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40% of Eurozone Banks Are in Trouble

Companies / Credit Crisis 2014 Oct 23, 2014 - 12:07 PM GMT

By: Raul_I_Meijer

Companies

Reuters has had a busy day today reporting on Europe’s banks and the stress tests the European Banking Authority is set to unveil on Sunday. And which put the EU and ECB on a see-saw like balancing act between credibility and panic.

The news bureau started off in the early morning citing a report by Spanish news agency Efe, which said 11 banks would fail the tests:


11 Banks To Fail European Stress Tests

At least 11 banks from six European countries are set to fail a region-wide financial health check this weekend, Spanish news agency Efe reported, citing several unidentified financial sources. The results of the stress tests on 130 banks by the European Central Bank are due to be unveiled on Sunday.

Four banks in Greece, three Italian lenders and two Austrian ones are among those that preliminary data showed had failed the tests, Efe said. It gave no details of how much capital the banks would have to raise and said this could yet change as numbers could be revised at the last minute. The euro fell on the report. Efe also identified a Cypriot bank and possibly one from Belgium and one from Portugal.

That’s right, the journalist lists 12 banks there, not 11. But anyway, that text is, miraculously, not available anymore, since at the same URL you now get the following article. Jean-Claude ‘When it gets serious, you lie’ Juncker’s first act in his first day in office as European Commission head may well have been to give Reuters a call. Make that a shout.

ECB Cools Speculation Over Bank Health Checks Ahead Of Results

The European Central Bank cautioned on Wednesday against speculation over the outcome of its stress tests after a media report said at least 11 banks had failed the landmark financial health checks, driving some banking shares lower. Austria’s Erste Group rejected the report from Spanish newswire Efe, which said that it along with banks from Italy, Belgium, Cyprus, Portugal and Greece, had failed the ECB review based on preliminary data, but it gave no details of the size of the capital holes at the banks.

The ECB, which will publish the test outcomes for 130 banks on Sunday, said final results had not yet been sent to the lenders involved, and it could not comment on individual institutions. “Any inferences drawn as to the final outcome of the exercise would be highly speculative until the results are final on 26 October,” said an ECB spokesman. The European Banking Authority, the EU watchdog coordinating the Europe-wide stress test, said the results would not be final until they are endorsed on Sunday just prior to publication. It had no comment on individual lenders.

Erste told Reuters it had no reason to believe it would fail the test. Banks have already had some feedback on the outcome of the tests through ‘supervisory dialogs’ with the ECB. They get the results on Thursday, three days ahead of the public announcement. The ECB becomes supervisor of the euro zone’s banks on Nov. 4. “Out of the supervisory dialogue we have no indication we won’t pass,” an Erste spokesman said. [..]“The bigger, more important question is not which banks have failed but which banks have achieved only a marginal pass,” said Jeremy Batstone-Carr at Charles Stanley.

Sources told Reuters that German public sector lender HSH Nordbank – which was not named in the Efe report – was set to pass the health checks. HSH was seen as the German lender most likely to fall short of requirements. Other than Erste, the banks listed by Efe were Italy’s Banco Popolare, Monte dei Paschi and Banca Popolare di Milano; Greece’s Alpha Bank, Piraeus Bank and Eurobank; Portugal’s Millennium BCP and Belgium’s Dexia. The agency also said a second, unnamed Austrian bank and a Cypriot bank were set to fail.

Looks like Brussels thinks it’s free of leaks to the media. Look, it’s Wednesday, and the banks will get results tomorrow. These are known, and can and will therefore be leaked. It’s 2014. Get with it.

Do note the words I bolded. Banks that only just slipped through the test are a major topic in this. If only because they’ve all had many months to shore up their capital by whatever means possible.

Those who still fail after that should probably have been long gone, while those who make it by a narrow margin are in bad shape. There are many ways to shore up your capital, including some that are temporary, just shy of being 100% legal and/or simply based on accounting tricks.

And of course many problems will remain hidden, for now, behind the veil of ultra cheap credit, either from central banks or corporate bond investors. Because that’s one of the damaging effects of ZIRP: it keeps zombies alive.

Then later in the day Reuters followed up with this interview with Pimco global banking specialist Philippe Bodereau, who says 18 banks will fail. Juncker must have thrown a hissy fit, and then lied about it.

130 banks are being tested. 12-18 will fail. And on top of that, almost a third of 130, that’s over 40, will pass while still getting their feet wet. That means anywhere between 40% and 44% of Eurozone banks either fail or are in bad shape. And Bodereau suggests this will lead to a positive market shock on Monday morning. You might want to ask yourself what market position he has taken, how short he is exactly, and what book he’s talking.

If 40% of your banks are either dead in the water or barely floating, I’d say you have a major problem. ECB head Mario Draghi is undoubtedly still stuck in misplaced confidence on account of how well his ‘whatever it takes’ speech worked out, and ‘fresh’ EC head Juncker is as we speak emptying several bottles of champagne at once to celebrate his new job. He’s known to like his drinky.

And the ECB, under current conditions, seems almost entirely powerless to do anything about this, since, as Tyler Durden, using Barclay’s numbers, summarizes, it can only purchase $10 billion or so in ABC/Covered bond purchases per month, and another $5 billion per month in corporate bonds. There is simply not more eligible debt available for it to buy. Its mandate would have to be changed in drastic ways, and that doesn’t seem to be in the cards at all.

To keep markets afloat, however, as Bloomberg notes, $200 billion a quarter in QE from the central bankers is needed. The Fed is almost out, China has mostly withdrawn, Japan has too many domestic problems to look out the window, and the ECB can do just $15 billion a month. Confused? You won’t be .. after next week’s episode of .. the Eurosoap.

We all know our world, be it politics or economics, consists almost exclusively of spin these days, but in the face of these numbers I very much wonder how many people will be willing to bet their own money that Europe can get away with another round of moonsmoke and roses come Monday.

By Raul Ilargi Meijer
Website: http://theautomaticearth.com (provides unique analysis of economics, finance, politics and social dynamics in the context of Complexity Theory)

© 2014 Copyright Raul I Meijer - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
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