For Those Who Failed To Heed My Warnings On Portugal, Visualize The Contagion That Causes European Bank Failure!!!
For anybody who didn’t catch the hint,
another banking crisis the continuation of the banking crisis is inevitable. I’ve said it before, Is Another Banking Crisis Inevitable? This is the current landscape, undoubtedly fudged over by optimistic marks.
|Banks NPAs to total loans|
|Source: IMF, Boombust research and analytics|
Euro banks remain weak as compared to their US counterparts
Health of European banks is weaker when compared to US banks. European banks are highly leveraged compared to their US counterparts (11.1x versus 4.1x) and are undercapitalized with core capital ratio of 6.5x vs. 8.5x. Also, the profitability of European banks is lower with net interest margin of 1.2% compared with 3.3%. However, non-performing loans-to-total loans for European banks are slightly better off when compared to US with NPL/loans at 4.9% vs. 5.6%. Nonetheless, considering the backdrop of high exposure to sovereign debt in Euro peripheral countries, we could see substantial write-downs for Euro banks AFS and HTM portfolio, which would more than offsets the relative strength of loan portfolio.
I really do mean substantial!
Impact of bank’s banking books on haircuts
EU banking book sovereign exposures are about five times larger than trading book. The table below gives sovereign exposure of major European countries for both trading and banking book. The EU trading book has €335bn of exposure while banking book has €1.7t exposure towards sovereign defaults. EU stress test estimated total write-down’s of €26bn as it only considered banks trading portfolio. This equated to implied haircut of 7.9% on trading portfolio with losses equating to 2.4% of Tier 1 capital. However, if the same haircuts (7.9% weighted average haircut) are applied to banking book then the loss would amount to €153bn equating to 13.8% of Tier 1 capital.
We have also presented an alternative scenario since we believe that EU stress test had failed not only to include banks HTM books but also the loss estimates were highly optimistic, as has much of the economic and financial forecasting that has come from the EU. It is highly recommended that readers review Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse! for a detailed view of a long pattern of unrealistically optimistic forecasting. Here’s and example…
Now, enter the sovereign entity of default to be known as Portugal!
Portugal has just illustrated the worst of the potential path to contagion – runaway free market rates. Thier latest debt auction results reveal… The yields on their 6 Month bill literally spiked from 2.984% three weeks ago to 5.117%. People, that is nearly double their funding cost from just THREE WEEKS ago. This is the definition of unsustainable. The 12 Month jumped from 4.311% to 5.902%.
Putting this into perspective, Portugal will pay 20.2 basis points more to issue 1 year debt in its own name than it would pay to borrow 5 year debt from the EFSF (European bail out credit facility). You don’t need me to tell you that this is a bailout or default waiting to happen – and very, very soon. Here’s the post where I laid it out on the line: Portugal Is On The Verge Of Tapping Out, UFC Style – You Knew It Was Coming, Here’s The Analysis! Remember, I included a full
|Attention subscribers: A new subscription document is ready for download The Inevitability of Another Bank Crisis|
Portugal bond haircut analysis for all to peruse. This is the time that it’s most useful, and if anything it is on the optimistic side. There’s actually a chance a credit event may occur by the time I give my Gloom and Doom speech in Amsterdam (www.seminar.ingref.com). Many people have asked me if there is chance CRE will pull through since many pockets are showing improvements. It’s as simple as your belief in whether CRE can thrive in a stagflationary environ with sharply spiking interest rates amid shaky and collapsing banks. I’ve made my viewpoints clear:
- Inflation Misconceptions Hide A Downright U-G-L-Y Real Estate Landscape! – Part 1 Friday, April 1st, 2011
- The True Cause Of The 2008 Market Crash Looks Like Its About To Rear Its Ugly Head Again, With A Vengeance
- Reggie Middleton ON CNBC’s Fast Money Discussing Hopium in Real Estate
- In Case You Didn’t Get The Memo, The US Is In a Real Estate Depression That Is About To Get Much Worse
- The Inevitable Has Finally Been Admitted In Europe: The Macro Experiment Has Ignited Inflation Without Commensurate Growth & Rates Will Spike
- The Coming Interest Rate Volatility, Sovereign Contagion, Geo-political Unrest & Double-Dip Recessions: Here’s The Answer To Valuing Global Real Estate Through This Mess
Greece and Ireland are in very similar boats, despite being post bailout. And as all know, I have warned thoroughly about both of these nations through ample analysis. Instead of going through each and every one of my posts that fill the bill, look at the early work (with subscription material) or my latest European opinion and analysis. Of course, by now I’m not the only one to sound the alarm that an interest rate storm is about to erupt and it will travel the world.
Some euro zone governments are concerned highly indebted Greece will not be able to refinance itself and may have to restructure its debt, the Financial Times Deutschland reported on Wednesday. The newspaper said representatives of several euro zone governments told the paper that a restructuring could no longer be ruled out. …”An extention and top-up of the aid package would not be politically possible. Then, consequences would have to be drawn,” the paper quoted a source in the finance ministry of a large euro zone country as saying.
It also quoted an advisor to the leader of an EU state as saying: “We must have a plan B ready” for the possibility Greece requires more financial assistance. Greek and European officials have long insisted that Greece can recover without restructuring its debt, and that even discussing a restructuring now would be counter-productive by damaging banks across Europe and causing panic in markets. On Saturday, the International Monetary Fund denied a report in German magazine Der Spiegel that it was privately pressing Greece to restructure its debt.
Irish banks have recently issued €18bn of notes backed by government guarantees with the aim of replacing expensive ELA funding from the Irish Central Bank (at the ECB’s marginal lending facility of 1.75% plus a penalty) with ECB funding at 1%. This replacement is likely to be reflected in the end- February financial statement of the Irish central bank. As of the end of January, Irish banks borrowed €126bn from the ECB (down €6bn from December) and €51bn from the national central bank’s ELA (unchanged from December).
The issuance of state guaranteed notes not only allows Irish banks to unwind their ELA dependence and reduces the cost of borrowing from central banks, but it also protects them against rating downgrades. Rating downgrades of non-guaranteed bonds raises the haircut applied by the ECB or in extreme cases can make these non-guaranteed bonds ineligible with the ECB.
This has been a problem for Greek banks, which, at the end of last year rushed to issue €25bn of government guaranteed bonds to meet new, more punitive collateral requirements by the ECB. The Greek government has just extended state-guarantees to Greek banks by another €30bn, on top of €55bn of outstanding state-guaranteed bank bonds. It appears that one Greek bank has already made use of the new €30bn liquidity package, issuing €1bn of government- guaranteed paper this week.
To the extent that this extra €30bn is being used by Greek banks, it will mean that from the €140-150bn of collateral that Greek banks have posted with the ECB so far, almost all of it will be government-related collateral (€85bn of stateguaranteed bank paper, €45bn of Greek government bonds owned by Greek banks and €8bn of zero-coupon bonds which the Greek government had lent to Greek banks in 2008). The huge exposure to government-related collateral puts the ECB at a huge disadvantage in the event of government restructurings/defaults.
If you remember, I warned of this months ago! This literally getting uglier by the second. Reference:
- “The ECB Loads Up On Increasingly Devalued Portuguese Bonds, Ensuring That They Will Get Hit Hard When Portugal Defaults
- ECB Swallows Massive Portuguese Bond Losses As It Is Clear That The Third State Will Soon Join The Bailout Brigade – Haircuts, Here We Come!!!
- and The Truth Behind Portugal’s Inevitable Default – Arithmetic Evidence Available Only Through BoomBustBlog followed by The Anatomy of a Portugal Default: A Graphical Step by Step Guide to the Beginning of the Largest String of Sovereign Defaults in Recent History
Anyone remotely interested in the coming market shake out cannot afford to be without this man’s insight .His analyzes is the best I have come across and you can be sure it’s independent and to the point .Reggie’s forensic analyzes puts him streets ahead every time .Well done Reggie.