Eric Sprott and David Franklin This past March, Jeroen Dijsselbloem, the head of the finance ministers of the eurozone, shocked the markets with seemingly off-the-cuff comments suggesting that the Cyprus banking solution will, “serve as a model for dealing with future banking crises.”1 Depositors across Europe took a collective gasp of horror – could banks possibly confiscate depositors’ funds in a form of daylight robbery? Indeed they could, and last week the Bank for International Settlements (“BIS”), the Central Bank's Central Bank, published what we have referred to as ‘the template’; a blueprint outlining the steps to handle the failure of a major bank and the conditions to be met before ‘bailing-in’ deposits. In their recently published paper “A Template For Recapitalising Too-Big-To-Fail Banks”, authors Paul Melaschenko and Noel Reynolds argue for a “simple” mechanism to recapitalize failed banks without the use of taxpayers' money. They propose a process whereby a bank, if it reached the point of failure, could transfer ownership to a newly created holding company over a weekend and be recapitalized. The bank would then be sold, enabling the market to determine the ultimate losses to previous equity holders and creditors. And, yes, this scenario includes losses for depositors above a guaranteed limit. Presto! A new bank with a clean balance sheet, ready to receive liquidity support from the prevailing central bank, without the need for handouts, bailouts, TARP programs, or any other form of government assistance. Previous debt and equity holders and depositors of this failed bank would be left with an equity position in the new entity. This ‘template’ would ensure that “shareholders and uninsured private sector creditors (read: depositors and bond holders) of such banks, rather than taxpayers, bear the cost of resolution.”2 While at the moment this framework is only outlined in a discussion paper, it confirms our suspicions. While the old template involved “bailing out” banks through the transfer of toxic assets from the corporate sector to the taxpayer, the new template calls for “bailing in”. In this model the risk is contained within the affected institution at the expense of equity holders, bond holders and finally depositors. Far from being an idle comment, the unscripted 'bomb' that Mr. Dijsselbloem dropped on the market during the Cyprus Banking crisis is on its way to becoming a reality across Europe and other major banking centers. In our opinion, the problem with the banks stems from an over-levered banking system that still has not been brought under control. Traditionally, banks would “de-lever” by selling portions of their loan portfolios to other banks, but since 2008, this hasn’t happened in most instances and leverage has remained elevated. In fact, an example of a bank “bail-out” that highlights the over-leverage still plaguing the system, happened recently in Mr. Dijsselbloem’s own back-yard. In this instance, the Netherlands nationalized SNS Reaal, a banking and insurance group, in a $14 billion rescue that highlights the continued fragility of the European banking sector. From The Wall Street Journal: The government rescue was inevitable after SNS Reaal suffered a run on deposits and failed to raise capital on its own. “It is worrisome. Nearly the entire Dutch banking system is now on a government lifeline,” said Arnoud Boot, a professor of corporate finance at the University of Amsterdam. The Dutch state will inject €2.2 billion ($2.99 billion) into the company, write off €800 million from an earlier bailout and €700 million on the value of SNS Reaal's toxic property loans. It will also provide an additional €6.1 billion in loans and guarantees to put the firm on a sound footing. The burden to taxpayers will be eased somewhat through a €1 billion contribution from the other Dutch banks through a special levy.3 Can you see the pattern? Depositor runs triggered a bailout of an over-levered institution, leading to a write-off of toxic assets, additional lending and guarantees by the government. All of this committed to by Mr. Dijsselbloem on behalf of the Dutch people. This will likely be the last time we see a rescue in this fashion, for now we have a new ‘template’ whose prima facie case was Cyprus. It is interesting to note that, to the best of our knowledge, there was no discussion of “bail-ins” for Dutch depositors of SNS Reaal. It is clear now that the crossing of the Rubicon into the confiscation of depositor funds was not a one-off emergency measure limited to Cyprus. We can only speculate as to what triggered these new rules. Perhaps the public would no longer tolerate the use of taxpayer-funds to effect bailouts of banks? Maybe this is the beginning of an attack on offshore banking havens? Or possibly the regulators are hoping to impose some market discipline on the banks, forcing depositors to review bank balance sheets before opening an account. Regardless of motivation this is a game changer. So what is the impact of this ‘template’ for investors? By law, when you put your money into a deposit account, your money becomes a liability of the bank. Above an insured amount, you become an ‘unsecured creditor’ with a claim against the assets of a bank if it were to fail; your deposits are now pooled with other assets and divided amongst other creditors. We urge investors to consider any deposits above the insured amounts to be only as safe as the credit-worthiness and capital structure of the bank indicates. Only by understanding where you are in the creditor ‘pecking order’ will you avoid a ‘Dijssel-Bomb’ in the next phase of the on-going financial crisis. Subscribe to Sprott's Thoughts at www.sprottgroup.com/subscribe http://www.moneyweb.co.za/moneyweb-the-money-whisperer/only-the-paranoid-survive http://www.bis.org/publ/qtrpdf/r_qt1306e.pdf http://online.wsj.com/article/SB10001424127887323701904578277253567195598.html Forward-Looking Statement This report contains forward-looking statements which reflect the current expectations of management regarding future growth, results of operations, performance and business prospects and opportunities. Wherever possible, words such as “may”, “would”, “could”, “will”, “anticipate”, “believe”, “plan”, “expect”, “intend”, “estimate”, and similar expressions have been used to identify these forward-looking statements. These statements reflect management’s current beliefs with respect to future events and are based on information currently available to management. Forward-looking statements involve significant known and unknown risks, uncertainties and assumptions. Many factors could cause actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements. Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking statements prove incorrect, actual results, performance or achievements could vary materially from those expressed or implied by the forward-looking statements contained in this document. These factors should be considered carefully and undue reliance should not be placed on these forward-looking statements. Although the forward-looking statements contained in this document are based upon what management currently believes to be reasonable assumptions, there is no assurance that actual results, performance or achievements will be consistent with these forward-looking statements. These forward-looking statements are made as of the date of this presentation and Sprott does not assume any obligation to update or revise. Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any fund or account managed by Sprott. Any reference to a particular company is for illustrative purposes only and should not to be considered as investment advice or a recommendation to buy or sell nor should it be considered as an indication of how the portfolio of any fund or account managed by Sprott will be invested.
Нидерланды: банковская и страховая группа SNS Reaal зафиксировала квартальный убыток в размере $2,12
Банковская и страховая группа SNS Reaal зафиксировала квартальный убыток в связи с повышением резервов на покрытие проблемных кредитов. Так, чистый убыток SNS Reaal за первый финансовый квартал составил 1,622 млрд евро ($2,12 млрд) при том, что на увеличение резервов на покрытие проблемных кредитов было выделено 2 млрд евро. Стоит отметить, что чистый убыток компании за 2012 год составил 972 млн евро.
A recent Free exchange column discusses the European Central Bank's troubles in providing support to peripheral economies (summary here). We are inviting experts in the field to comment on the piece and related research. Michael McMahon, a macroeconomist at the University of Warwick commented here. Gilles Moec, co-head of European economic research at Deutsche Bank, added thoughts here. Next up is Luis Garicano, professor of economics at the London School of Economics.SINCE the start of the crisis, the link between banks and their sovereigns has only been strengthening with dire consequences for the periphery’s economies. To focus on Spain, in October 2008, the Spanish financial system had €78 billion of Spanish government bonds. By February 2013, these holdings had increased to €259 billion: almost 30% of GDP, according to Bank of Spain data (see Figure 1).Additionally, their direct lending to all the government levels, which was a negative €22 billion in 2008 (government deposits where larger than loans), was €49 billion by February 2013 (see Figure 2).The loop is also strengthening in the other direction. The hidden losses in the banking system are starting to materialise, with €37 billion injected this year by the Spanish state, apart from a still ongoing stock of slightly over €100 billion of state-guaranteed bank debt by the end of 2012 (see Figure 3).European leaders are aware of the damaging loop, and committed themselves at the June 2012 Euro Summit to “break the vicious circle between banks and sovereigns”. Specifically, they promised that, “When an effective single supervisory mechanism is established, involving the ECB, for banks in the euro area the ESM could, following a regular decision, have the possibility to recapitalise banks directly.”Regrettably, this good purpose was fast “clarified”. A senior EU official told the Wall Street Journal only a few days after the summit (on July 6):I need to make clear what the ESM can do: the ESM is able–if one were to decide ever on such an instrument–to take an equity share in a bank. But only against full guarantee by the sovereign concerned … Does it still remain the risk of the sovereign or [does it go to] the ESM? It remains the risk of the sovereign.Later, the Dutch, Finnish, and German finance ministers, on a summit on September 29 stated that, “the ESM can take direct responsibility of problems that occur under the new supervision, but legacy assets should be under the responsibility of national authorities...".Mr Wolfgang Schaeuble has been fast backpedalling on hopes for a banking union and turning it into a banking union “on the cheap”. At the recent Dublin summit, he said banking union "only makes sense…if we also have rules for restructuring and resolving banks. But if we want European institutions for that, we will need a treaty change.“ Other rules cheapening the banking union include no deposit insurance, and no resolution authority for the ECB without (certainly hard to envision and long in coming) treaty changes. In fact, the only decision that has been made is the one that ostensibly involves no cost, the new Single Supervisory Mechanism to start in March.Sadly, Mr Schaeuble has it exactly backwards. The key to restart growth and ensure the survival of the euro process is to recognise that “mistakes were made” by all in the design of the euro, and that these mistakes have had very severe consequences for a number of countries (the debtors) which are now spreading to the rest. In other words, sharing of legacy debts is fair, and, provided the institutions are firmly put in place to avoid future credit bubbles, growth enhancing.We can again turn to Spain for evidence that the deterioration of the aggregate sovereign finance balance sheet is at the root of the current contraction. In spite of the improved credit access by the state caused by lax monetary policies and the OMT threat by Mario Draghi, credit conditions are tight, and families and business are still struggling.Spain has been applying the German recipe to the letter. First, before the SSM is constituted, it has been trying to clean up its own mess with the funds of the state. In the current round, the subordinated liability exercises raised €12.7 billion and the state injected €37 billion for nationalised Cajas (in Q4 2012), plus €1.8 billion (Q1 2013) for surviving ones, for a total of around 5% of GDP. The 3 to 1 ratio public to private participation is similar to the SNS Reaal recap using the new Dutch intervention act, which invested €3.7 billion from the Dutch state, and subordinated debt for €1 billion. Spain moreover set up a bad bank whereby the weaker Cajas and banks transferred a gross total of over €100 billion, for a net asset value of €50.78 billion (transfer finished March 2013) in assets. Senior creditors have benefited from all existing (SLE) bail in exercises. Regrettably the liability exercise again left out senior creditors, which are in fact the ones who have the best monitoring ability (thus able to provide good incentives to countries) and loss absorption capacityBut the bank recap combined with Draghi’s magic words is not improving credit access. True, the OMT means the state is financing itself at much better rates, with cheaper and better credit to banks and a halving of risk premia. But the Bank Lending Survey from the Bank of Spain for January shows that 22% of banks have tightened their lending to large companies, and 10% to SMEs and families for both house purchase and for consumption. The most recent data show that lending to corporates is falling by about 6% per year and this fall with will continue or accelerate this year. Aggregate figures show a huge rise in credit to general government and a brutal drop in credit to businesses and households. But of course, credit drops could be, regardless of surveys, caused by lack of demand, rather than excessive supply restrictions.Evidence of the causal link between supply restrictions and growth in Spain is provided by a recent trio of papers. In a recent AER publication, Jiménez, Ongena, Peydró and Saurina show that weaker banks deny more loans, even when the loans compared are identical (which allows them to identify the supply, rather than demand channel) and that business cannot in general substitute for the weak bank by going to another bank. Also, in a recent (April 2013) working paper, Bentolila, Jansen, Jiménez and Ruano show that businesses whose credit proceeded from weak financial entities that were later subject to intervention (the old “Cajas”) reduced employment by an additional 3.5 to 5 percentage points relative to those whose credit proceeded from strong ones. Finally, in work with my colleague at the London School of Economics Claudia Steinwender, we show that Spanish-owned companies reduce employment substantially more (6%), and investment by much more (by 19%) than the Spanish operations of foreign companies, pointing also to the key role played by investment.In sum, the Spanish state owns more bank risk, the banks own more of the public-sector debts, credit is being restricted, and growth is suffering. The low cost banking union being proposed, which loads the cost of the clean up on the individual member states will not cut through these problems. Several of the key Schaeubleian nostrums must be rejected:– Legacy debt cannot possibly be absorbed by individual states. The euro-zone countries must recognise they signed up to a flawed euro area and that we are today where we are, at least in part, as a result of these flaws. The two key objectives being pursued—minimising taxpayer and EMS involvement as well as ensuring an adequate credit supply—are in contradiction. Maintaining the supply of credit across the euro zone must be the priority.– As Cyprus shows, member states cannot individually guarantee deposits, and common deposit insurance (right now completely off the table) must be part of union– Some instrument for joint lending (a form of Eurobonds) that may allow the gradual easing of the link between banks and sovereigns is necessary. I have proposed, with a group of European economists, the ESBies, a solution based on securitisation that avoids joint liability. This solution generates a large liquidity premium shared by all, redirects flight-to-safety flows from across national borders to across tranches.– A banking union needs strong centralised resolution powers within the supervisor. As the Cajas debacle showed: local authorities are too close to management and do not internalise the cost to the system of wobbly banks. Moreover, the ESM must have the ability to directly inject funds into banks, at market prices, and also lend to local deposit insurance schemes, but sharing cost requires centralised decision making.– A deposit guarantee scheme is needed to break the link between sovereigns and banks. Its cost, with a credible resolution framework able to impose losses on creditors and uninsured depositors, does not have to be excessive.After the German elections, Europe has a short window of opportunity to rescue the euro project. It is the moment for Germany to accept what it signed for in joining the Euro or exit.
Authors: Zsolt DarvasAlmost like a bolt from the blue, the Eurogroup meeting of euro-area finance ministers, along with the troika of the European Commission, the European Central Bank and the International Monetary Fund, agreed on March 16 to a tax on all deposits in Cyprus, including small deposits. During the subsequent few days policymakers all busily disclaimed all responsibility for the decision -- a typical European nonsense. Then the Cypriot parliament turned around and rejected the deal, after which the country sought help from Russia – without success. Cyprus ended up reaching a new agreement with the Eurogroup and the troika on 25 March, to avoid a disorderly exit from the euro area. The new deal is quite sensible in a number of aspects: it fully protects all insured deposits up the €100,000 threshold of the deposit guarantee scheme. Bank shareholders and big creditors take the first hit, while deposits over the €100,000 threshold of the troubled banks will also have to bear the burden of bank losses and contribute to bank recapitalisation as much as needed. Yet the involvement of uninsured depositors sparked a major controversy: will this be the new 'template' for dealing with banking crises in the euro area in the future? The answer is clearly no, even though the communication fiasco that resulted from the public disagreement did not help matters. The Cyprus case is special. The capital shortfall is estimated at about a half of Cypriot GDP: I cannot imagine a banking loss of this magnitude in any other country. And someone had to bear these Cypriot losses. The government did not have the fiscal means to absorb them; Russia did not step in with a huge grant; and euro area partners did not want to burden their taxpayers further. The only remaining solution was to involve bank shareholders and lenders, including uninsured depositors. It is likely that there will be more ‘bail-ins’ in Europe in the future - that is, involving owners and certain investors in the cleanup of banking losses. But these will be along the harmonised principles of the soon-to-be-adopted Bank Recovery and Resolution Directive (BRRD). This in fact aims to protect deposits. Even if Cypriot banking mess is a unique case, it has made one broader lesson abundantly clear: the euro area needs to adopt a fully-fledged banking union. Under this, bank supervision, resolution, and deposit guarantees would be centralised in euro-area countries, as well as those non-euro countries of the EU that decide to opt-in. As things stand, we are only part of the way there. The agreement on centralised supervision has been reached, and banks in the participating countries will be supervised by the ECB, most likely from the middle of next year. In itself this will be a major plus, because the ECB will presumably do everything to avoid flops like the Cyprus disaster, or the sudden crumpling of Dexia in Belgium and the Dutch financial conglomerate SNS Reaal. But it won’t be enough. Trust in deposit insurance has been shaken by chain of events in Cyprus. This may indeed be a special case, but not all small depositors throughout the euro area will understand this. The grave mistake of introducing payments and capital controls in Cyprus to stop money flowing abroad will make matters worse. To rebuild that shattered trust, euro area-wide deposit insurance will be needed. On top of this, a euro-area resolution authority equipped with a well-defined toolbox along the lines of the BRRD is needed in cases of bank failures. And there has to be a burden sharing agreement on eventual banking losses, otherwise, a half-baked banking union will not separate banking and sovereign risks from each other, which would have detrimental effects of the economy. The Cyprus crisis may be contained for now, but it is not over. The payment controls will deepen the already bleak economic outlook, because even the few relatively healthy banks will not be able provide adequate financial services to the economy. The deep economic contraction ahead in Cyprus will make it very difficult to implement the fiscal and structural adjustment programme, and therefore we cannot be assured that Cyprus is saved. Cyprus’s situation is so desperate that it has no choice but to forge ahead with fiscal consolidation and structural reforms. This is not the case in most of the euro area, where fiscal accounts are much stronger. Boosting private investment in core euro area countries with tax breaks, or even increasing public investment financed from government borrowing at the close to zero rates, would revive the economy of the euro area core -- with positive spill-overs to southern Europe. The time has also come to engineer a massive investment programme for southern Europe, like a kind of new Marshall-plan. After all, every euro-member is responsible for the defunct architecture of the euro that allowed the build-up of vulnerabilities that are now causing suffering to millions of people. This column was published in The Times: http://www.thetimes.co.uk/tto/business/columnists/article3728435.ece Read more...
Wolf Richter www.testosteronepit.com www.amazon.com/author/wolfrichter Cyprus didn’t prick the Eurozone bailout bubble, the notion that bank investors who took enormous risks to gain financial rewards would always be made whole by taxpayers. That bubble had been pricked in February. But it was the first time that the international bailout cabal, the Troika, stuck its needle into it—while Germany quietly bailed out all investors in one of its own rotten banks. The bailout deal was pretty slick; it dodged the Cypriot parliament which had demolished the prior package. Well-honed Eurozone tactics: don’t allow voting to mess up the plans. Uninsured depositors would eat €4.2 billion—much of it Russian money. Junior and senior bondholders would kiss their €1.7 billion goodbye. That even senior debt, albeit only €200 million, was destroyed was a first in Eurozone history. Eurozone taxpayers would pick up the remaining €10 billion—still a lot for such a tiny country, but at least it wouldn’t be pocketed by some hedge funds, or worse apparently, Russian depositors. In return, the country won’t go bankrupt. Not for the moment, at least. But no one knows how Cyprus can rebuild its economy without its outsized banking sector. The Russian money—what’s left of it—will be leaving. Years down the road, production of natural gas might kick in. Until then, Cyprus will be force-fed the Troika’s sacred medicine of “structural reforms,” so austerity, and privatizations of state-owned enterprises. Markets soared when the deal was announced. But then a new reality interfered: Jeroen Dijsselbloem, Dutch Finance Minister and since January, President of the Eurogroup, said in an interview what should have been said years ago. Markets tanked. “If there is a risk in a bank,” he said, “our first question should be ‘Okay, what are you in the bank going to do about that? What can you do to recapitalize yourself?’ If the bank can’t do it, then we’ll talk to the shareholders and the bondholders, we’ll ask them to contribute in recapitalizing the bank, and if necessary the uninsured deposit holders.” He was extrapolating the Cyprus deal to banks elsewhere. Everyone who’d taken risks for financial gain would get whacked by the very risk they’d taken, before taxpayers, who hadn’t taken any risks, would get whacked. The process of bleeding the taxpayers for the benefit of investors had to stop, he said. And risks would have to be risks again. What about other smaller countries with disproportionately large, highly leveraged banking sectors, like Luxembourg or Malta? They’d have to trim and strengthen their banks and fix their balance sheets before they get in trouble, he said. Investors should know that the ESM bailout fund would no longer “automatically” swoop in and make them whole. “Now we’re going down the bail-in track,” he said. “It will force all financial institutions, as well as investors, to think about the risks they are taking.” A sea change from Jean-Claude Juncker, his predecessor at the Eurogroup and Prime Minister of Luxembourg—the very country that Dijsselbloem had warned would need to strengthen its banks before they got in trouble. But in his own back yard, Dijsselbloem did make whole certain investors when SNS Reaal, fourth largest bank and insurance group in the Netherlands was sinking into a morass of real-estate loans left over from a housing bubble. Under his direction, the bank was bailed out and nationalized in February, after already having been bailed out in 2008. It cost Dutch taxpayers €3.7 billion. A bankruptcy “would have unacceptably large and undesirable consequences,” Dijsselbloem explained at the time. But stockholders were wiped out. And so were holders of junior debt! It sent tremors through the system. The needle that pricked the Eurozone bailout bubble. Anecdotes were bandied about of mom-and-pop investors who’d lost their life savings because they’d bought these crappy junior bonds that had been touted as safe. They would have been worthless anyway in a bankruptcy, retorted Dijsselbloem and stuck to his semi-hard line—semi-hard because all depositors, insured or not, as well as holders of senior debt and covered bonds were still bailed out by taxpayers. But the unwritten government guarantee on bank debt was off for the first time. Instead of flagellating his arms to justify why taxpayers had to bail out investors, he signaled that he wouldn’t tolerate a situation where the capital “at risk” wasn’t at risk. It would become the new way. Or so you’d think. But last week, it was Germany’s turn to bail out a bank, mercifully obscured by the furor over Cyprus: HSH Nordbank, the world’s top ship-financing bank. The shipping-industry bubble that had turned into a crisis was sinking the bank. Due to overcapacity and low freight rates, ship owners could no longer service their loans. So HSH got bailed out by the states of Hamburg and Schleswig-Holstein that together own 90.69% of the bank. They’d raise state guarantees by €3 billion to €10 billion. Additional bailout aid would be considered. No haircuts for anyone. Except taxpayers. And like SNS Reaal, HSH had already been bailed out in 2008. But when Dijsselbloem saw the markets swoon after his refreshing statements, he half-recanted—no one is allowed to prick the stock market bubble that central banks are blowing with such ardor, not even he. “Cyprus is a specific case with exceptional challenges which required the bail-in measures we have agreed upon yesterday,” he backpedaled hours later. “Programs are tailor-made to the situation of the country concerned, and no models or templates are used.” Indeed. As the bank bailouts in the Netherlands and Germany have shown, every country will bail out its own banks however it sees fit—and taxpayers will continue to bear the brunt of the losses. But if the country isn’t big enough to bail out its own banks and requests an international rescue, the new model will be applied. These banks have now been marked. Of course, when the next megabank craters, when it isn’t a matter of a few billion, but a few trillion, all bets are off. The bailout of the Cypriot banks centered on how to sock it to Russian depositors. But in Moscow there are many people who are jubilating right now. Their wildest dreams have come true. Read.... Cyprus Crisis: A Triumph For Russian Isolationists
With the Cypriot government still 'undecided' about what to 'take' and the European leaders very much 'decided' about what to 'give', the fact of the matter is, as JPMorgan explains in this excellent summary of the state of affairs in Europe, that because ELA funding facility is limited by the availability of collateral (and the haircuts applied to those by the central bank), and cutting the Cypriot banking system completely from ELA access is equivalent to cutting it from the Eurosystem making an exit from the euro a matter of time. This makes it inevitable that capital controls and a capital freeze will be imposed, in their view, but it is not only bank deposits that are at risk. A broader retrenchment in funding markets is possible given the confusion and inconsistency last weekend's decision created for investors relative to previous policy decisions. Add to this the move by Spain, which announced this week a tax or bank levy (probably 0.2%) to be imposed on bank deposits, without details on which deposits will be affected or timing, and the chance of sparking much broader deposit outflows across the union are rising quickly. Via JPMorgan, Capital Control Risks What was widely viewed as an ill-conceived Cyprus deal last weekend renewed fears of a re-escalation of the euro debt crisis. The original proposal to hit insured depositors below €100k caused a bank run and set a new precedent in the course of the Euro area debt crisis, with potential negative consequences for bank deposits not only in Cyprus but also in other peripheral countries. Once again, as it happened with the Greek crisis last May, the Cyprus crisis exposes the fragmentation of the deposit guarantee schemes in the Euro area and its inconsistency with a monetary union. Even if the original deal is eventually revised and the guarantee for depositors with less than €100k is respected, the damage from the original proposal will be difficult to undo, in our view. Cypriot banks are relying on ECB’s Emergency Liquidity Assistance (ELA) to avert a collapse once they open next week. ELA reflects collateralized borrowing from the national central bank rather than the ECB directly, not only at a more punitive interest rate relative to refi rate but more importantly with much larger collateral haircuts. The ECB is still on the hook under ELA because the national central bank borrows these funds from the ECB, i.e. it generates a liability against the Eurosystem. The ECB’s provision of liquidity via ELA is admittedly not a given but it will be provided to Cypriot banks for as long as Cyprus is looking to finalize its revised bailout plan, the so called Plan B. Although the ECB always states that it provides liquidity to only solvent and well-capitalized institutions, past experience with Irish and Greek banks and even with Cypriot banks shows that the ECB has tolerated long periods of liquidity provision to undercapitalized institutions. Greece is the most characteristic case. Greek banks had access to ELA even when the bank recapitalization was pending between April and December 2012. And Greek banks had access to ELA in-between the two Greek elections when it was not even clear whether Greece would stay in the euro. Cutting the Cypriot banking system completely from ELA access is equivalent to cutting it from the Eurosystem making an exit from the euro a matter of time. This is a political decision rather than a decision that the ECB can take alone. This would effectively cut the Central Bank of Cyprus off from TARGET2 and force it along with the Cypriot government to eventually issue its own money. But even assuming that a new deal is agreed between Cyprus and the Eurogroup and ELA continues for the Cypriot banking system after Monday, this does not mean that this ELA is unlimited. ELA is limited by the availability of collateral and the haircuts that the central bank applies to this collateral. The Greek case is the most characteristic example of how punitive haircuts on ELA collateral can be. As of the end of January Greek banks used €122bn of collateral to borrow €31bn via ELA, i.e. an implied haircut of 75%. In contrast, they borrowed €76bn via normal ECB operations posting collateral of €97bn, i.e. the implied haircut on their normal ECB borrowing was 22%. The higher haircut on ELA collateral i.e. is mostly the result of the lower quality of this collateral, typically credit claims, vs. that accepted in normal ECB operations, typically securities. But it perhaps also reflects the higher riskiness the ECB sees with its counterparty, i.e. the national central bank and eventually the sovereign, when a country's banking system has to resort to ELA. Because of the recapitalization issue which has been pending since last April, post the Greek PSI, Cypriot banks had been steadily losing access to normal ECB operations and had been increasing their reliance on ELA steadily since then. By November 2012 Cypriot banks had access to ELA only. This ELA borrowing peaked at €10bn last November and stood at €9bn as of the end of January. What is the maximum ELA borrowing for Cypriot banks? Looking at their assets, Cypriot banks had €72bn of loans to non MFIs as of the end of January, roughly equal to total non-MFI deposits of €68bn. Assuming that all these loans are acceptable as ELA collateral with the same average haircut as in the case of Greek ELA, i.e. 75%, results to only €18bn of total ELA. Given that Cypriot banks have already €9bn via ELA, this leaves them with another €9bn of potential additional ELA. Of course the ECB could be more lenient with its ELA haircuts with Cypriot banks relative to Greek banks, and indeed even in the case of Greek banks, ELA haircuts appear to have been as low as 50% at certain points of time during 2012. But we doubt that total ELA could exceed €30bn, which represents more than 40% of the loan assets of Cypriot banks. In the case of Greek banks ECB reliance never exceeded 40% of total loan and security assets. So further liquidity support from the ECB seems limited, and not enough to offset the €21bn of non-euro area deposits with Cypriot banks, largely Russian (80%) and British (20%) and the €5bn of deposits with other euro area residents outside Cyprus. This makes it inevitable that capital controls and a capital freeze will be imposed, in our view, even if a deal is reached by the end of the week, to prevent depositors, especially non-domestic depositors, fleeing the country. Article 63 of the Treaty on the Functioning of the European Union prohibits “all restrictions” on the movement of capital between Member States and between Member States and third countries. But there would be certain exceptions for measures justified on grounds of public policy or security, see Article 65 of the Treaty on the Functioning of the European Union. But even if allowed in exceptional circumstances, these capital controls and capital freezes are contagious and appear inconsistent with a monetary union. The obvious risk is the impact that these capital controls will have on deposits in other peripheral countries. Large deposits, above €100k, and uninsured deposits are mostly at risk as these are the ones to be likely frozen in the Cypriot case. While a modest deposit tax might be acceptable to large depositors, a freeze of deposits for an un identifiable time period would likely be unacceptable to most large depositors such as corporations and institutional investors. There are no recent data of how big this universe of large deposits is. Data from the European Commission suggest that in 2007 large deposits of above €100k and uninsured deposits comprised more than half of all deposits in peripheral countries. See Figure 1. The current shares are perhaps different from those reported in Figure 1 for 2007, but most likely the share of large or uninsured deposits is likely to be close to half of total deposits. What cushions other peripheral countries relative to Cyprus is that these large deposits are mostly domestic. As explained in the next section, the share of non--domestic deposits in peripheral banks is rather modest at 7% as of the end of 2012. But it is not only bank deposits that are at risk. A broader retrenchment in funding markets is possible given the confusion and inconsistency last weekend's decision created for investors relative to previous policy decisions: 1) In the case of Cypriot banks, depositors are hit while senior bond holders are spared, so seniority is not respected. 2) Deposits of foreign branches are protected while deposits of domestic branches are hit. This is the opposite of what happened to Iceland. 3) In the case if Ireland which also had a big banking system relative to the size of its economy, only sub debt holders, accounting for a very small portion of total creditors, were hit. No depositors were hit, in either domestic or foreign branches. 4) In the case of SNS sub debt holders were wiped out and reports suggest that the Dutch government came close to imposing losses on senior bond holders and was only prevented from doing so because of unsecured intergroup loans between SNS bank and Reaal insurance that would be subjected to the same losses as senior bond holders. But beyond the confusion and inconsistency, all these trends and the case of Cyprus in particular, are not only showing bailout fatigue on the part of creditor nations, especially in Netherlands where economic conditions have been deteriorating rapidly, but they are also pointing to a shift towards bailing in private creditors in future sovereign bailouts or bank resolutions to avoid using taxpayers’ money. Which funding markets do we need to track going forward? In our view, the excess cash in the Euro area banking system is the most important metric to track on a high frequency, daily, basis. This metric reflects the amount euro area banks borrow from the ECB in excess of their normal liquidity needs due to reserve requirements or autonomous factors. A loss in deposits or a loss in funding in wholesale markets forces banks to either access ELA or the Marginal Lending Facility at any time or, in less urgent situations, to access the standard weekly Main Refinancing Operation (MRO) every Tuesday. So euro area banks can borrow from the ECB and the excess cash in the euro area banking system can rise at any day of the week and not only with Tuesday's MRO. Any potential increase in ELA, such as from Cypriot banks, is reflected in the excess cash in the Euro area banking system via a decrease in autonomous factors rather than an increase in outstanding operations. The excess cash in the euro area banking system actually declined this week, with a decrease in outstanding operations and an increase in autonomous factors, indicating no signs of broad contagion yet. In terms of the impact on wholesale bank funding markets, we can also track peripheral bank debt issuance directly. This week peripheral banks issued only €600m of bonds vs. €4bn in the previous two weeks. The represents a marked slowing, suggesting that Cyprus might be having some impact on peripheral wholesale funding markets. On a lower frequency basis, we need to track the monthly Target2 balances for peripheral countries, which typically become available during the first two weeks of the following month, and the ECB data on MFI balance sheets which are published at the end of thee following month. In what we view as another ill-conceived and ill-timed move, the Spanish Minister of Finance & Public Administration announced this week a tax or bank levy (probably 0.2%) to be imposed on bank deposits, without details on which deposits will be affected or timing. This is adding to the Cypriot crisis in sparking deposit outflow risks.
Wolf Richter www.testosteronepit.com www.amazon.com/author/wolfrichter Eurozone nations have to fundamentally reorganize themselves and shift sovereignty away from national parliaments to new layers of centralized, transnational, beyond-control bureaucracies that can decide at will when to extract untold wealth from taxpayers. That’s what the Eurozone has to do, according to the “first ever European Union-wide assessment of the soundness and stability of the financial sector,” released Friday by the institution that the world couldn’t do without, the IMF. “Financial stability has not been assured,” the report stated flatly about the fiasco in the Eurozone, despite ceaseless hope-mongering by Eurocrats and politicians, and banks remain “vulnerable to shocks.” The report, which never mentioned banks or countries by name, discussed a number of “risks” that could topple these banks, with some of these “risks” already having transitioned to reality: “Declining growth.” Banks with “excessive leverage, risky business models, and an adverse feedback loop with sovereigns and the real economy” are particularly vulnerable. Hence, most banks. A number of European countries have been in a deep recession, some of them for years. So “declining growth” is a reality, and these “shocks” are happening now, said the IMF in its more or less subtle ways. “Further drop in asset prices.” Real estate prices are now dropping in some countries that didn’t see a collapse during the first wave, including France and the Netherlands—where it already took down SNS Reaal, the country’s fourth largest bank [A Taxpayer Revolt Against Bank Bailouts In the Eurozone]. So hurry up and do something, the IMF said. The report points at other risks for banks. Pressures in wholesale funding markets could dry up liquidity and tighten refinancing conditions. And the market could lose confidence in the sovereign debt that banks hold. For example, an Italian bank, loaded with Italian government debt, would topple if that debt lost value—but of course, the report refuses to name names. And in “several countries,” the heavy concentration of megabanks “creates too-big-to-fail problems that could amplify the country’s vulnerability.” So Germany, France, and the UK. Alas, in Europe too-big-to-fail doesn’t necessarily mean big. In tiny Cyprus, fifth country to get a bailout, the banks, though minuscule by megabank standards, are getting bailed out anyway. It’s psychological. A fear. If even a small bank were allowed to go bankrupt, the confidence in all banks across the Eurozone would collapse. That’s how fragile Eurocrats and politicians fear their banks have become—despite their reassurances to the contrary. And so “policymakers and banks need to intensify their efforts across a wide range of areas” to save these banks, the IMF exhorts these Eurocrats and politicians. Big priorities: “bank balance sheet repair”; banks should build larger capital buffers to be able to absorb shocks. And “credibility” repair of these balance sheets. In an admission that bank balance sheets still aren’t worth the paper they’re printed on, the IMF calls for stiffening the disclosure requirements, “especially of impaired assets” that are decomposing in hidden-from view basements. The new Single Supervisory Mechanism (SSM), the EU-wide banking regulator under the ECB, to be operational by early 2014, would have to have real teeth, along with expertise, the IMF pointed out. It should regulate all banks in the Eurozone “to sustain the currency union” and in the entire EU to sustain “the single market for financial services.” In other words, without the SSM, the currency union won’t make it. But the IMF’s killer app is the Banking Union, a “single framework for crisis management, deposit insurance, supervision, and resolution, with a common backstop for the banking system.” Under this system, taxpayers in all Eurozone countries would automatically be responsible for bailing out banks, their investors, bondholders, counterparties, and account holders in any Eurozone country. For the most hopeless cases, the Single Resolution Mechanism would step in to dissolve banks “without disrupting financial stability”—hence bail out investors, disrupting financial stability being a term that’s commonly used to justify anything. The medium would be the transnational taxpayer-funded ESM bailout fund; it would bail out banks directly, rather than bail out countries after they bail out their own banks—which is the rule today. In the process, countries would surrender much of their authority over banks—and how or even whether to bail them out—to this new instrument. Decision makers would be Eurocrats, far removed from any popular vote. Victims would be the people who’d end up paying for it. Investors and speculators would profit. Other beneficiaries would be politicians who’d no longer have to bamboozle voters into bailing out banks because it would be done by a distant power. The dictum that there is never an alternative to bailouts would be cemented into the system. Democracy, which always gets trampled during bailouts, would be essentially abolished when it comes to transferring money from citizens to bank investors. And that’s of course the ultimate goal of the banking industry. The stark reality facing millions of Spaniards, Italians, Greeks, and Portuguese is hidden—buried deep under a mountain of economic data, massaged to suit the purposes of the central planners-in-chief. But this is the story of a dying breed: self-made entrepreneurs and small business owners here in Spain. Read.... The Reality Of Doing Business In Spain: A Personal Account.
Wolf Richter www.testosteronepit.com www.amazon.com/author/wolfrichter Bank bailouts in the Eurozone, like bank bailouts elsewhere, have made owners of otherwise worthless bank debt whole through a circuitous process where, in the end, taxpayers transferred their money to investors. Even in Greece, investors were coddled. Even Proton Bank that had siphoned off $1 billion in a scheme of fraud, embezzlement, and money laundering was bailed out at taxpayer expense [European Bailout Fund For Greek Money Laundering And Fraud]. By contrast, private-sector holders of Greek government debt, such as hedge funds who’d bought this crap for cents on the euro, got ugly haircuts of over 70%. Public-sector holders, like the ECB, got off scot-free. It wasn't fair. But fairness had nothing to do with it. These were bailouts! That’s how it was done. Until now. SNS Reaal, fourth largest bank and insurance group in the Netherlands, cratering under a huge load of rotting real-estate loans, was bailed out on February 1, after already having been bailed out in 2008, and nationalized with a €10-billion package. A collapse and bankruptcy “would have unacceptably large and undesirable consequences,” explained Dutch Finance Minister Jeroen Dijsselbloem, confirming that bank bailouts would be the norm in the Eurozone. Only question: to what extent would taxpayers be sacrificed? In the SNS bailout, all depositors were made whole. But stockholders were wiped out. And so were holders of junior debt! Tremors went through the system. Stories surfaced of individual holders, such as artists, who’d lost their savings because they’d bought these crappy bank bonds that had been touted as safe. Alas, that junior debt would have been worthless anyway in a bankruptcy, retorted Dijsselbloem and stuck to his semi-hard line—semi-hard because holders of senior debt and covered bonds were still bailed out by taxpayers. On Monday, the Dutch Council of State blessed that procedure and thus set an example for the rest of the Eurozone: when a bank is bailed out and nationalized, owners of its debt can lose their entire capital. The unwritten government guarantee on bank debt is off. A government finally drew the line on one of its big banks, instead of flailing about to justify why taxpayers had to bail out bondholders who’d benefitted from the yields that had compensated them for the risks. Why tolerate a situation where the capital “at risk” wasn’t at risk? That exotic theory is already spreading. Dijsselbloem is President of the Eurogroup that approves country bailouts. And the German government has been toying with the idea of going after bank investors for months. At issue: the bailout of the banks in Cyprus. But there, it’s more ... delicate. These banks didn’t issue a lot of debt. They didn’t have to; they were flooded with deposits from rich Russians, Russian companies with mailbox subsidiaries in Cyprus, and even Oligarchs [Cyprus, ‘A Money Laundering Machine For Russian criminals’]. As more stories about the Russian connection surfaced, the unwritten government guarantee of uninsured bank deposits has been fraying around the edges. The Cypriot government, unlike the Dutch government, cannot bail out its own banks. It’s bankrupt too and needs a bailout. So, which bank stakeholders get bailed out and which get sacrificed will have to be negotiated with the Troika. Even deposit accounts aren’t sacrosanct anymore, and their owners, the “rich Russians,” are being prepped for a haircut, a mild one presumably, not a crew cut. Nevertheless, it would break another barrier. Next? Senior bank debt. Its unwritten government guarantee has not yet been broken, and any attempts to do so would be met with determined opposition by the banks themselves. Once investors in senior debt realize that they could lose their capital, they would, in theory, demand higher yields to compensate them for the risk—thus raise the cost of funds for banks and squeeze their margins. So far in the Eurozone, it has just been one major bank, but not a TBTF bank, where junior debt holders lost their shirts. More such bank bailouts would have to take place before investors accept them as reality and price that risk into the equation. Then, they might actually try to look at the crap these banks have hidden in their basements. In theory. In practice, central banks rule. Their money-printing operations and asset-purchase programs have distorted the markets. Risk has been wrung out of the equation. If a bank is TBTF, it wouldn’t be the taxpayer to bail it out directly, but the central bank, as the Fed had done, beyond the reach of democratic processes or controls, with amounts that dwarf what the taxpayer could do, generating huge profits for bailed out investors and those betting on these bailouts, and in the process devaluing the currency for everyone else. Investors are fuming—this time in the US about another long-running debacle. But traders, the lucky ones who got the timing right, love it. So do Wall Street firms that shuffle companies around to collect fees. For decades, Hewlett-Packard did what they wanted it to do: swallow other companies, whole or in pieces, spit out some mangled limbs, and dump tens of thousands of employees along the way. But someone ended up holding the bag. Read... H-P's Big Investors Finally Can’t Take It Anymore.
The shareholders and subordinated bond holders of SNS Reaal are now fighting an alleged expropriation at the Dutch Council of State. In addition, these stakeholders are contesting the Dutch government's position that shareholders and subordinated debt holders cannot sue for compensation against the bank due to mismanagement at SNS Reaal. Clearly, the Dutch government, as the sole owner is looking to limit its liabilities.Related research and analysis at Credit Writedowns Pro starts at $39.99. Try Credit Writedowns Pro free for one week. Nationalized Dutch bank investors fight expropriation originally appeared on Credit Writedowns Links: RSS - Daily - Weekly - Twitter - Facebook - Contact Credit Writedowns Feed # abf0d081857b85fe6be494728740a4f1
The shareholders and subordinated bond holders of SNS Reaal are now fighting an alleged expropriation at the Dutch Council of State. In addition, these stakeholders are contesting the Dutch government's position that shareholders and subordinated debt holders cannot sue for compensation against the bank due to mismanagement at SNS Reaal. Clearly, the Dutch government, as the sole owner is looking to limit its liabilities.Related research and analysis at Credit Writedowns Pro starts at $39.99. Try Credit Writedowns Pro free for one week. Nationalised Dutch bank equity and sub debt holders fight alleged expropriation originally appeared on Credit Writedowns Links: RSS - Daily - Weekly - Twitter - Facebook - Contact Credit Writedowns Feed # abf0d081857b85fe6be494728740a4f1
These EU debt crisis stories aren't what they used to be. The Netherlands sells ;2.7B of 5-year paper with yields edging up only 2 basis points from last quarter's auction. Fitch last week lowered the outlook on the country's AAA rating to Negative following the ;3.7B rescue of failed financial group SNS Reaal.
These EU debt crisis stories aren't what they used to be. The Netherlands sells €2.7B of 5-year paper with yields edging up only 2 basis points from last quarter's auction. Fitch last week lowered the outlook on the country's AAA rating to Negative following the €3.7B rescue of failed financial group SNS Reaal. Post your comment!
Nationalised Dutch lender SNS Reaal, the fourth largest bank in the Netherlands has recently been nationalised despite a reported 13 percent Tier 1 capital level in the most recent round of banking stress tests in Europe. Clearly, the stress tests weren't particularly stressful. I would go so far as to say they were 'phony'.Related research and analysis at Credit Writedowns Pro starts at $39.99. Try Credit Writedowns Pro free for one week. Buiter was right about Europe’s phony bank stress tests and the Dutch mortgage crisis originally appeared on Credit Writedowns Links: RSS - Daily - Weekly - Twitter - Facebook - Contact Credit Writedowns Feed # abf0d081857b85fe6be494728740a4f1