace revolt' at the FOMC yesterday, when three district presidents dissented from the FOMC decision. Unfortunately, this is unlikely to stop Bernanke from continuing his money printing experiments at full blast. The man's hubris and faith in inflationist doctrines are breathtakingly well developed. The fact that the policies have so far failed to deliver what they allegedly were designed to deliver has not provoked any introspection. The verdict is apparently that we need even more of what hasn't worked. Eventually it will become clear, just as it became clear in post revolutionary France after a while, that printing more money has less and less 'positive' and more and more 'unintended' effects – and that there is one decisive thing it can not do: create a single iota of wealth. Once clarity on these points has been unequivocally demonstrated, there will likely be a more forceful insurrection against the good chairman's plans. Unfortunately, the more time he has to continue with his experiments, the bigger the price we will eventually have to pay. By now he strikes us a past master of not letting any opportunities for producing fresh catastrophes passing him by. Many people erroneously believe that he 'saved the economy' in 2008 and that 'he had to do it'. Nothing could be further from the truth. Did anyone expect the financial markets to be in panic forever?
It is not possible to 'save' an economy that is finally paying the bill for decades of unbridled money supply inflation and credit expansion by engaging in even more of the same. One doesn't need to be a trained economist to see this – common sense should suffice. In fact, being a trained economist could prove to be an obstacle to this recognition, considering the views espoused by Bernanke and many of his fellow economists. Doing the same things over and over again and expecting different results is the hallmark of insanity. Apparently, insanity is de rigeur among many of today's mainstream economists.
We confidently predict that their interventionism will be thoroughly discredited a few years hence. Their names will live on in infamy – like Rudolf von Havenstein, the cold hard reality of economic law will eventually unmask them for the charlatans they really are.
US Banks In Trouble As Well
Just because the crisis is now centered in euro-land does of course not mean that the global interconnectedness of the financial system is no longer important and US banks have it good. The opposite is the case. Bank of America (BAC) find itself increasingly under suspicion from investors, as it continues to choke on its acquisitions made during GFC, Phase 1. Readers may recall our comments on the take-over of Countrywide by BAC – at the time we noted that in our view, the takeover was done because Countrywide was one of the biggest counterparties of BAC. By taking it over, the losses that would have come due on occasion of Countrywide's bankruptcy could be swept under the rug. Moreover, BAC had invested a lot of money in Countrywide and strove to make it appear as though these investment had been wise. That the then management of BAC paid such a high price in the takeover was clearly a dereliction of its fiduciary duties. It could have gotten the carcass a few weeks later for next to nothing. Instead it decided to pay a high price for what has likely turned into a sheer bottom-less well of losses. This was then topped off with the acquisition of Merrill Lynch, likely at the behest of the administration – again in order to avert what would likely have become a major bankruptcy otherwise. If this reminds you of the story of Creditanstalt in the early 1930's, we say it should. BAC appears to be on the brink again. Its new management keeps saying that no new capital will have to be raised and that the bank's 'fundamentals are strong', but since it continues to sell 'non-core assets' at a fast clip, it evidently does need more capital. The market's verdict is rather worrisome.
BAC on the skids. There's evidently something the market is worried about – click for higher resolution.
5 year CDS on BAC – those 'strong fundamentals' must be striking – click for higher resolution.
5 year CDS on BAC, long term – contrary to those on the European banks, CDS on BAC have yet to exceed the 2008 highs, but they are almost there. Crisis? What crisis? – click for higher resolution.
Citigroup (C) finds itself in a similar dilemma, although Citi has the advantage of a strong international presence – or perhaps that is no longer an advantage? In any event, its CDS prices look a great deal better behaved than BAC's at the moment.
Shares of Citi [C] are on the same slippery slope lately. Consider that this is really $2.80/share pre-reverse split – click for higher resolution.
5 year CDS on Citi are still comparatively 'well behaved', but lately also rising strongly – click for higher resolution.
5 year CDS on Citi, long term – here we can see the difference between C and BAC – Citi was deemed to be in far worse shape in 2008/9, whereas BAC is under the bigger cloud today – click for higher resolution.
Obviously the strong declines in European stocks led to a reassessment of the 'FOMC bounce' in the US as well. The market essentially took back Tuesday's rally in its entirety, but we would caution bears that this has merely left it in the same oversold position it inhabited before. Unless the system really blows a gasket here and now, chances are that we are approaching a rebound in spite of this renewed decline. As always, the short term action is very difficult to forecast, and we acknowledge that risk remains elevated. Alas, experience tells us to be wary, whereby we must caution that it is our impression from anecdotal evidence that there is still a lot of nonchalance out there about this decline. For the sake of our own sanity we are not watching CBNC, but a friend e-mailed us today after the close of trading to let us know that 'all they're talking about is what to buy'.
To this we would like to quote Carl Swenlin of Decisionpoint: 'This is a bear market, and bear market rules apply'. While it is perfectly legitimate to give some thoughtto which stocks one would consider buying when the market gets smashed to bits, the proper attitude in bear markets is not to look for lows to buy, but for highs to sell. That's how we see it anyway, unless of course the vaunted talking heads were talking about buying gold stocks, which we doubt. After all, everybody knows that gold must top out any day now, right? :)
The SPX – another decline, but note that volume has been weaker this time around and Tuesday's intraday lows were not undercut. Moreover, the DJIA declined far more, which constitutes a slight bullish divergence – click for higher resolution.
A weekly chart of the 10 year treasury note yield. It has come very close to the major support from late 2008 now – and this was a very big move in a very short time. Alas, in 1942, this yield was at 1.5%. We would not be surprised to see this level eventually revisited. Note that shorter term yields from 1 to 5 years are now below those of Japan – click for higher resolution.
Gold has gone into 'acceleration mode' – yes, it is overbought, very much so in fact. Volatility is to be expected. Alas, we personally do not believe a significant top is in yet, even though a correction could obviously begin any day – click for higher resolution.
Below you find an extended collection of our usual chart update. We have added a few charts we haven't shown for some time, as well as a few entirely new ones. One of our readers reminded us that we should present the CDS on the 'Big Four' Australian banks again, now that another crisis is in full swing, so these are included as well this time. Needless to say, the banks from Oz seem to be in a spot of trouble as well here. We expect them to be in a lot more trouble as time goes on and the Australian real estate bubble deflates.
Also noteworthy, near term euro basis swaps continue to show growing stresses. CDS, yields and swaps in basis points, color-coded where applicable.
5 year CDS on Portugal, Italy, Greece and Spain – Spain and Italy see their CDS rise again – click for higher resolution.
5 year CDS on Ireland, France, Belgium and Japan – as noted before, CDS on Belgium and France continue to go 'ballistic'. This is what has people worried that France may eventually see a downgrade, even though the rating agencies deny for now that it will happen – click for higher resolution.
5 year CDS on Bulgaria, Croatia, Hungary and Austria – the 'rocket ride' continues – click for higher resolution.
5 year CDS on Latvia, Lithuania, Slovenia and Slovakia – ditto, although there are some small hints at profit taking. Really, Slovakia is fiscally sound, much sounder than either France or Belgium, and the same goes for Slovenia – click for higher resolution.
5 year CDS on Romania, Poland, Slovakia and Estonia – a tiny pullback here in some – click for higher resolution.
5 year CDS on Saudi Arabia, Bahrain, Morocco and Turkey – Turkey keeps running after the Western European CDS spreads – click for higher resolution.
10 year government bond yields of Ireland, Greece, Portugal and Spain – the beneficiaries of ECB buying and bailouts – click for higher resolution.
10 year government bond yields of Italy and Austria, UK gilts and the Greek 2 year note. We didn't think it possible, but here we are – with gilts at 2.48%. The long term fiscal outlook of the UK is – in spite of austerity measures – catastrophic. Reportedly a great deal worse than Italy's in fact – click for higher resolution.
France's 10 year yield – similar to Austria, this yield is paradoxically falling concurrently with CDS spreads rising sharply. Alas, the spread to German rates is at a new high of nearly 90 basis points – click for higher resolution.
The German Bund – you wouldn't know this country has just had an economic boom – click for higher resolution.
5 year CDS on Germany - oops! Bailing out all and sundry seems to have changed risk perceptions markedly – click for higher resolution.
5 year CDS on Germany, long term – approaching the 2008 crisis wides – click for higher resolution.
5 year CDS on the 'Big Four' Australian banks – beginning to move up with some verve now – click for higher resolution.
The Global airfreight index (an amalgam of 92 airlines if memory serves) – globally synchronized recession anyone? As an aside to this, the BDI (Baltic Dry Index) has collapsed nearly all the way back to its 2008 crisis lows in the meantime – click for higher resolution.
L.A. inbound container traffic. A lower high and falling now – this is a chart we will revisit – click for higher resolution.
Lastly, 5 year CDS on US treasury debt - these have come back in now that the debt ceiling debate is over – click for higher resolution.
5 year CDS on US treasury debt, long term – in 2008, worries were much greater, but then this time around the troubles are centered on Europe – click for higher resolution.
3 month euro basis swap at a new post 2008 low. Dollar funding problems and growing counterparty risk perceptions are evident here – click for higher resolution.
The one year euro basis swap look less extreme, but this is also a new low for the move – click for higher resolution.
The recent riots in London and other UK cities are yet another sign that the social mood in Europe is deteriorating and consistent with a secular bear market. Note the character of these riots – they have no focus, except looting and the destruction of property. While the shooting of a young man by police started the riots, they are not protests in the sense that people are waving placards and the like. It is pure chaos, a warning of what can eventually happen anywhere in a long lasting economic contraction.
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