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Surprise! It’s Not the EUrozone Crisis Anymore. Welcome to the EU, LLC. It’s Still a Crisis.

Well, it’s official (pending approval). The ‘second pillar’ of the EU’s banking union – a 55 billion euro bail-out fund and a bunch of new rules – appears to be in place following recent negotiations. It was an all night compromise bender! Yes, lots of compromises were made, but the core principles that have emerged during the EU’s multi-year-long quest for a banking union are still intact. Those principles being, of course:

1. Bail-ins by depositors and creditors should be expected for bank failures before the bail-out fund is tapped. In other words, it’s the ‘Cyprus Solution’ of bail-ins for the entire EU so it’s potentially fairer to smaller nations in that respect.

2. The banking union can’t be too forgiving. Nations with ailing banks should have the minimal help needed to avoid a complete catastrophe. The joint bank bail-out fund shouldn’t be large enough to actually solve a large banking crisis. Smaller nations should still remain disproportionately vulnerable because the bailout fund, itself, will be so small that any serious crises will quickly overwhelm the fund and leave the remaining liabilities on the individual nation. At that point, it’s troika-time!

3. The eurozone member nations, which are presumably more inclined to a mutual pooling of liabilities given the shared currency, will not actually share those liabilities in the event that the bail-out fund is spent even though that was a central tenet of the original banking union idea.

4. Banks shouldn’t be allowed to treat their national debt as ‘risk-free’, a move intended to minimize the ‘bank-sovereign nexus’ where domestic banks load up on domestic government debt because it’s given favored ‘risk-free’ status. It’s been a proposal championed by Bundesbank chief Jens Weidmann. As Greece demonstrated, sovereign bonds in the EU aren’t necessarily ‘risk free’ because bondholders just might be forced to take a trip to the bond-barborshop. In theory, preventing risk-free sovereign bonds should prevent the concentration of a nation’s debt in its own banking system. In reality, it might accomplish that goal, but it will probably also exacerbate any existing “sovereign debt bank nexus” problems if implemented poorly and generally goes against the spirit of a real “union” by emphasizing a “each member is on its own” attitude.

5. The minimally helpful plans should be hailed as a triumph of compromise, practicality, and fairness.

Yes, the second pillar in the EU’s banking union is a triumph of compromise, practicality, and fairness:

Europe strikes deal to complete banking union

Thu Mar 20, 2014 8:33pm GMT

(Reuters) – Europe took the final step to complete a banking union on Thursday with an agency to shut failing euro zone banks, but there will be no joint government back-up to pay the costs of closures.

The breakthrough ends an impasse with the European Parliament, which persuaded euro zone countries to strengthen the scheme. It completes the second pillar of banking union, which starts at the end of the year when the European Central Bank takes over as watchdog.

The accord means that the ECB has the means to shut banks it decides are too weak to survive, reinforcing its role as supervisor as it prepares to run health checks on the still fragile sector.

Michel Barnier, the European commissioner in charge of regulation, said the scheme would help to bring “an end to the era of massive bailouts”.

“The second pillar of banking union will allow bank crises to be managed more effectively,” he said.

Thursday’s agreement makes it harder for EU countries to challenge the ECB if the central bank triggers bank closures, and establishes a common 55 billion euro back-up fund over eight years – quicker than planned but far longer than the ECB’s watchdog had hoped.

Notice that the compromises include establishing the 55 billion euro bail out fund in eight years, which is sooner than expected but far longer than the ECB’s new watchdog had hoped. It raises the question of the time frame the ECB’s Watchdog would have preferred for the full funding of the too-small fund? 5 years? 3 years? Now?

Continuing…


But the new system, which Barnier conceded was not ‘perfect’, has shortcomings.

For one, the ‘resolution’ fund is small and would, in the view of the ECB watchdog, be quickly spent. To remedy that the fund will be able to borrow to replenish spent money.

Euro zone governments will not, however, club together to make it cheaper and easier for it to do so.

The 18 euro zone countries do not intend to cover jointly the cost of dealing with individual bank failures, a central tenet of the original plan for banking union.

Germany resisted pressure from Spain and France to make such a concession. Its finance minister Wolfgang Schaeuble welcomed new rules forcing bank creditors to take losses and that “the mutualised liability … remained ruled out” – a reference to sharing the burden of a bank collapse.

Neither will there be any joint protection of deposits.

DEADLY EMBRACE

Almost seven years since German small business lender IKB became Europe’s first victim of the global financial crisis, the region is still struggling to lift its economy out of the doldrums and banks are taking much of the blame for not lending.

The banking union, and the clean-up of banks’ books that will accompany it, is intended to restore their confidence in one another. It is also supposed to stop indebted states from shielding the banks that buy their bonds, treated in law as ‘risk-free’ despite Greece’s default in all but name.

Under the deal reached, a fund made up by levies on banks will be built up over eight years, rather than 10 as originally foreseen. Forty percent of the fund will be shared among countries from the start and 60 percent after two years.

It also envisages giving the European Central Bank the primary role in triggering the closure of a bank, limiting the scope for country ministers to challenge such a move.

Mark Wall, Deutsche Bank’s chief euro zone economist, said new rules to impose losses on the bondholders of troubled banks would reduce the burden on the fund but warned that its size was too modest. “A cross-European fund of the size of 55 billion raises some eyebrows in terms of scale,” he said.

The fund will be able to borrow against future bank levies but will not be able to rely on the euro zone bailout fund to raise credit. Critics say this means primary responsibility for problem lenders remained with their home countries and that the banking union will never live up to its name.

“The key to the banking union is an authority with financial clout. They don’t have it so we don’t have a banking union,” said Paul De Grauwe of the London School of Economics.

“The whole idea was to cut the deadly embrace between bank and sovereign. But if a banking crisis were to erupt again, it would be back to how it was in 2008 with every country on its own.”

Let’s review some of the details being proposed:
– A 55 billion euro bailout fund is being created from levies on banks. The CEB Watchdog say this is much too small and could be spent quickly.

– It will take 8 years for the fund to be fully financed, less than the planned 10 years but much longer than the ECB watchdog was hoping for.

– The 55 billion euro fund can borrow against future blank levy’s but it can’t rely on the eurozone bailout fund (which makes sense since this banking union includes eurozone and non-eurozone members).

– And, due primarily to German opposition, the 18 eurozone members states are not going to be jointly funding for the bailouts, even though joint funding was one of the original central tenets of the banking union. There will also be no joint protection of deposits (it’s the third pillar of the banking union, so some scheme involving). So the smaller nations or those with weaker economies should probably be expecting some sort of troika following any future major financial crises.

– Once the 55 billion euro fund is exhuasted, “it would be back to how it was in 2008 with every country on its own”.

The More Things Change, the More They Stay the Same In the Banking Union. Via Veto Power
If the above plan doesn’t sound very likely to succeed keep in mind that there’s nothing preventing corrective changes to the banking union in the future. Except for the veto-power of individual member states. Yes, because this was an inter-governmental agreement, individual members need to agree to future changes and hold an implied veto power. So while the banking union may be here to stay, it doesn’t have to stay the same. But it easily could:

Financial Times

A highly imperfect banking union
Eurozone banks and sovereigns remain tightly embraced
March 23, 2014 5:01 pm
Editorial

Twenty months ago, at the height of the sovereign debt crisis, EU leaders vowed to shore up the eurozone’s financial system by building a “banking union”. The aim was to end the deadly embrace between governments and banks that had proven catastrophic for countries such as Spain and Ireland. Never again would a single member state have to deal with a banking crisis alone, as its partners would help by sharing some of the burden.

Last week the journey towards the EU’s most ambitious integration project since the creation of the euro came to an end. After a 16-hour negotiation, the European parliament and member states agreed to create a unified system for handling banking crises. The so-called “single resolution mechanism” is one of the building blocks of a banking union. The other cornerstone – removing from national regulators the powers to supervise the eurozone’s largest banks and attributing them to the European Central Bank – had already been laid last year.

Constructing a banking union was always going to involve uneasy compromises between states. Early in the negotiations it became clear that Germany was opposed to the idea of building a common guarantee scheme that would protect small depositors in case of a bank failure. But while this part of the plan was abandoned, the hope was that the other elements of the banking union would not be watered down. Alas, the opposite has happened.

Most importantly, the promise that eurozone members would share the burden of rescuing or resolving a bank has been forgotten. True, the extensive use of “bail-in” rules means that bondholders will finally face the true cost of the risks they take. But after that the financial responsibility for saving a bank will largely fall on the shoulders of an individual government. As for banks that need to be shut down, at just €55bn the common resolution fund is tiny and, anyway, will take eight years to build.

One would worry less about these imperfections if it were clear that the agreement would be improved at a later stage. But this will be difficult. For example, since the single resolution fund was included in an inter-governmental agreement, member states will retain veto powers over subsequent changes. Germany, which is terrified of anything that involves a mutualisation of liabilities, is unlikely to give much ground.

The eurozone risks being stuck with a flawed banking union until the next crisis. This places a greater onus on the ECB. The central bank is undertaking a forensic audit of the balance sheets of the institutions it will supervise to ensure they hold enough capital. This assessment must be credible and put the largest banks in position to withstand the next shock. After this week’s deficient agreement on banking union, any mistake risks being extremely costly.

Yes, “since the single resolution fund was included in an inter-governmental agreement, member states will retain veto powers over subsequent changes. Germany, which is terrified of anything that involves a mutualisation of liabilities, is unlikely to give much ground.”. And if Germany isn’t giving much ground, ground probably isn’t going to be given at all. That just how things work. It’s the implied sixth principle of the banking union:

6. He who has the gold makes the rules.

So does this implied veto right by member nations mean that a clearly questionable banking union is now the law of the land? Indefinitely? Well, perhaps, but that doesn’t mean there aren’t other possible positive changes coming as a result of the new union. For instance, one of the unambiguous positives to the new ‘bad bank’ resolution scheme is that it takes us one step closer to resolving the the previous ‘bad bank’ resolution schemes. As Berlin recently made clear, those previous really bad ‘bad bank’ resolution schemes that bankrupted entire countries and mandated troikas aren’t going to get resolved until the entire banking union is set up. So, as bad as many the new banking union seems with the announcement of these new proposals, at least it gets us closer to undoing the last horrible banking scheme:

Irish Times
Germany dampens hopes of Irish bank recapitalisation from ESM
Schäuble rules out mutual liability of EU member states

Suzanne Lynch, Derek Scally

Fri, Mar 21, 2014, 01:00

Germany has dampened expectations of imminent bank recapitalisations for Irish banks from the European Stability Mechanism bailout fund after yesterday’s agreement on a further pillar of the European banking union.

After 16 hours of talks through the night, European Union member states and the European Parliament agreed final details of a single resolution mechanism (SRM) to wind up failing banks.

Taoiseach Enda Kenny welcomed yesterday’s agreement as another “essential” stage in the euro area’s post-crisis path towards a banking union.

“This means that we’re moving towards the endgame in terms of having the structure put in place by which matters of recapitalisation can be considered,” he said, speaking on his way into a summit of EU leaders in Brussels. “And, as I’ve always said, that will apply on a case-by-case basis by the end of the year.”

German finance minister Wolfgang Schäuble agreed that yesterday’s deal marked a “great step forward for Europe” on the banking union, which he described as the “greatest European projection since the introduction of the euro”.

Mutual liability ruled out
While the political deal represented a sensible compromise, with Berlin giving ground on key points, Mr Schäuble insisted that it “still rules out mutual liability of participating member states”. Berlin officials were circumspect about the time it would take to complete the banking union’s final lap. For now, they said, Berlin’s priority was “pouring the SRM deal into a concrete structure”.

“Only then can we look further,” said a finance ministry spokesman.

After agreement in December 2012 on a single supervisory mechanism for banks, the SRM is the second of three pillars of Europe’s banking union with talks still outstanding on a third: a common deposit insurance fund. Until all three are in place, and the banking union is operational, Berlin declines to entertain even discussion of recapitalisations. The idea of establishing a common European banking deposit insurance fund is highly unpopular both with German banks and German savers and is likely to trigger a prolonged political debate there.

Note that the German Constitutional Court very recently ruled that a direct recapitalision of Ireland banks would indeed be constitutional, removing a major hurdle to this needed step. But don’t expect any recapilisations any time soon since, as mentioned above, Berlin is declining to entertain even discussion of bank recapitalizations until all three pillars are in place for the new banking union. And the third pillar – deposit insurance – has yet to even be addressed and is likely to trigger a prolonged debate. So the Ireland, the ‘good student’ that has been holding out for recapitalisation for years, is going to have to keep waiting.

Continuing…


Late-night haggling
Yesterday’s agreement between member states and the European Parliament under the co-decision process follows agreement among member states in December. The centralised resolution body and accompanying €55 billion fund will be responsible for winding-up struggling banks.

After late-night haggling, including a reported 5.30am phone call to Mr Schäuble, euro-group president Jeroen Dijsselbloem emerged with a deal at 7am.

It has been seen as favouring smaller countries such as Ireland because it accelerates the pace at which the €55 billion fund will be fully mutualised. (The first SRM draft proposals envisaged a 30 per cent mutualisation in the first three years, with full mutualisation only after a decade.)

This was one crucial concession European Parliament negotiators wrung from Germany; another was reducing from 10 to eight years the transition period during which a pool of national funds would shift towards a shared fund.

Mutualisation
The revised package also brings forward mutualisation: 40 per cent in the first year; 20 per cent in the second year; and the rest equally over a further six years.

According to Dutch MEP Corienn Wortmann-Kool the resulting resolution process will treat banks equally regardless of their home country.

“We want bail-in of creditors and investors to be applied in the same way to all banks irrespective of the member states these banks are located in,” she said, using the example of Ireland as compared with larger states such as Germany and France.

The plan agreed by member states in December would have seen, for example, French or German banks backed by a large fund allowing moderate bail-ins. An Irish bank with a smaller national fund would, under draft proposals, have been forced into a deeper bail-in, leading to higher funding costs, she said.

“This would definitely not be what we want to achieve in terms of breaking the link between sovereign and banking debt,” she said.

The agreement also envisages that the European Commission, rather than member states, will approve decisions made by the SRM’s board on resolving banks. MEPs were anxious to limit political interference from member states, though finance ministers will still have power to intervene in certain cases.

So it’s bad, but not all bad, right? At least it wasn’t “definitely not be what we want to achieve in terms of breaking the link between sovereign and banking debt” like the proposed plan in December was where the larger members would have larger bail-out funds. Instead, everyone shares in the too-small-too-succeed bailout fund.

The EU’s ‘Mutual’ Fund Has ‘Eye-Opening’ Non-Mutual Benefits
Additionally, notice how the ‘compromise’ is being spun as “favouring smaller countries such as Ireland because it accelerates the pace at which the €55 billion fund will be fully mutualised.” As the article points out:


The plan agreed by member states in December would have seen, for example, French or German banks backed by a large fund allowing moderate bail-ins. An Irish bank with a smaller national fund would, under draft proposals, have been forced into a deeper bail-in, leading to higher funding costs

What does this mean? Well, basically, the 55 billion euro bailout fund isn’t fully funded or fully “mutualised” for 8 years. There’s a transitionary phase of 8 years when the fund builds up. During this phase the funds are separated between “national” funds and “European funds” and money in each nation’s “national” compartment is only available for bailing out that nation’s bank. In other words each member is sort of on their own when it comes to dealing with a banking crisis during this transition period. But the degree to which a country is on its own will go down each year as the fund grows in size and become increasingly “mutualized”. But, again, it’s going to take 8 years for this process to be completed and 8 years can last a LONG time when you’re in the midst of some sort of socioeconomic experiment gone horribly awry.

So the recent changes made in the compromise agreement really would reduce the risk assumed by the smaller states because that’s what mutualisation does. By speeding up the overall time frame from 10 to 8 years and by speeding up the mutualisation schedule from the 10 year schedule proposed in December it really does reduce systemic risk (otherwise insurance wouldn’t really work). So this is quite an accomplishment, right?

Well, as we already saw above, mutualisation is indeed helpful but that helpfulness is dramatically limited by the fact that the bailout fund is limited to 55 billion euros.

Sure, 55 billion euros sounds like a lot of money, but keep in mind the Ireland, alone, spent 85 billion euros bailing out its private banks and this basically bankrupted the country (require an additional bailout and endless austerity…and the ongoing need for recapitalisations). Portugal need 78 billion euros. Once that 55 billion euro bailout fund is expended the liabilities fall back on the member nations. So bailouts are mutualised, but only to an extent that would have been inadequate for dealing with virtually ALL of the crises we’ve seen thus far.

Still, we can be a bit relieved that the newly proposed bailout fund scheme is an improvement over the proposal in December. By pushing up the funding schedule from 10 to 8 years and increasing the mutualisation rates the new scheme is probably fairer overall. At least, it’s hopefully a fairer arrangement between the larger nations (like Germany and France) and the smaller states like Ireland.

As the following article points out, however, there’s still a question of fairness between the larger states. Yes, in what turned out to be quite an “eye opener” last week, it looks like France, and not Germany, will be paying more into the bailout fund than anyone else and “mutualisation” will dramatically bring down Germany’s overall share for the 55 billion euro fund. Given the intense opposition by German negotiators to the very idea of mutualisation, this wasn’t the expected outcome:

Financial Times

March 17, 2014 4:41 pm
France and Germany squabble over who pays for EU banking union

By Alex Barker in Brussels

France and Germany are squabbling over who should foot the bill for Europe’s banking union, with Paris fearing its banks will pay the biggest share towards a €55bn rescue fund.

As the EU enters a potentially decisive week in talks on a central system for handling bank crises, France is fighting plans to make its sector of big universal banks the leading contributors to the common insurance plan.

It is one of several highly political issues that remain unresolved with days left before a Wednesday deadline to agree legislation with the European parliament, so that it has time to pass before the European elections.

Although it is highly technical, the dispute over the bank levy cuts across some fraught EU issues: whether the rescue system is genuinely European or actually partly national; whose banking system is most risky; and therefore whose lenders should pay more for insurance. France, Spain and Portugal have all submitted papers on the topic.

One senior diplomat said the breakdown of contributions was an “eye opener”, given that Germany, the EU’s biggest economy, is leading resistance to increasing the heft of the rescue fund or accelerating its mutualisation.

“Everyone put up with [Germany’s] antics because they thought it was the German banks that pay by far the most, but that isn’t quite true. It is the French banks that will fund this party,” the official said.

Some MEPs think it right that complex, “too big to fail” banks pay more. Sven Giegold, a German Green in the parliament negotiating team, said he was “appalled” by member states’ attempting to rig the calculation, to “give a subsidy to risky banks”.

A French informal position paper, circulated on Friday, lays out rough estimates showing the variance in national contributions depending on the method used. One big factor is whether the funding target – expected to be around 1 per cent of covered deposits – is set at European level or national level.

Under a European target France’s highly concentrated banking sector, including BNP Paribas and Société Générale, is on the hook for 21 per cent of the fund, slightly more than Germany’s more deposit funded sector.

By contrast, if the target is set at national level, the contributions of German banks would rise to 35 per cent, while France’s remain at 21 per cent. Berlin fought hard to limit the contributions of its big savings bank sector to the central fund.

France argues that given the fund is established with national compartments that are gradually broken down over 10 years, the European target level should also be phased in. This would leave French banks paying 21 per cent, or around €11bn, while German lenders would pay 28 per cent, around €15bn.

“Using a reference to national target level during the transitional period is consistent with the existence of national compartments,” the French paper argues, pointing out that a failing bank’s access to rescue funds varies according to its home state.

That might have seemed like a lot of jargon. Here’s the critical part:


Under a European target France’s highly concentrated banking sector, including BNP Paribas and Société Générale, is on the hook for 21 per cent of the fund, slightly more than Germany’s more deposit funded sector.

By contrast, if the target is set at national level, the contributions of German banks would rise to 35 per cent, while France’s remain at 21 per cent. Berlin fought hard to limit the contributions of its big savings bank sector to the central fund.

France argues that given the fund is established with national compartments that are gradually broken down over 10 years, the European target level should also be phased in. This would leave French banks paying 21 per cent, or around €11bn, while German lenders would pay 28 per cent, around €15bn.

Keep in mind that the above article was written days before the latest deal, so the earlier bailout fund schedule was still on the table (10 years for financing the fund and slower mutualization) but the overall dynamic described hasn’t changed with the new deal. Now notice the point made by the French negotiators at the time: The bailout fund is established with national compartments that are broken down and merged into the “European” compartment as the fund gets mutualised. If the contributions where set at the “national target level”, Germany’s banking sector would be on the hook for 35% of the 55 billion euro fund. But at the “European level” the German banks are only liable for 20% of the fund. The French banks, on the other hand, appear to be on the hook for 21% either way. So, somehow, the formula used for the “mutualisation” of liabilities seems to dramatically slash the German liabilities without impacting the French banking sector at all. Banks can have different structures and risks, so this isn’t entirely surprising that the formulas chosen can have different impacts on different banking sector. But, again, the opposition to debt mutualisation has been the strongest in Germany and yet, in the end, debt mutualisation appears cut the German liabilities by 42%! It helps explain why this scheme was such an ‘eye opener’.

You Say Mutualise, I Say Mutualize. Let’s Call the Whole Thing Off All Create A Limited Liability Company
Still, our eyes shouldn’t be too wide with surprise by the new EU banking New Deal and its quirky funding formulas because it wasn’t simply “mutualisation” of the bail-out fund that Germany has been opposing this entire time. It’s the “mutualisation” of ALL potential liabilities that Berlin has been fearing.

Sure, the “mutualisation” of the 55 billion euro fund appears to reduced Germany’s bailout liabilities for the 55 billion euro fund, but that’s not where the major saving for Germany are accrued. The major reduction in German liabilities (and the liabilities of any leading European economies in the future) come from the fact that the “mutualisation” of liabilities is capped at 55 billion euros. That’s the major ‘eye-opener’ in this plan because once that 55 billion euro bailout fund gets used up nothing else gets mutualized and the relevance of the banking union effectively ends. The EU, at the end of the day, is a limited liability company for nation states. That’s the unifying principle underlying the banking union. My Brother’s Keeper, LLC.

And why kind if banking union “crisis resolution” power will a nation state LLC have? One that appears to intentionally create of a scheme that is unable to handle anything other than a small, single-nation banking crisis coupled with a very serious threat of “Troika Time!” for any member states that that find themselves in need of national bailout. In other words, it’s a preventative approach. The EU’s new plan for dealing with a crisis is to have a bank crisis resolution scheme that is so completely inadequate that member nations will preemptively curtail excesses in their banking systems simply to avoid the possibility of needing a national bailout (and more Troika timeouts). It’s the ‘all stick, no carrot’ approach to creating a union.

But will it work? Can it work? After all, we’re talking about a banking union within a European union. Can unions rooted in conflicts of interest, a lack of trust, and a deep aversion to burden-sharing actually survive in the long run? If so, is a limited liability company really the kind of long-term relationship the EU wants to be?

Wouldn’t the E-“U-and-Me” be better?

Discussion

10 comments for “Surprise! It’s Not the EUrozone Crisis Anymore. Welcome to the EU, LLC. It’s Still a Crisis.”

  1. Well isn’t this reassuring: Lithuania is scheduled to ditch its currency and join the euro in January 2015 and that has German conservatives on edge. Why? Because Lithuania is going to be the 19th eurozone member, and 19 is sort of a magical number the way the treaty was written. Once more than 18 members are in the EU, the five nations with the largest financials sectors will no longer get 5 permanent votes on the ECB council. Instead, Germany, France, Italy, Spain and the Netherlands are going to have to start sharing 4 votes on a rotating basis which means each of them will be without an ECB council vote once every five months. Not surprising, this is has a lot of Germany’s policy makers freaked out and asking for a treaty change to give Germany a permanent vote. Germany’s Finance Ministry has said that it has no intention of a treaty change. At least no intentions, “at the moment”:

    UPDATE 1-Germany doesn’t want ECB reform to give Bundesbank permanent vote

    Mon Jun 16, 2014 6:56pm IST

    * ECB votes start to rotate once euro zone members exceed 18

    * Lithuania to become 19th euro zone member in January 2015

    * Bundesbank will have to sit out once every five months

    * Amending ECB rotation system would require treaty change (Adds quotes, comments German politicians)

    By Stephen Brown and Eva Taylor

    BERLIN/FRANKFURT, June 16 (Reuters) – Germany sees no reason to change the new voting system at the European Central Bank that takes effect when Lithuania joins the euro next year, despite a potential loss of influence for the Bundesbank, the finance ministry said on Monday.

    Once Lithuania becomes the 19th state to adopt the European Union’s single currency next January, the national central bank governors who sit on the ECB’s Governing Council will take turns voting, to speed up decision-making

    The Bundesbank will have to sit out once every five months. Critics – mostly German conservative politicians – argue that Germany, which provides just over a quarter of the ECB’s overall capital, should keep its permanent vote. But there is no support from Berlin for such a move.

    “We see no reason to make any changes at the moment,” said German finance ministry spokeswoman Marianne Kothe. “The reasons for this principle are still valid.”

    National central bank governors who do not get to vote can still take part in the session with the right to speak, “so they can always join in the discussion”, Kothe told reporters. “The European Central Bank is a European institution which looks after European interests, not national ones.”

    Once Lithuania joins, the five largest economies with the biggest financial sectors will share four votes. On current rankings that means Germany, France, Italy, Spain and the Netherlands. The remaining 14 countries will get 11 votes.

    The system was set by the ECB and the EU in 2003, but so far the number of member countries has not increased enough to trigger the rotation system.

    Altering the new rules would require an EU treaty change, which needs a unanimous vote. Lack of support from the German government makes that unlikely.

    UNCHARTED WATERS

    Taking turns to vote will affect all euro zone members, but will be more keenly felt in Germany, whose central bank served as a blueprint for the ECB. Its influence has since shrunk and support for its stern views on monetary policy has diminished during the euro zone debt crisis.

    But as the ECB moves deeper into uncharted waters, some non-German central bankers also believe the bloc’s largest economy should maintain a constant level of influence, particularly as monetary policy decisions could move closer to the fiscal realm.

    The ECB could ultimately start buying sovereign or private debt in the market to keep the euro zone from entering a spiral of weak or falling prices, which would slow growth and curb consumption, though such a step has not been needed so far.

    The Alternative for Germany (AfD), a small Eurosceptic party founded last year which threatens to steal right-wing votes from Chancellor Angela Merkel’s Christian Democrats (CDU), is pushing to preserve the Bundesbank’s influence.

    AfD leader Bernd Lucke wants to annul the agreed rotation of votes “to ensure that stability-oriented central banks like the German Bundesbank always have a voting right appropriate to their status”, he told Handelsblatt newspaper’s online edition.

    Voting rights should depend on the share of ECB capital, to which Germany contributes around 27 percent, Lucke said.

    Conservative German lawmaker Klaus-Peter Willsch from the CDU also called for a rule change. “It must not be accepted that (Bundesbank President Jens) Weidmann will be temporarily without a voting right,” he told Die Welt newspaper.

    So far, the Bundesbank has taken a pragmatic view, stressing that all countries will still have a voice in ECB discussions and that governors are not meant to represent their country’s interests on the council but those of the whole bloc.

    As we can see, it’s not only the AfD calling for giving Germany a permanent seat on the ECB council opposing. Some of Merkel’s own CDU members are calling for a permanent German seat too. So when Germany’s Finance Ministry says that it doesn’t see any reason to change the treaty “at this time”, the obvious next question is “ok, so when is as good time?” A sudden financial crisis that overwhelms the existing bailout structure (created in the new EU banking union) could be such a catalyst. Or how about a slow motion political crisis?

    German eurosceptics go mainstream in threat to Merkel

    By Noah Barkin and Stephen Brown

    BERLIN Sun Jun 15, 2014 6:09am EDT

    (Reuters) – The Alternative for Germany (AfD) failed to make as big a splash in European elections last month as its eurosceptic counterparts in France and Britain. But that may be about to change.

    Less than a month after the vote, the party formed last year by a group of renegade academics is on track to establish itself as a permanent force in German politics and a long-term headache for Chancellor Angela Merkel and her Christian Democrats (CDU).

    The admission last week of the AfD into British Prime Minister David Cameron’s conservative faction in the European Parliament has given the party a dose of credibility and its leaders a boost in their drive to distance the AfD from the populist, anti-immigrant movements of France’s Marine Le Pen and Geert Wilders of the Netherlands.

    After a professionally run EU campaign in which the party spoke less about its signature issue, the euro, and more about conservative German values, pollsters say the AfD is being seen by a growing number of voters as a legitimate, democratic party to the right of the CDU, and less like a flash in the pan.

    Ahead of three regional elections in eastern Germany which are likely to vault the AfD into state assemblies for the first time, their rise is unsettling members of the CDU, with some now suggesting their party consider cooperating with the upstarts they had hoped would fade away.

    “The AfD is establishing itself as a national conservative party, the kind that couldn’t emerge after 1949 (when West Germany was founded) but has a tradition in pre-war Germany,” said Ulrike Guerot of the Open Society Initiative for Europe.

    Its core supporters are not rabid xenophobes, as Germany’s mainstream parties have seemed to suggest, but church-going traditionalists who believe in conservative family values, are deeply worried about the loose policies of the European Central Bank (ECB) and want Germany to cure its own ills rather than help its euro partners.

    Note that the statement, “its core supporters are not rabid xenophobes, as Germany’s mainstream parties have seemed to suggest, but church-going traditionalists who believe in conservative family values”, sort of leaves out the AfD’s problems with far-right infiltration and the use of slogans alarmingly close to the NPD’s during last fall’s elections.

    Continuing…

    “Until now these voters had stuck with the CDU. But under Merkel the CDU has lost much of its conservative flavor,” Guerot said.

    BROADER MESSAGE

    In the German federal election last September, the AfD fell just shy of the 5 percent threshold needed to enter the Bundestag lower house of parliament.

    Some experts predicted the party would wither away like the once trendy Pirates party, and in the months after the German vote that looked like a good bet. At the turn of the year, media reports on the AfD described a party in crisis, beset by infighting and struggling to stem an exodus of members.

    Most damaging, in a country where far-right views are not tolerated in politics because of the Nazi past, were allegations the AfD was being hijacked by extremists.

    But leader Bernd Lucke, a 51-year-old economics professor and father of five, appears to have silenced the more radical elements in the party and broadened out the AfD’s message.

    At its founding, it was a one issue party calling for a return to the Deutsche Mark. During the recent EU campaign it talked as much about education, domestic security and support for small businesses as it did about the euro, scoring 7 percent.

    These are the themes regional AfD leader Frauke Petry hopes will secure the party a double-digit result in an election in the eastern state of Saxony in late August. State votes in Thuringia and Brandenburg follow two weeks later.

    “If we get into all three state assemblies it would establish the AfD as a stable force in German politics,” said Petry, a 39-year-old chemist and founder of a small business that makes sealant for tires.

    “The fact that we are now working with Britain’s Tories in Brussels shows we’ve arrived on the European scene. We’ll use this in the election campaign to send a signal to voters about our legitimacy.”

    Saxony, which shares a border with Poland and the Czech Republic, has been ruled by Merkel’s CDU ever since German reunification in 1990. It is the last state in the country where the CDU governs with the Free Democrats (FDP), its traditional ally on the right but now a party in free fall.

    The FDP’s weakness may force the CDU to look for another partner this time around. And officials like Steffen Flath, CDU leader in the regional parliament in Saxony, believe his party cannot afford to rule out cooperation with the AfD.

    That seems highly unlikely given strict orders from Merkel that the party steer clear of the AfD. But if a similar scenario plays out in other states over the coming years, the CDU could face the same fate as the center-left Social Democrats (SPD), crippled half a decade ago by a divisive internal debate over cooperation with the radical Left party.

    “I think the elections in the eastern states are coming too early for the CDU to consider changing its stance on working with the AfD,” said German pollster Klaus-Peter Schoeppner.

    “But if the AfD plays its cards right, there will be people in the CDU who say it needs to consider the AfD option for the next federal election in 2017.”

    SCARED OLD MEN

    Under Merkel, the party that has shifted to the left, embracing a minimum wage, renewable energy, female quotas in boardrooms and rental caps.

    This has been welcomed by the broader German electorate, which re-elected Merkel to a third term in September with her party’s strongest score since reunification.

    But the policy shift, and Merkel’s support for euro bailouts and accommodative ECB policies, have also alienated a core group of CDU traditionalists, opening the door to the AfD and its Germany-first, conservative values message.

    “I really don’t know what the CDU stands for today,” complained Reinhold Festge, head of the German Engineering Association (VDMA) in a newspaper interview last week. “My party has lost most of its identity. This saddens and infuriates me.”

    Guerot of the Open Society Initiative believes the AfD, fueled by CDU defectors, has the potential to grab up to 10 percent of the vote in Germany.

    This would put it on a par with more established parties like the Greens and Left – and profoundly change the German political landscape.

    Could the rise of the AfD bring about the rise of a reactionary CDU? We’ll see. But keep in mind that with the way the banking union is structured – with a 55 billion euro fund that observers view as far too small to deal with another EU-wide financial crisis – the possibility of future financial crises morphing into a political crisis is still very acute. A bailout scheme that inevitable requires its own bailout probably isn’t going to be politically viable in Germany once the next crisis hits. So a revisitation of the structure of the ECB’s governing council may not be on the agenda “at the moment”, but it’s probably going to happen sooner or later.

    Posted by Pterrafractyl | June 22, 2014, 6:37 pm
  2. Here’s something to watch: The ECB is rewriting the rules for the big banking stress tests after Germany’s banks balked at some of the provisions. The first complaint relates to the confidentiality requirement for the results the ECB is planning on communicating to banks on the results of their stress test in advance of making the results public. German banks are making arguing that such an agreement could run foul of Germany’s market disclosure laws. And the second complaint is over the fact that this private disclosure period is only 48 hours before the results are made public, which the banks say is too little time. So now the rules are changing:

    ECB to change bank secrecy agreement amid legal doubts

    Tue Sep 16, 2014 10:29am EDT

    (Reuters) – The European Central Bank (ECB) will change a non-disclosure agreement with banks undergoing its stress tests after complaints from German banks that they risked getting into conflict with laws requiring them to disclose price-sensitive information.

    >German banks have refused to sign a confidentiality agreement which requires them to remain silent about meetings planned for September, at which the regulator will offer general guidance about the results of the tests which will be published in late October.

    In a letter to the ECB’s top regulators, the German Banking Industry Committee – an umbrella association representing the likes of Deutsche Bank (DBKGn.DE), Commerzbank (CBKG.DE) and thousands of unlisted cooperative and savings banks – warned of “significant risks” and said the ECB’s demands to keep mum about the so-called supervisory dialogue put banks in conflict with laws requiring disclosure of price-sensitive information.

    The ECB told Reuters it was planning to alter the confidentiality pact.

    The ECB is putting some 130 of the euro zone’s largest banks through checks of their ability to withstand future crises before it becomes their supervisor in November.

    The German Banking Industry Committee said the ECB’s plans did not allow them enough time to analyze and verify the test results once they are revealed as planned in the second half of October. It called on the ECB for more time and transparency to deal with the results.

    Separately, the committee also criticized ECB plans to guard against data leaks by giving banks just 48 hours to review the full results of the balance sheet checks before the ECB makes them public.

    “This lead time is by no means sufficient for a review of the respective data,” the committee said in a letter to Daniele Nouy, head of the ECB’s supervisory board, and Executive Board member Sabine Lautenschlaeger.

    The committee’s complaint comes shortly after Germany’s savings bank association accused the ECB of acting arbitrarily and inconsistently, saying its procedures seemed designed to disadvantage the strongest institutions.

    So there appears be significant concern about the reporting of these stress test results coming from Germany’s banks which seems a little odd given the relative strength of the German banks compared to the rest of the EU. And yet, as the article below points out, “in particular, bankers are concerned that the 48-hour window does not give them time to contest the ECB’s findings if a large capital shortfall is discovered.” So is a “a large capital shortfall” expected at this point?

    Financial Times

    September 16, 2014 7:03 pm
    Lenders hit at ECB over secrecy agreements

    By Alice Ross in Frankfurt

    The European Central Bank has come under fire from banks after asking them to sign secrecy agreements ahead of the results of sweeping stress tests that are probing the balance sheets of the eurozone’s largest lenders.

    The German banking association warned in a private letter that it had “serious concerns” with the way the ECB is handling its probe of European banks’ balance sheets as the central bank prepares to give lenders feedback on the exercise this month.

    The letter, a copy of which was seen by the Financial Times, was sent to Danièle Nouy, head of the ECB’s new banking supervision arm, and her deputy Sabine Lautenschlaeger on Sunday.

    The feedback process has raised concerns that banks could be required to make disclosures to the market under European Union laws governing insider dealing and market manipulation. People familiar with the process have insisted that any feedback will be partial and will not be detailed enough to force the banks to make a statement to the market. Banks have been asked to sign non-disclosure agreements with the ECB to minimise the risk of market leaks, with a deadline of 15 September that has now been missed.

    In the letter, the German banking association complained that banks have still not had enough information about how the stress tests and the asset quality review will be combined, a process the ECB refers to as “the join-up”. Banks are also unhappy about plans to inform them of their official results just 48 hours before they are published to the market.

    “Participating banks need more transparency on the mechanics of the join-up in order to understand in detail the calculations made by the ECB,” the letter states.

    In particular, bankers are concerned that the 48-hour window does not give them time to contest the ECB’s findings if a large capital shortfall is discovered. One person familiar with the letter said that bankers are concerned they could be vulnerable to legal action from shareholders if they sign off on the ECB’s judgment and are then unable to defend themselves because of the non-disclosure agreement, which currently has no time limit.

    The ECB said that the intention had always been that banks would be able to discuss their results with investors after they were published. ‘We’re working closely with banks and as part of this, we will address feedback received on the non-disclosure agreement in a revised version to issue to banks in the coming days.”

    It’ll be interesting to see how the rules are changed. It’ll also be interesting to see which large German financial institutions would have had reason to be concerned about what to do in that 48 hour period if their stress tests showed a large capital shortfall…

    Posted by Pterrafractyl | September 16, 2014, 11:08 am
  3. Here’s an update on the looming banking stress tests: Deutsche Bank might be in the clear for a capital shortfall. Commerzbank, on the other hand, might have a bit of a problem. And it’s not the only one:

    Financial Times
    Capital shortfalls likely to emerge from unprecedented ECB probe

    By Sam Fleming and Alice Ross
    September 17, 2014 4:54 pm

    The probe of the euro area banking sector being led by the European Central Bank has been billed as a once-and-for-all opportunity to kill the lingering crisis of confidence that is hampering lending in the region.

    But amid huge uncertainty over the likely results at the end of next month, observers of the process caution that the outcome may prove less decisive than some have hoped.

    The initial answers thrown up by the exercise in late October will leave grey areas and scope for haggling, and the full repercussions of the so-called Asset Quality Review which has lain at the heart of the exercise may not become clear for many months. With only weeks to go before the results are disclosed, there is no clear consensus on what the outcome will be.

    A poll by Goldman Sachs of institutional investors shows nine banks that are expected to have capital shortfalls, led by Banca Monte dei Paschi di Siena, Commerzbank and Millennium BCP, leading to €51bn of funds in capital raisings expected on average.

    Fewer investors now expect significant capital holes to be exposed, however, with a sharp decline in the number of respondents expecting more than €100bn to be raised overall.

    Nick Anderson, a banking analyst at Berenberg, warns that there is market complacency around the ECB’s health check – despite what he believes to be deep-rooted issues in the European banking system.

    “The overwhelming consensus is that the tests are a non-event and there will be few problems,” he says. But he adds: “I’m convinced there are large scale hidden loan losses.”

    The health checks are the most complex and far-reaching such exercise in euro area history, covering 85 per cent of all banking assets in the region and probing more than 130 lenders.

    The exercise, comprising the AQR and a set of stress tests, is an attempt to scotch the region’s reputation for avoiding problems with its banking sector. It will be critical to the reputation of the ECB’s new Single Supervisory Mechanism, which takes over regulation of major banks in November.

    Banks will take their two weeks’ grace period – where they have to come up with plans to plug any capital hole – to make the best case they can as to why existing or planned cuts could count towards painting their finances in a better light.

    The details of these plans, which will be presented to the ECB, will not be made public, according to a person familiar with the exercise. Kinner Lakhani, an analyst at Citi, estimates an initial shortfall of €28bn across the sector that will fall to just €12bn once balance sheet repairs in 2014 are taken into account.

    The process will trigger a further, longer-term set of implications. Nicolas Véron, of the Peterson Institute think-tank, expects intensive discussions between banks and regulators following the AQR findings, with the result that some lenders end up modifying accounting and valuation practices. This could have a significant, longer-term impact on regulatory capital – and many investors are not ready for it, he argues.

    “This is, in effect, the bad news to come – the impact of the Comprehensive Assessment will be felt long after October,” says Mr Véron. “This makes it more difficult to assess the impact of the AQR on the day of the result. There could be a long sequence of recapitalisations and restructurings that last beyond the initial six to nine months following the October announcement.”

    So it sounds like Deutsche Bank has probably already raised the capital it needs but Commerzbank might fall short. And Nicolas Veron of the pro-austerity Peterson Institute is predicting that the banking stress tests are going to cause much more significant, long-term impacts than the markets appear to be expecting although, in the article below, it’s not Commerzbank that faces the biggest shakeup. It’s the publicly owned banks, like the German Landesbanks, that are the likeliest to be overhauled and/or privatized:

    EurActive
    ECB stress tests to challenge Germany’s Landesbanken
    Published: 17/09/2014 – 12:38 | Updated: 17/09/2014 – 14:41

    For the first time since the financial crisis struck in 2008, the European Union is carrying out stress tests that could force change at banks with strong political connections, such as Germany’s regional banks – the “Landesbanken”.

    The European Central Bank (ECB) is leading the latest attempt to uncover problems that would endanger any lender’s survival in a future crisis. Unlike the three previous efforts, which were hamstrung by national authorities’ reluctance to expose their banks’ weaknesses, Frankfurt has a vested interest in revealing problems before it takes over as supervisor in November.

    “The last time the process was done at the national level by the same old supervisors,” said Nicolas Veron, an expert on banking at the Bruegel think-tank in Brussels and the Peterson Institute for International Economics in Washington.

    “Here, we have a completely new pair of eyes, and the ECB has every incentive to be tough because the ECB doesn’t own the present failures but it will own the future failures.”

    The tests are likely to force some banks into raising more cash to prove they can withstand another downturn without the taxpayer-funded rescues that a number needed in the last crisis.

    But crucially, EU rules restricting state aid have been toughened since the last stress tests in 2011. This means any bank seeking government money to fill a hole revealed by the ECB review may have to restructure its business, as well as forcing losses on shareholders and junior creditors if the European Commission decides the injection represents state aid.

    Germany’s HSH Nordbank, majority owned by the local governments of Hamburg and Schleswig-Holstein, and a major lender to the troubled shipping industry, flagged this restructuring risk in a note accompanying its half-year results.

    HSH has said it is confident it will pass the tests, the results of which are expected in late October, but some analysts see it as one of the German lenders at risk of failing.

    If it were unable to fill any capital hole itself and needed its local government owners to step in, Brussels could order HSH to close down as it has already received €13 billion in guarantees and capital from German taxpayers.

    The Commission normally requires banks that receive state aid at least to undergo substantial restructuring, shrink their balance sheets and spin off some activities to avoid distorting competition with healthy lenders. All such aid has to be notified to the EU competition commissioner, who typically sets tough conditions for approval.

    If any of Germany’s regional banks, known as Landesbanken, do need help from their state owners, this could put the federal government in Berlin on a collision course with Brussels. Such funding would constitute state aid, but would not necessarily be illegal. EU rules permit government help if it is linked to restructuring, and the public owner acts as a rational investor.

    In their coalition agreement, Germany’s government parties said help from public sector owners following the ECB tests should be treated in the same way as that from private owners.

    “That is a political promise that I trust,” Liane Buchholz, managing director of the VOEB association of public sector banks said. “It cannot be that one EU institution (the ECB) asks for a recapitalisation and another EU institution (the Commission) then sanctions this as state aid,” she said, adding that the VOEB was confident all Landesbanken would pass the tests.

    Special favours?

    European taxpayers shelled out €1.6 trillion euros to guarantee and support their banks between 2008 and 2010 alone. To ensure this never happens again, EU leaders agreed to create a banking union so that investors, rather than the public, pick up the tab when banks get into trouble.

    As a major step towards Europe’s long-term goal of breaking the link between governments and banks, the aftermath of the ECB’s tests will be closely watched.

    “Will there be no special favours for banks that have powerful political sponsors? To me, that is going to be the test,” said Veron. “If there is nothing that changes in the Landesbank landscape after results of the comprehensive assessment, many people will be surprised and disappointed.

    It is hard to say yet whether national governments will be able to influence the size of the capital holes revealed or the treatment of any public funds used to plug shortfalls.

    Franco-Belgian lender Dexia, which has had €12 billion euros in state aid and is being wound down, won a powerful concession by not having to prove it could withstand a financial crisis in the tests, according to sources familiar with the matter.

    On the other hand, the ECB has overruled German objections, and is making banks such as HSH Nordbank and fellow Landesbank Nord LB as well as Commerzbank use more conservative valuations for their shipping loans, sources have told Reuters.

    This treatment is one of the reasons why some analysts believe these three banks might fail the stress test and balance sheet review. The banks themselves have said they are well prepared for the scrutiny.

    The ECB is giving lenders 6-9 months to fill any capital shortfalls it uncovers; they are expected to sell shares, cut dividends, raid earnings and sell assets and bonds to do so.

    Eurozone banks undergoing the ECB’s tests have increased their capital buffers by €103.5 billion since June last year, nearly half of it by selling shares on the stock market.

    Banks without a stock market listing – around half of the 130 or so being tested in the eurozone – are more constrained in their ability to raise extra capital.

    Credit ratings agency Fitch said Austrian cooperative bank Volksbanken, which has been bailed out three times by the government since 2008, may need yet more state aid because it looks likely to fail the ECB review.

    External impetus

    Politically-connected banks have been at the heart of Europe’s financial crisis. These ranged from Hypo Alpe-Adria, a sleepy Austrian provincial lender until it raised its exposure to the Balkans with the backing of late far-right leader Jörg Haider, to Spain’s savings banks or “cajas”, whose property loan binges were approved by politicians sitting on their boards.

    External institutions have had some success in diluting the interplay of local politics and high finance in Europe.

    The Commission cancelled state guarantees for the German Landesbanken in 2001 and it sounded the death knell of WestLB, once the biggest, which was wound down in 2012 after repeated bailouts on the back of trading scandals and losses.

    The IMF and the EU pushed Spain effectively to do away with the savings bank model after the country was forced into a €41.3 billion bailout due to their property losses. Spain has replaced the cajas with a system of more tightly-regulated banking foundations which in turn are shareholders in commercial banks.

    But even this system, and Spain’s handful of cooperative banks, could face further changes when the ECB takes over as supervisor and lenders come under ever greater pressure to beef up their capital, pushing them to bring in outside investors and overhauling their structure.

    Italy’s cooperative banks, owned by their customers and employees, could also come under pressure to reform their ownership model if they are revealed to have large capital holes that require them to raise more funds from investors.

    Although some of these “popolari” banks are listed on the stock market, they give all shareholders the same voting rights regardless of the size of their holdings.

    The one-investor-one-vote rule, designed to bind the popolari to their region, has not prevented them raising €4.3 billion in equity so far this year, but investors could demand a greater say in a second round of rights issues.

    “I would not rule out that some popolari banks, especially if they fare particularly poorly in the asset-quality-review and stress tests, may be under some pressure to switch to the standard governance model,” said Andrea Resti, professor of finance at Bocconi University and a member of the supervisory board for UBI Banca.

    Critics of the Landesbanken hope that having the ECB as supervisor will force more change. The banks have already shrunk their balance sheets by 40% since the crisis, partly due to restructuring plans agreed with Brussels.

    “The political affiliation with the Landesbanken is too strong, so reforms from within Germany are not very likely to happen,” said Jörg Rocholl, president of the European School of Management and Technology (ESMT) in Berlin. “This external impetus may lead to change.”

    The IMF and the OECD have both called for more private ownership of the Landesbanken to boost their profitability, which was weak even before the crisis struck, and to dilute the influence of local politicians who sit on their supervisory boards.

    Buchholz said privatising the Landesbanken did not make sense because their economic position had improved since the crisis and she defended having politicians help oversee their activities. “Expertise is important for membership of a supervisory board. I don’t think it’s fair to assume that politicians per se don’t have the necessary expertise.”

    Could we be seeing the beginning of the end for the Landesbanks and other publicly-owned EU banks? As Nicholas Veron of the Peterson Institute indicated, there’s an incentive for the ECB to “play tough” in order to avoiding “owning” any future crises, and it sounds like the publicly owned banks are clearly in the cross hairs of institutions like the IMF and OECD (and the major private banks presumably wouldn’t mind forced privatizations of their publicly owned brethren). So it’s certainly looking like a major overhaul/privatization of the EU’s public bans could be on the way.

    And since the IMF and OECD also have greater profitability in mind as one of the goals of a public sector banking overhaul, it’s worth pointing out that the German Landesbanks’ big dive into risky securities and lending practices was precipitated by a 2001 change in the laws that scheduled the removal of the Landesbanks’ state-backing by 2005, raising their borrowing costs and helping to fuel property bubble across the EU by causing a chase for higher yielding investments. So that previous attempt to reduce the link between Germany’s banks and the public sector (a link that new EU bank bailout rules are designed to sever across the EU) ended up encouraging the kind of behavior that led to the situation requiring a large number public bailouts for the Landesbanks anyways after the financial crisis. It’s a reminder that profitability and stability are generally mutually contradictory in the world of finance which is important to keep in mind since it looks like both greater profitability and stability are the goals going forward…unless all of the “too big to fail” banks are preemptive shrunk down to a “small enough to fail” size. Something’s got to give.

    Posted by Pterrafractyl | September 18, 2014, 12:45 pm
  4. Here’s another followup on the looming shake up in the EU financial system following the stress tests next month: It’s an article from 1999 discussing the fight between Brussels and Berlin to strip the state backing of the Landesbanks. And that’s certainly a legitimate topic for debate, especially for banks that played as significant roles in the financial bubbles outside of their home countries like the Landesbanks. But it’s notable that the private banks, including Deutsche Bank, were amongst the biggest backers of stripping the state guarantees in part because the Landesbanks could lend at cheaper rates vs their private sector partner not only because of the state backed guarantees but also because they didn’t need to be quite as profit-oriented as their private counterparts. Today, the Landesbanks have already lost their state guarantees although they still got bailed out with much of the rest of the banking sector, they’re still publicly owned, and that public ownership has an implied state backing (although that implied public backing could change with the new EU banking union). So this public vs private dynamic is something to keep in mind should public banks across the EU end up failing the stress tests because there’s little reason to believe Deutsche Bank and the other big private banks that wanted to gobble up the public banks back in 1999 aren’t still hungry:

    Bloomberg Businessweek
    Banking: It’s Brussels Vs. Berlin (Int’l Edition)
    November 14, 1999

    By David Fairlamb in Frankfurt
    The EC says German state banks have an unfair advantage

    For years, Germany’s state-backed Landesbanks have been a thorn in the side of the country’s private banks. With the support of state and federal officials, they have expanded aggressively by lending to local communities and companies on terms that private banks couldn’t match. Those balmy days are about to end. In July, the European Commission ruled that Dusseldorf’s Westdeutsche Landesbank, Germany’s fourth-largest bank by assets, must repay $860 million-plus in interest to its main owner, the state of North Rhine-Westphalia, which gave it a huge subsidy in 1992. Now, Mario Monti, the EC’s competition commissioner, wants to end the privileged status of public-sector companies in general. If he succeeds, as seems likely, WestLB and Germany’s 11 other Landesbanks will suffer a devastating blow.

    Monti’s plan, which the EC will review later this month, would eventually strip the Landesbanks of their state guarantees. Landesbanks are house banks to state governments, handle wholesale banking for local savings banks, and are usually owned in part by the states. As a result, they benefit from their owners’ strong credit ratings. That means they can raise money up to 50 basis points cheaper than private rivals–and offer borrowers better terms. “The Landesbanks can do lots of big-ticket lending at knock-down rates,” says Jens Schmidt-Bugel, associate director for financial institutions at rating agency Fitch IBCA in London. “They wouldn’t be able to do that without their guarantees and credit ratings.”

    The EC plans have wide support outside Germany. But WestLB’s management-board chairman, Friedel Neuber, backed by the other Landesbanks, is preparing to fight them with everything he’s got. Powerful German politicians, from Chancellor Gerhard Schroder to Finance Minister Hans Eichel and Wolfgang Clement, prime minister of North Rhine-Westphalia, are also rushing to defend the status quo. That’s no surprise considering the Landesbanks’ usually spirited support for the economic policies of their political masters. “There is going to be a huge battle between Berlin and Brussels over this,” predicts Metehan Sen, a banking analyst at B. Metzler seel. Sohn & Co., a private bank in Frankfurt. “The future of the entire German banking sector is at stake.”

    Germany’s private banks are rooting for Monti, too. They resent that the Landesbanks have better credit ratings than they do (table). What’s more, state governments are usually satisfied with more meager returns on their shares than private bank shareholders are, so the Landesbanks can lend even more aggressively. Indeed, German private banks have been pushed into a corner. Private banks in France, Spain, the Nordic countries, and Benelux account for more than 40% of all domestic lending, but in Germany, their share is below 20%. That’s why Commerzbank Chief Executive Martin Kohlhaussen, who is chairman of the German Bankers’ Assn., roundly condemns the Landesbanks’ privileges. “We aren’t playing by the same rules,” he complains.

    He has a point. If it weren’t for their state guarantees, the Landesbanks would almost certainly have less impressive ratings. WestLB and Bayerische Landesbank, for example, are graded Aa1 and Aaa, respectively. Yet both are saddled with millions of dollars’ worth of nonperforming loans in emerging markets and low returns on equity of around 5.4%. Their credit ratings should probably reflect their financial-strength ratings–D and C.

    And it’s not just inside Germany that the Landesbanks are throwing their weight around. Over the past two decades, they have expanded aggressively abroad. WestLB and Frankfurt’s Landesbank Hessen-Thuringen now have sizable capital-market operations in London and New York as well as Germany. Their close links to regional governments also mean that public-sector underwriting mandates come their way. They have become major issuers of bonds in their own right. Sarah-Jo Millan, an analyst at Barclays Capital Inc. in London, figures that the Landesbanks’ bond business has soared tenfold, from $2.3 billion in 1990 to $23.3 billion last year. Their top ratings give them a big advantage in the derivatives business. They’re involved in local-government financing in Scandinavia, the Australian-dollar capital markets, and even Indian trade financing. Now, they are pushing hard into money management. In April, WestLB Asset Management Co. bought the Houston-based fixed-income business of Nicholas-

    Applegate Capital Management; WestLB hopes to have $100 billion under management within three years. “They are far more active abroad than they would ever be without those guarantees,” says Peter Vipond, a director of the British Bankers’ Assn. “They really have an unfair advantage.””LOGICAL.” Stripped of their guarantees, the Landesbanks would need new sources of equity to underpin their vast balance sheets and sprawling empires. They would have to cut the range of services they offer and sell off businesses. Some might even be privatized. “The idea of selling off Landesbanks has always been taboo,” says Metzler’s Sen. “But it could be the logical thing if Brussels gets rid of their privileges.”

    Indeed, senior regional politicians suspect that the likes of Deutsche Bank and Dresdner Bank want to force the privatization of the Landesbanks so they can buy them. “Obviously, we want Brussels to get rid of the guarantees,” says a managing board member at one of the largest private-sector banks. “But we don’t want to irritate the politicians again. We’re scared of retaliation.” The banks already irked some pols by complaining to the EC about the transfer of a public housing agency to WestLB, which they claimed amounted to an unfair $1.4 billion subsidy. That was the case Brussels decided in their favor in July. Schroder immediately appealed the ruling.

    However much pressure comes from German pols, Commissioner Monti’s persistence is likely to prevail. Short run, he’s sugaring the pill by stressing that he isn’t targeting any one institution or country. Nor is he calling for an abrupt end to all state guarantees. Instead, Monti wants the EU to limit guarantees such as those the Landesbanks receive and make sure they’re paid for at market rates. Once that happens, the Landesbanks will lose much of their present raison d’etre–and the playing field for European financial services will be a lot more level than it is now.

    And here’s a 2010 piece that make the point that even after the 2005 loss of state guarantees, the Landesbanks were still a source of reduced profits for the German private banking sector. And the private banks were still pissed about it:

    The New York Times
    Landesbank Losses May Bring Change to German Banking

    By JACK EWING
    Published: January 11, 2010

    FRANKFURT — Even in an era of bad banking deals, the case of Bayerische Landesbank, a bank based in Munich, stands out.

    Its ill-fated attempt to expand in Eastern Europe has cost Bavarian taxpayers 3.7 billion euros ($5.4 billion). It has also led to a criminal investigation of the bank’s former chief executive, which included the spectacle of Munich police and prosecutors raiding offices of an institution whose supervisory board is stacked with local politicians.

    The criminal investigation is a new twist in the troubled history of Germany’s state-owned banks, but the sizable losses are not. Even before the most recent scandal, the Bayerische Landesbank, known as BayernLB, had required a taxpayer bailout equal to a quarter of the state’s annual budget, in part caused by investments placed with banks in Iceland.

    Taxpayers in Baden-Württemberg and Hamburg have also had to pump billions into their state-owned banks. In North-Rhine Westphalia, Germany’s most populous state, WestLB in Düsseldorf needed 8 billion euros in government grants and loan guarantees to stay afloat after making disastrous investments that included derivatives tied to subprime mortgages in the United States.

    The Landesbank rescues — reminiscent of the financial crises at American-backed lenders Freddie Mac and Fannie Mae — have placed a serious burden on German state governments already suffering from slumping tax revenue, as well as the federal government, which is helping to cover some losses.

    “They wasted billions that we could have spent on schools, police and streets,” said Inge Aures, deputy chairwoman of a Landesbank oversight committee in the Bavarian legislature, referring to BayernLB.

    But the problems of the Landesbanks could turn out to benefit the fragmented commercial banking sector, which has long struggled to produce global players.

    Rivals, economists and European Union antitrust regulators have long complained that the state banks enjoy unfair advantages over commercial banks because they can raise money more cheaply, because of their implicit government backing. The public-sector institutions are a major reason Germany’s big banks have the lowest profit margins, on average, in Western Europe, even though Germany is the largest economy.

    Now, though, the Landesbanks are being forced to scale back operations to survive, creating more space for Deutsche Bank and other private-sector institutions.

    “The prospects for private banks will improve because the competition won’t be as severe,” said Dirk Schiereck, a professor of banking at the Technical University of Darmstadt. He estimates the Landesbanks will have to shrink their assets by half compared with 2008.

    The German economics minister, Rainer Brüderle, told Der Tagesspiegel, the Berlin daily, in an interview published on Jan. 4 that the country needed only one Landesbank, rather than the seven it now has. But such severe consolidation is unlikely any time soon, because local politicians are reluctant to give up control over their Landesbanks, a potent source of influence in the local economy.

    There is also a risk that borrowing costs for companies could rise if there is less competition from the state banks — one reason that politicians will resist privatizing the banks. However, they may be chastened enough by the recent losses to support mergers with other state-owned banks.

    “The political will to support mergers is higher than it has ever been,” said Katharina Barten, a senior analyst at Moody’s Investors Service, who added that she expected consolidation to take several years.

    The losses, however, are already forcing the banks to focus more on their main business — lending to local companies. Landesbanks account for about a quarter of all commercial lending in Germany, more than Deutsche Bank and the other big private banks combined.

    In recent years, institutions like BayernLB and WestLB opened branches overseas and moved into investment banking, with disastrous results. “Those times are over,” said Peter Altmiks, an economist at the Friedrich Naumann Foundation, a research group in Potsdam with ties to the pro-business FDP party. “The majority of state governments have no ambitions to build these big banks anymore.”

    Commercial bankers say the state-supported banks have an unfair advantage because they face less pressure to be profitable and, with the state as owners, enjoy better credit ratings than their balance sheets would normally justify.

    While conceding that some reforms are needed, Landesbank representatives argue that the institutions are essential, especially in hard times, because they provide capital to the midsize companies that drive the German economy. “One Landesbank wouldn’t be enough,” said Stephan Rabe, a spokesman for the Association of German Public Sector Banks. Advocates also point out that private-sector institutions like Hypo Real Estate Holding and Commerzbank have required government aid.

    Pressure on the Landesbanks is also coming from European Union antitrust authorities. Regulators set harsh terms in return for approving a rescue plan for WestLB, obligating the bank to unload risky assets and cut its balance sheet in half to about 140 billion euros.

    Keep in mind that the reduced need for profitability is something the OECD and IMF are currently expressing a desire to change when your read things like:

    “Rivals, economists and European Union antitrust regulators have long complained that the state banks enjoy unfair advantages over commercial banks because they can raise money more cheaply, because of their implicit government backing. The public-sector institutions are a major reason Germany’s big banks have the lowest profit margins, on average, in Western Europe, even though Germany is the largest economy.


    Commercial bankers say the state-supported banks have an unfair advantage because they face less pressure to be profitable and, with the state as owners, enjoy better credit ratings than their balance sheets would normally justify”.

    So, while the role the Landesbanks played in fueling bubbles outside of Germany is clearly something that shouldn’t be repeated, it’s looking more and more like public banking, even for domestic lending, is about to undergo a strange pro-profit public/private assault in the new EU. Is that in the public interest?

    Posted by Pterrafractyl | September 18, 2014, 2:26 pm
  5. Back in the spring of 2014, a hint of despair was in the air. Everywhere. At least everywhere that counts. Would the boom years of financial trading ever return? Maybe, but maybe not. You don’t see a financial public/private bubble-nanza clusterf#ck like what took place in the lead up to the 2008 financial meltdown everyday. That was a special kind of financial public/private bubble-nanza clusterf#ck. And maybe one of the kind. The “good times” for the big banks and trading houses that profit for volatility and volume (defined as the times right before and right after the 2008 bubble burst in this case) might never return. At least, that was the fear last year:

    Reuters
    Boom times for bank trading have gone, and may never come back

    LONDON | By Jamie McGeever
    Mon May 12, 2014 5:33pm IST

    The boom years of financial market trading, when banks made unprecedented profits from bonds, currencies and commodities, may be over for good as financial firms realise there will be no cyclical upswing on their dealing desks.

    Even though it’s taken Western economies several years to regain pre-crisis national output levels, many doubt banks will ever revisit the pre-crisis high watermark of their trading activities.

    Revenues from fixed income, currencies and commodities – the so-called ‘FICC’ universe – continued to tumble for most major U.S. and European banks during the first quarter of 2014, increasing the pressure on them to rethink business models.

    Thanks to a more stringent regulatory environment and a potential turning point in the 20-year cycle of falling global interest rates, the twin peaks of just before and after the 2008 global financial crisis look unlikely to be revisited.

    Revenue from FICC amd equity trading, which critics sometimes dub “casino banking” and distinguish from traditional investment banking services like underwriting share issues or arranging mergers and acquisitions, still accounts for over 70 percent of banks’ overall income from investment banking, according to research by Freeman Consulting.

    FICC and equity trading income at Goldman Sachs last year was 72 percent of the bank’s overall revenue from investment banking, compared with 82 percent in 2010. Morgan Stanley’s FICC and equity trading revenue was 70 percent of its total investment banking revenue, well down from 82 percent in 2003.

    The FICC share of these trading revenues is shrinking. In 2007 around 70 percent of Goldman’s $22.89 billion overall trading revenue came from FICC. Last year, barely half its $15.72 billion of such revenue was from FICC, according to Freeman.

    In 2006 FICC income accounted for just over 60 percent of Morgan Stanley’s $15.9 billion overall trading revenue, compared to just 35 percent of the $10.1 billion pie last year, the consultancy said.

    As new regulation bites and extraordinary monetary and economic policies smother extreme market swings, the trading volumes and price volatility that middlemen banking traders thrive off has ebbed.

    And it looks like a structural shift rather than a cyclical or temporary lull.

    “The revenues have gone. The world has changed from 2007, 2008,” said Grant Peterkin, head of absolute bond returns at Lombard Odier in Geneva.

    “The regulatory aspect is the biggest aspect.”

    Regulation after the 2007-08 crisis such as ‘Dodd-Frank’ and ‘Volcker Rule’ legislation in the United States and Basel III banking reforms globally, effectively restrict banks’ ability to hold, trade and speculate on fixed income and derivatives.

    This reduces liquidity, but other traditional liquidity providers like hedge funds have been unable to fill the gap because their businesses are also under pressure.

    IN A FICC

    The pressure on banks’ FICC operations was brought into sharp focus by the broad-based slump in first-quarter earnings.

    British bank Barclays grabbed the headlines, posting a 41 percent plunge in trading revenue compared with the same period in 2013, then announcing 7,000 of its 26,000 investment banking jobs will be cut.

    “Some of the pressures we saw on the business towards the end of last year are clearly structural as well as cyclical,” Barclays Chief Executive Antony Jenkins told CNBC on Thursday.

    Other bank chief executives are likely to follow Jenkins in terms of direction if not magnitude, and reduce the size of their FICC trading desk operations, analysts say.

    They are expected to continue cutting costs, trimming headcount, and in some cases, exit particular markets.

    The collapse in market volatility has also contributed to the decline. This may be a relief for risk-averse investors but it also makes them less likely to use market hedging instruments sold by the banks.

    It also reduces the arbitrage opportunities that nimble banks and brokers feed off for in-house trading profits.

    Implied volatility, which measures the potential for asset price swings over a specific period, is at or close to record lows in deeply liquid and highly-traded assets like U.S. Treasuries, euro/dollar and dollar/yen.

    Analysts also say the whiff of scandal resulting from global investigations into alleged rigging of benchmark foreign exchange rates and Libor interest rates is clouding the FICC environment, and forcing banks to set aside billions of dollars for potential litigation costs.

    The final nail in the FICC coffin, analysts say, is that the world on the cusp of rising interest rate cycle, led by the U.S. Federal Reserve’s reduction – or “tapering” – of its extraordinary post-crisis stimulus.

    It’s completely uncharted territory for banks and traders, and not conducive to making easy money.

    “We’ve had the most enormous change,” said Chris Wheeler, banking analyst at Mediobanca in London. “And there’s more to come as the full impact of tapering is felt.”

    Yes, as of the spring of 2014, the profits from “FICC” (fixed income, currencies and commodities) were well off their bubbly highs as new regulations began clipping bankster wings a bit, leading many to wonder if a new era was upon us where the FICC’s fraction of the financial sector’s bottom line is permanently shrunk:

    Thanks to a more stringent regulatory environment and a potential turning point in the 20-year cycle of falling global interest rates, the twin peaks of just before and after the 2008 global financial crisis look unlikely to be revisited.

    Revenue from FICC amd equity trading, which critics sometimes dub “casino banking” and distinguish from traditional investment banking services like underwriting share issues or arranging mergers and acquisitions, still accounts for over 70 percent of banks’ overall income from investment banking, according to research by Freeman Consulting.

    Only 70 percent. Will the good times ever return? Maybe, but not yet:

    Reuters
    Banks’ ‘FICC’ market trading in second-quarter points to ongoing squeeze

    By Jamie McGeever, Reuters
    July 30, 2015

    LONDON – Hopes the worst is over for big banks’ financial market trading look premature, with the latest snapshot of earnings and volumes suggesting the pressure on these operations remains intense.

    With post-crisis regulatory changes forcing them to hold more capital and liquidity, effectively meaning they are less able to trade, banks’ fixed income, currency and commodity (FICC) trading desks are unlikely to be expanded any time soon.

    The first quarter is traditionally the most active and profitable for banks’ FICC trading, as clients put cash to work at the start of the year.

    Even so, FICC revenues trended down as much as 5 percent in the second quarter from the same period a year ago, and were 25-30 percent lower than in the first quarter, according to financial industry analytics firm Coalition.

    “FICC revenues for the Coalition Index will decline in Q2 this year versus Q2 last year, and the first half versus the first half last year,” said George Kuznetsov, head of research and analytics at Coalition.

    “We don’t see any significant hiring sprees this year as the revenue growth simply isn’t there. Banks have an interesting decision to make given lower revenues and stable costs.”

    This comes on the back of a relatively strong performance in the first three months of the year, which had given cause for cautious optimism that the tide might be turning.

    The Coalition Index tracks the performance of the world’s 10 largest investment banks, and unlike the banks themselves, it breaks down FICC revenues into their categories. The fully updated index will be published on Sept. 4.

    Coalition’s Kuznetsov said the weakness was predominantly in G10 interest rates trading, as the “significant” growth triggered by the European Central Bank’s 1 trillion euro bond-buying stimulus program in the first quarter evaporated.

    U.S. VS EUROPE

    The three months to June was a particularly volatile period. Greece lurched perilously close to crashing out of the euro, a “flash crash” in the German government bond market sent global bond yields soaring, and China’s stock market fell sharply.

    Yet rather than boosting trading activity, as rising volatility often does, traders and investors drew in their horns.

    “This uncertainty slowed the momentum we saw in the first quarter and kept clients on the sidelines in currencies and emerging markets,” JP Morgan chief financial officer Marianne Lake said on a call with analysts after the bank’s Q2 results earlier this month.

    Revenue from the bank’s FICC business fell 10 percent on an adjusted basis, not a great result but not as bad as some of its peers — Goldman Sachs’s net revenue from FICC trading fell 28 percent to $1.60 billion.

    Yet U.S. banks continue to increase market share at the expense of their European counterparts.

    The European earnings season is a few weeks behind the U.S. equivalent, and not all the continent’s major banks have reported yet.

    Barclays PLC , one of Europe’s biggest banks and the third largest foreign exchange bank in the world, this week said its FICC income fell 11 percent in the second quarter to 554 million pounds. Its credit and equities trading held up better.

    Flash forward to today and the FICC squeeze for the banks continues as regulations mandating higher capital requirements take hold. Will there ever be any relief for the people of the FICC?

    Well, while the FICC activity may still be contracting for a number of banks, it’s not always contracting, as the article hinted:


    The three months to June was a particularly volatile period. Greece lurched perilously close to crashing out of the euro, a “flash crash” in the German government bond market sent global bond yields soaring, and China’s stock market fell sharply.

    Yes, whenever a crisis breaks out, it’s always a little tempting to says something like “well, the Chinese word for ‘crisis’ is ‘opportunity’! It’s all good!” At least, it’s always a little tempting to say if you don’t speak Mandarin and don’t realize that the word for ‘crisis’ isn’t actually ‘opportunity’. But that doesn’t mean a crisis can’t also be an opportunity. Like an opportunity to reverse the regulatorily mandated pledges you recently took to reduce your FICC exposure:

    Bloomberg View
    Greece is a Godsend for Traders

    Jul 31, 2015 6:24 AM EDT
    By Mark Gilbert

    The turmoil in Greece has been a godsend for traders, who struggle to make money when prices in financial markets are flatlining and have a much more lucrative existence when they swing freely between highs and lows. That’s been boosting profits at the securities divisions of Europe’s investment banks — at the very time when they’ve committed to scaling back trading to take fewer risks and reinforce their capital bases.

    On Friday, France’s BNP Paribas posted its best quarterly profit since 2012, with a 22 percent improvement in equities revenue, and 4 percent in fixed-income sales and what it calls “good growth” in currencies and commodities. Earlier this week, Germany’s Deutsche Bank said revenue from trading bonds and currencies climbed 16 percent in the second quarter, while Barclays in the U.K. said its rates and forex business expanded by 10 percent.

    After years of watching market volatility decline, damped by a combination of unchanged near-zero interest rates from the world’s biggest central banks and banks committing less money to buying and selling securities, traders have been granted a new lease on life by Greece’s woes. Here’s a chart showing how volatility in the interest-rate market has been increasing since the beginning of the year:

    The prospect of Greece exiting the euro didn’t fuel contagion, in the sense of investors betting that Portugal, Italy or other countries would follow. But it has made prices in the financial markets jump around — creating profit and revenue opportunities. Euronext, which operates stock markets in France, the Netherlands, Belgium and Portugal, says the second quarter brought its highest trading volumes in half a decade, with average daily volumes climbing more than 40 percent from a year earlier. Here’s how volatility has increased in the German stock market in recent quarters:

    The jump in volatility and the parallel gain in profit  poses a dilemma for banks that have pledged to curb trading. But since the risk that Greece will imperil the euro has subsided this month, volatility has swiftly become subdued. As Greek Prime Minister Alexis Tsipras struggles to keep his government together amid domestic opposition to Europe’s bailout agreement, traders may be praying that he fails.

    Ok, so the Greek crisis this year introduced so much volatility into the financial markets, expecially the bond markets, that the big banks like Deutsche Bank and Barclays are going back on their pledges to reduce their fixed-income risks because it’s just too profitable not to do.


    The prospect of Greece exiting the euro didn’t fuel contagion, in the sense of investors betting that Portugal, Italy or other countries would follow. But it has made prices in the financial markets jump around — creating profit and revenue opportunities. Euronext, which operates stock markets in France, the Netherlands, Belgium and Portugal, says the second quarter brought its highest trading volumes in half a decade, with average daily volumes climbing more than 40 percent from a year earlier

    Mental note: Big Banks LOVE the eurozone’s dance with death.

    But as the article also pointed out, now that the Greece crisis has lulled a bit (for the moment), all that volatility that was driving this sudden surge is at risk of withering away.

    What’s a large bank that’s reliant on market volatility for its profit margins to do? Here’s an option: do nothing. And just wait for who’s ‘Netxit’:

    Foreign Policy
    Who’s Nexit?

    As many as five other eurozone countries are flirting with trouble. Could one of them be the first to leave the common currency?

    By Daniel Altman
    July 30, 2015

    Which will be the next eurozone domino to fall? With Greece enjoying a temporary lull in its apparently permanent crisis, we can take a moment to look around its neighborhood at other candidates for trouble. There are several — and the euro’s future looks far from bright.

    Greece ran into trouble mainly because it should never have been in the eurozone in the first place. Its governments couldn’t balance their budgets, and its economic cycle was far out of sync with those of the eurozone’s leading lights. When Germany grew, Greece shrank, and vice versa. Using the same monetary policy in both countries made no sense at all.

    The more proximate cause of the Greek crisis was its inability to service its debts on time. In the midst of a deep depression, taxes and other government revenue started to slip away, eventually falling 15 percent between 2007 and 2014. Without control of the currency, the government couldn’t print money to stimulate the economy and devalue its debts. It had to choose between repaying its lenders and doing everything else: paying pensions, providing public services, protecting its citizens, etc.

    What other countries in the eurozone might soon face this choice? To hear the credit-rating agencies tell it, the first in line are Portugal, whose government bonds are rated as junk by Standard & Poor’s, and Italy, which receives the lowest investment-grade rating of BBB-. Each country’s government is carrying a debt bigger than its GDP, something the IMF doesn’t expect to change any time in the next five years. Spain, whose debt-to-GDP ratio is below 70 percent but may rise in the coming years, is rated BBB.

    Not far behind are Ireland, whose debt burden of 86 percent of GDP is supposed to decline rapidly now that economic growth has resumed, and France, at 89 percent, where growth rates may struggle to crack 2 percent in the coming years. Both of them receive reasonable grades from Standard & Poor’s — AA for France and A+ for Ireland, with AAA being the safest of all.

    But it’s important to take these ratings with a grain of salt. After all, Standard & Poor’s gave Greece’s debt a grade of A- until December 2009, when the fiscal writing was already on the wall. Partly because of the rating, Greece had no trouble borrowing at reasonable interest rates as late as November of that year, just as Portugal can today. Yet at the end of 2009, all of the countries above except France were once again being called by their pejorative acronym: the PIIGS.

    Going forward, the primary risks for these countries are dips in government revenue (mostly likely stemming from disappointing economic growth) and the buildup of other fiscal obligations. Either one could force a decision like the one that faced Greece: to pay or not to pay.

    Government revenue in France and Italy has trended gently upward ever since the introduction of the euro in 1999, with few fluctuations along the way. By contrast, revenue in Ireland and Spain spiked dramatically just before the global financial crisis, suggesting that their governments relied more on volatile sources like corporate income taxes. (Because companies pay taxes only when they’re profitable — as opposed to households, which pay them when they have revenue — collections from corporate income taxes tend to be much more correlated with the ups and downs of the economic cycle.) Portugal landed somewhere in between:

    Of course, collecting revenue is one thing; what a government chooses to do with it is another. During those heady high-revenue years from 2005 through 2007, Ireland paid down almost 30 percent of its debt, but Spain shrank its liabilities by only about 13 percent. Yet Portugal took the brass ring for most profligate fiscal policy, with its debt load rising sharply every year — despite a growing economy and rising tax revenue — for a total increase of 36 percent. If any of these events reflects long-term tendencies, then Portugal is one to watch.

    Another risk for these countries is the possibility that their economic cycles will fall out of sync with the rest of the eurozone or, more pertinently, with Germany. The PIIGS and France rely much more on tourism, for instance, than Germany; as a result, trends in their exports may depend on demand from wealthy households in China, Japan, South Korea, and the United States more than on industrial activity in the eurozone.

    If the countries at risk fall out of sync, then the European Central Bank (ECB) will be raising interest rates when they’re already in recession or lowering rates when the countries are growing apace. In this situation, monetary policy will have the opposite of its intended purpose; it will only serve to amplify the countries’ booms and busts.

    What are the big risks that might determine who’s ‘Nexit’ in the ‘-exit’ queue? Let’s see…


    Going forward, the primary risks for these countries are dips in government revenue (mostly likely stemming from disappointing economic growth) and the buildup of other fiscal obligations. Either one could force a decision like the one that faced Greece: to pay or not to pay.


    Another risk for these countries is the possibility that their economic cycles will fall out of sync with the rest of the eurozone or, more pertinently, with Germany. The PIIGS and France rely much more on tourism, for instance, than Germany; as a result, trends in their exports may depend on demand from wealthy households in China, Japan, South Korea, and the United States more than on industrial activity in the eurozone.

    So events like disappointing economic growth (a recession) or growing fiscal obligations (which one would expect in any nation with an aging population and/or recessions) might be destabilizing enough to the Portugal, Ireland, Spain (three austerity poster-children), Italy, and maybe even France, to force these countries into a ‘Nexit’ situation. Or maybe the eurozone economies become decoupled for whatever reason and the ECB ends up implementing a policy that’s the opposite of what needed for the weakest economist (those on the ‘Nexit’-list need)? Either way, the ‘Nexit’ candidates just might end up in a situation where they either have to choose to pay their debts or pay their people. Or leave the eurozone altogether so they have a chance to both pay their debts, pay their people, and actually stimulate growth but at the brutal cost of sudden economic dislocation.

    A recession, aging, or just a decoupling of the national business cycles…that’s all part of what could bring on a ‘Nexit’. It’s a rather alarming assessment considering that all of these potentially dire scenarios are also pretty inevitable. If the regular cycles of business happen or societies age, a variety of eurozone member states just might find themselves caught in Greek Tragedy. And given the deep flaws in the eurozone’s structure and the demonstrated political will to do nothing to alleviate those flaws, that means it may not be the worst time to familiarize yourself with eurozone crisis trading and investing strategies.

    Investing in your own future might be a rather difficult in countries across the eurozone, especially if you have a lot of your future ahead of you, but at least FICC volume should pick up again every time one of the eurozone member states is thrust into a “pay or not to pay, or exit” situation. Hooray.

    Posted by Pterrafractyl | August 3, 2015, 11:13 pm
  6. Here’s another reminder that the structural problems with the eurozone due to a lack of monetary sovereignty aren’t limited to a lack of freedom to set central banking interest rates. If you’re a country like Greece facing a major crisis, you also lose the guarantee that your new shared central bank will even perform basic central banks obligations like being a lender of last resort:

    The Washington Post
    Greece’s banks are dying, and fast
    By Matt O’Brien August 6 at 7:00 AM

    Greece is finding out that you can’t have an economy without banks, but you can’t have banks without an economy, either. Or at least one where businesses aren’t allowed to buy the things they need to stay in business.

    Now, Greece’s banks have fallen victim to a classic blunder. The most famous of which is “never start a land war in Asia,” but only slightly less well-known is this: “never set up shop in a country that’s been forced into mega-austerity and capital controls as a result of the currency union it’s a part of.” In other words, they didn’t lend money to people they shouldn’t have or lose money on their own bad bets. Greece’s banks just made the mistake of being banks in Greece.

    Part of it is the fear that Greece will get kicked out of the common currency, and everybody’s euros will get turned into drachmas that aren’t worth anywhere near as much. That’s set off a slow-motion bank run—a bank jog, really—that picked up the pace the past few months when it looked like there might not actually be a deal. But that was a manageable problem as long as the European Central Bank did its job as a lender-of-last-resort, and loaned Greece’s banks cash in return for hard-to-sell assets. The ECB stopped doing that, though, and Greece’s banks had no choice but to close for a few weeks or else close for good. Not only that, but the government has had to prevent people from moving their money out of the country, what economists call capital controls, so that the run on the banks wouldn’t turn into a run on Greece.

    It’s only a slight exaggeration to say that this has made Greece go from having not much of an economy to having not one at all. Greek companies haven’t been able to pay foreign suppliers since they can’t send money out of the country, so their factories have run out of supplies. Everything has come to a standstill. Greece’s Purchasing Mangers Index, which measures manufacturing activity, just collapsed from a sickly 46.9 to a deathly 30.2. Anything less than 50 means that the manufacturing sector is shrinking.

    That, in turn, means that Greek businesses that should have been able to pay back what they owed won’t be anymore. And so the Greek banks that loaned them money—which, at the time, was a perfectly reasonable thing to do—are in line for a lot more losses. How many more? Well, enough that, as you can see below, their stocks have fallen by the maximum 30 percent almost every day since the country’s markets re-opened. Add it all up, and Greece’s four-biggest banks have plunged between 80 and 90 percent since last October. At this rate, it won’t be long until they need the 10 to 25 billion euro bailout that Greece’s creditors think it will take to recapitalize them.

    Now that we’re looking at a situation where Greece is being forced to implement an austerity package that’s just more of the same and that basically everyone thinks can’t work, this really can’t be emphasized enough: The troika created a bank run and collapsed Greece’s economy when the ECB decided to stop acting like a normal central bank in order to squeeze the Greeks during the negotiations:


    Part of it is the fear that Greece will get kicked out of the common currency, and everybody’s euros will get turned into drachmas that aren’t worth anywhere near as much. That’s set off a slow-motion bank run—a bank jog, really—that picked up the pace the past few months when it looked like there might not actually be a deal. But that was a manageable problem as long as the European Central Bank did its job as a lender-of-last-resort, and loaned Greece’s banks cash in return for hard-to-sell assets. The ECB stopped doing that, though, and Greece’s banks had no choice but to close for a few weeks or else close for good. Not only that, but the government has had to prevent people from moving their money out of the country, what economists call capital controls, so that the run on the banks wouldn’t turn into a run on Greece.

    It’s only a slight exaggeration to say that this has made Greece go from having not much of an economy to having not one at all…

    “But that was a manageable problem as long as the European Central Bank did its job as a lender-of-last-resort, and loaned Greece’s banks cash in return for hard-to-sell assets. The ECB stopped doing that, though, and Greece’s banks had no choice but to close for a few weeks or else close for good.”
    Yes, the showdown between Greece and the troika was a manageable showdown. But then the ECB decided that slowly strangling the Greek economy was an appropriate use of its central banking independence in stark contrast to prior pledges to “do whatever it takes” to keep the eurozone held together.

    Hmmm…something must have strongly influence that independent ECB thinking. What could it be? It’s a total mystery.

    Posted by Pterrafractyl | August 6, 2015, 2:54 pm
  7. Something happened on the way to Greece’s smooth completion of the Troika’s demands in order to release the funds needed to recapitalize Greece’s banks. It’s something that should sound familiar at this point: The Troika made a demand that would make life a lot worse for a lot of people, Greece said “hey, this is insane,” and since the Troika is also insane another Greek/Troikan showdown might be on the way:

    Reuters
    UPDATE 2-Greece sets red line in mortgage talks: no mass foreclosures

    Fri Oct 23, 2015 9:02am EDT

    * Greece says will not tolerate mass foreclosures on homes

    * “We aren’t convicts serving time” PM says

    * Hollande supports Greece on debt, foreclosures (Updates throughout)

    By Renee Maltezou and Jean-Baptiste Vey

    ATHENS, Oct 23 (Reuters) – Greek Prime Minister Alexis Tsipras on Friday said his country would fully meet its obligations under a multi-billion euro bailout but would not tolerate mass foreclosures on problem mortgage loans for thousands of indebted people.

    Setting a red line in talks with the country’s lenders now in Athens for consultations, Tsipras said turning the country into an “arena of confiscations” of homes was out of the question.

    Although he did not so directly, he was implicitly referring to talks with creditors, which have hit a snag over protection of primary residences of homeowners who cannot afford to pay their mortgages.

    “Some may be attempting to revive a debate (on Greece exiting the euro) … by delaying the implementation of reviews and delaying the recapitalisation of banks,” Tsipras told journalists after talks with French President Francois Hollande.

    Representatives of Greece’s lenders are in Athens assessing compliance with reforms required under the 86 billion-euro bailout. Athens wants the review concluded soon so it can proceed with debt-relief talks and complete the recapitalisation of its four main banks by the end of the year.

    Hollande, in Greece on a two-day visit, has sided with Tsipras’s call for debt renegotiation. In a speech to parliament, he also said homeowners should be protected.

    HOMEOWNERS

    “It is very important for commitments to be met, and for there to be no doubts over fundamental rights of families in Greece – the right for a roof over their heads – and here I’m speaking about confiscations of primary residences,” Hollande said.

    Greek officials have said there are disagreements with lenders on a mechanism to tackle non-performing loans at banks. The ratio of non-performing loans at Greek banks was 35.6 percent in the first quarter, the highest ratio in Europe bar Cyprus.

    A high rate of non-performing loans, after years of recession and high unemployment, is one of the main reasons capital buffers of Greek banks are eroded. Lenders were also weakened by capital flight earlier this year when Greece teetered on the verge of toppling out of the euro.

    Banks are in line to get a portion of bailout cash by the end of the year, but a high proportion of bad loans also mean banks are reluctant to extend credit, stunting potential growth.

    Athens wants protection from foreclosures to cover property values of at least 200,000 euros. Lenders insist the threshold should not exceed 120,000. Greece calculates that would cover only 17 percent of mortgage holders.

    Tsipras said Greece would meet its bailout obligations, though he said the country had its limits.

    An estimated 320,000 homeowners are behind on their mortgages in the country. About 130,000 of them have applied for foreclosure protection under an existing law, which sets a threshold of 300,000 euros.

    “Athens wants protection from foreclosures to cover property values of at least 200,000 euros. Lenders insist the threshold should not exceed 120,000. Greece calculates that would cover only 17 percent of mortgage holders.”
    That appears to be the crux of the matter: both sides agree that there should be a threshold level below which Greeks are protected from foreclosure on their primary residences. Greece wasn’t it at 200,000 euros, down from the existing 300,000 euro level, while the Troika is insisting on a 120,000 threshold. So both sides agree that there should be some sort of protection for poor Greek homeowners, but it’s a question of how cheap their house should be in order to qualify for that protection.

    And note that when you read:


    A high rate of non-performing loans, after years of recession and high unemployment, is one of the main reasons capital buffers of Greek banks are eroded. Lenders were also weakened by capital flight earlier this year when Greece teetered on the verge of toppling out of the euro.

    keep in mind that the ECB’s repeated decisions to significantly restrict the emergency lending available to Greece’s banks during the negotiations with the Troika this spring and summer didn’t exactly help the lending situation either.

    Also note that when you read:


    Hollande, in Greece on a two-day visit, has sided with Tsipras’s call for debt renegotiation. In a speech to parliament, he also said homeowners should be protected.

    HOMEOWNERS

    “It is very important for commitments to be met, and for there to be no doubts over fundamental rights of families in Greece – the right for a roof over their heads – and here I’m speaking about confiscations of primary residences,” Hollande said.

    it’s nice that France is going to be make Greece’s case to the rest of the Troika as this dispute unfold, but as with all tussles with the Troika, having France on your side is nice, but probably not nice enough, as evidenced by today’s declaration by the ‘Eurogroup’ of eurozone finance ministers that no funds will be released for the recapitalization of Greek banks until the foreclosure laws (among others) are passed, which they expect Greece to do this week:

    Reuters
    Euro zone won’t release new money for Greece until reforms done
    BRUSSELS | By Jan Strupczewski and Francesco Guarascio

    Mon Nov 9, 2015 3:26pm EST

    The euro zone will release the next tranche of loans for Greece as well as money for bank recapitalization only after Athens implements agreed reforms, euro zone finance ministers said, noting a Greek pledge the conditions would be met this week.

    A European Central Bank Stress test showed at the end of October that Greek banks needed a total of 14.4 billion euros in additional capital if they were to survive a scenario of adverse economic conditions.

    Some of the needed total is likely to come from private investors, but the euro zone will have to provide the rest, using all or part of the 10 billion euros already earmarked for that purpose in the euro zone’s bailout fund.

    “We await the finalization of all the measures in the first set of milestones and the financial sector measures which are essential for a successful recapitalization process,” the ministers said in a document at the end of a meeting on Greece.

    “We stand ready to support the disbursement of the 2 billion euros sub-tranche linked to the first set of milestones and the transfer to the HFSF of the funds needed for the recapitalization of the Greek banking sector out of the 10 billion euros earmarked for this purpose, provided that the agreed conditionality is met,” the ministers said.

    Prime among the disagreements for the Greeks is protection for poorer families in danger of losing their homes through foreclosure.

    Dijsselbloem said passing the foreclosures law was key before banks could be recapitalized, because it had a direct impact on the number of bad loans that banks would have to deal with through recapitalization.

    But Greek officials note that repossessions are politically sensitive at a time when Athens is undertaking to provide food and housing for thousands of asylum-seekers under a plan to handle the European Union’s migration crisis.

    Officials in the leftist-led government say a wave of evictions could boost support for the far-right Golden Dawn party.

    Differences between Athens and its euro zone partners also remain in how to treat taxpayers who are late repaying overdue tax under a special scheme.

    There is also no agreement on the minimum prices of medicine and on a tax on private education, official said.

    “We welcomed the commitment by the Greek authorities that this conditionality will be fulfilled in the course of the week,” the ministers said.

    They said their deputies would meet at the start of next week at the latest to assess if the reforms have been implemented as agreed, paving the way for any disbursement.

    Greece said on Monday it would need a political decision to overcome a dispute, so that thousands of poorer Greeks would not be at risk of losing their homes as banks repossess them.

    Greek Prime Minister Alexis Tsipras and European Commission President Jean-Claude Juncker discussed the bad loans issue by telephone on Sunday. French President Francois Hollande and German Chancellor Angela Merkel also talked about it by phone.

    “Greece is making considerable efforts. They are scrupulously respecting the July agreement,” French Finance Minister Michel Sapin told reporters. “I want an agreement to be reached today. France wants an agreement today.”

    Greek officials stress that Athens wants to fulfill all the points of the bailout agreement, but for the reforms to fly, they have to have social cohesion, which means not making life more difficult for poorer citizens.

    “The Eurogroup will press Greece to find sufficient solutions till Wednesday,” one euro zone official said.

    “There is always room for compromise but I don’t think the ministers would accept rules that are much more favorable for people not paying their mortgages than in any other country,” the official said.

    Yep, if Greece doesn’t pass the foreclosure law soon (and all the other Troikan demands), Greece’s banks won’t get the recapitalization funds that were a key part of the “bailout” agreement and, presumably, its economy melts down since this whole bailout was about conceding austerity reforms in exchange for urgently needed bank recapitalizations and public debt restructuring.

    And when you read:


    “There is always room for compromise but I don’t think the ministers would accept rules that are much more favorable for people not paying their mortgages than in any other country,”

    keep in mind that France’s finance minister did at least stick up for Greece during the recent Eurogroup meeting when he pointed out that actually, other eurozone nations have similar foreclosure protection laws

    The Wall Street Journal
    Eurozone Finance Ministers Press Greece to Move Forward With Overhauls
    About $2.15 billion in financial aid contingent on new foreclosure, bank-governance rules, among others

    By Gabriele Steinhauser And Viktoria Dendrinou
    Updated Nov. 9, 2015 5:41 p.m. ET

    BRUSSELS—Eurozone finance ministers on Monday said Greece needs to deliver on new foreclosure rules and other promised overhauls within a week to get a delayed slice of financial aid valued at €2 billion ($2.15 billion).

    The ministers, at their monthly meeting in Brussels, also urged Athens to deliver swiftly on overhauls to its financial system, including measures aimed at strengthening bank governance, in order to proceed with the recapitalization of its banks.

    Thanks to recent stress tests that uncovered lower-than-expected capital requirements at Greece’s banks and new forecasts that predict the economy will shrink less than previously expected, pressure on the government in Athens has eased in recent months.

    But the disagreement over overhauls is also putting off talks on how to reduce the country’s debt load. At the same time, postponing payments to government employees and contractors risks weighing on Greece’s economic recovery.

    Under this summer’s agreement, Athens was meant to implement a full set of overhauls by mid-October. But national elections in September and disagreements over some unpopular and painful measures have held up talks with creditors.

    Key among these is a new set of rules for when banks can foreclose on homeowners who haven’t been paying their mortgages.

    Greece’s left-wing Syriza government wants to protect citizens at risk of losing their primary residence and had initially asked banks not to take possession of homes worth less than €300,000—an amount creditors have deemed too high.

    “It doesn’t make sense to recapitalize the banks if banking rules don’t allow the banks to collect their claims,” said German Finance Minister Wolfgang Schäuble on his way to the meeting. “Nonperforming loans are one of the main causes of problems at the Greek banks.”

    In recent days, Athens has lowered its protection threshold and drawn up strict criteria, such as a family’s annual income, that would limit the number of homes shielded from foreclosure, said officials familiar with the negotiations between Greece and its creditors.

    But the two sides haven’t yet reached common ground on a set of criteria that would guarantee enough protection in the Greek government’s eyes and appease the creditors’ concerns that such measures won’t encourage the nonpayment of debts.

    “We must find the right balance between protection of the situation of the most vulnerable but also the fact that some strategic defaulters could not benefit from these protections,” said Pierre Moscovici, the EU’s economic-affairs chief.

    Still, some backup for Athens came from French Finance Minister Michel Sapin, who said earlier Monday that limits on foreclosures also exist in other eurozone states. “People shouldn’t make demands on Greece for something that goes further than in their own country,” he said.

    “Still, some backup for Athens came from French Finance Minister Michel Sapin, who said earlier Monday that limits on foreclosures also exist in other eurozone states. “People shouldn’t make demands on Greece for something that goes further than in their own country,” he said. ”

    So let’s compare and contrast the statements coming from the eurogroup of finance ministers:

    “There is always room for compromise but I don’t think the ministers would accept rules that are much more favorable for people not paying their mortgages than in any other country,” the official said.

    VS

    “People shouldn’t make demands on Greece for something that goes further than in their own country,”

    At least Greece is getting a mass foreclosure law imposed on it with at least a bit of verbal support along the way (solidarity is complicated in the eurozone).

    And note the argument made by Germany’s finance minister Wolfgang Schaeuble, that the non-performing loans need to be foreclosed on because they’re the main cause of problems at the Greek banks:


    “It doesn’t make sense to recapitalize the banks if banking rules don’t allow the banks to collect their claims,” said German Finance Minister Wolfgang Schäuble on his way to the meeting. “Nonperforming loans are one of the main causes of problems at the Greek banks.”

    And now let’s relate that rationale to that given by eurogroup chief Jeoren Dijsselbloem in the previous excerpt for why the eurogroup’s demands must be met: passing the mass foreclosure the law would have “a direct impact on the number of bad loans that banks would have to deal with through recapitalization”:


    Dijsselbloem said passing the foreclosures law was key before banks could be recapitalized, because it had a direct impact on the number of bad loans that banks would have to deal with through recapitalization.

    And, to some extent, Dijsselbloem and Schaeuble do have a point. The fewer homes that are under foreclosure protection, the more banks will know in terms of how much additional capital they’ll need, and getting those bad loans off the books would indeed help Greece’s banks and broader economy.

    But that’s also assuming that the process of forcing mass foreclosures doesn’t simultaneously tank the economy and cause even more bad loans. It’s a type concern that folks like Dijsselbloem and Schaeuble have been largely unwilling to consider when it comes to the impact of virtually all the austerity measures they have been demanding from one country after another, but when the issue of foreclosure protection came up in Greece two years ago, there was actually one major group that you might not expect to champion such policies that didn’t appear to mind the foreclosure protections. And it was specifically due to fears of what mass foreclosures to do to both Greek banks’ balance sheets and the broader Greek economy. And that group was, of course, the big Greek banks holding all those bad loans:

    The Wall Street Journal
    Greek Banks Win Extension of Foreclosure Ban
    Move Looks To Avoid Potentially Disastrous Asset Revaluation
    By Alkman Granitsas and Matina Stevis
    Updated Dec. 22, 2013 3:43 p.m. ET

    ATHENS—Greek banks got an unusual Christmas gift this year: a freeze on home foreclosures in 2014, legally shielding thousands of homeowners who owe them tens of billions of euros.

    On Saturday, Greece’s Parliament suspended, for one more year, most home repossessions. That will keep some 200,000 families off the streets, and their overdue property loans in a state of suspended animation.

    The new legislation covers only primary residencies valued at up to €200,000 ($273,000) and households with an annual net income of under €35,000. The total worth of a household’s real estate and liquid assets can’t exceed €270,000, while bank deposits, shares and bonds can’t be valued at more than €15,000. According to the Development Ministry, 90% of Greek homeowners are protected.

    Greece’s big four banks— National Bank of Greece, Piraeus Bank, Alpha Bank and Eurobank, who control more than 90% of the market between them—had been pushing for the extension, in a reversal of the way banks normally function. Under normal circumstances, lenders generally want the freedom to seize the collateral of borrowers who have defaulted.

    It is a measure of how deeply troubled Greece’s banking system remains that the industry has lobbied, both in Athens and Brussels, to preserve the moratorium, which began in 2008.

    After a deep, six-year recession, the collapse of a property bubble, panic among depositors and a €200 billion ($275 billion) sovereign-debt restructuring, Greece’s banks are in a world of hurt. This year, they were recapitalized with the help of a European Union loan, but together they still hold some €70 billion in bad loans—a sum equal to a third of Greece’s gross domestic product.

    Some 24% of Greek mortgages, or €17.4 billion worth, are in default, according to Bank of Greece data. Greek real-estate prices are already down a third from their peak. A wave of repossessions, followed by widespread sales of the homes at discounted prices, could push prices down another 10% to 15%, analysts say.

    That would force the banks to mark down the collateral on their remaining property loans that haven’t gone sour, potentially tearing a multibillion-euro hole in their balance sheets.

    “The banks certainly agree with extending the ban and their efforts are aimed at making sure it’s not eliminated,” Paris Matzavras, an analyst at Pantelakis Securities, said prior to the vote. “Extending it is the best case for the banks, rather than a wave of foreclosures that will depress the real-estate market further and weigh on their loan books.”

    The Greek government, the banks and consumer groups all favor a go-slow approach. That would entail cracking down on the 10% to 20% of borrowers who have the means to repay their loans but are choosing not to because of the moratorium, while leaving genuinely troubled borrowers untouched.

    “We have no interest or desire, or the administrative capacity, to turn our banks into real-estate agencies,” said a senior banker at one of Greece’s Big Four lenders.

    Many homeowners also support that approach. Andreas Papadopoulos, who owes money from a messy business bankruptcy and hasn’t worked since 2009, says the foreclosure ban should last for as long as Greece is in recession.

    “I have always been a reliable payer,” said the 60-year-old businessman, who owes €200,000 on a loan that is backed by his house. “But in the last three to four years, there has been no work, no cash, no opportunities. What else is there to take? Only our homes and our dignity.”

    “After the crisis, I will find a job and pay off the loan,” he added.

    In other wobbling euro-zone countries, banks have also been reluctant to recognize the full losses on their loan portfolios. The practice of “extend and pretend,” in which banks repeatedly restructure loan terms to avoid having to recognize costly losses, has been widespread in countries such as Spain. But regulators in those countries have pushed the banks to end what they regard as unrealistic forbearance policies.

    That probably won’t happen in Greece until 2015 at the earliest. Regulators, the banks, the government and the country’s international creditors are all grappling with how to begin restructuring the country’s mountain of bad debt.

    Yes, almost two years this was the argument from Greece’s own banks: mass foreclosures will tank the economy and our balance sheets. Please. Don’t:


    Some 24% of Greek mortgages, or €17.4 billion worth, are in default, according to Bank of Greece data. Greek real-estate prices are already down a third from their peak. A wave of repossessions, followed by widespread sales of the homes at discounted prices, could push prices down another 10% to 15%, analysts say.

    That would force the banks to mark down the collateral on their remaining property loans that haven’t gone sour, potentially tearing a multibillion-euro hole in their balance sheets.

    “The banks certainly agree with extending the ban and their efforts are aimed at making sure it’s not eliminated,” Paris Matzavras, an analyst at Pantelakis Securities, said prior to the vote. “Extending it is the best case for the banks, rather than a wave of foreclosures that will depress the real-estate market further and weigh on their loan books.”

    Hmmm…so either the situation has substantially improved in Greece’s economy over the last couple of years to the point where mass foreclosures won’t have a massively negative impact on the Greek economy and social cohesion or this is just another example of the Troika, well, being the Troika.

    Regardless, it’s looking like Greece’s is probably about to face a wave of foreclosures. And given the urgency of the situation, it’s probably going to be facing that wave soon. Why so urgent? Well, it isn’t just that those big banks need to be recapitalized sooner or later. Thanks to new EU banking union law, if Greece doesn’t resolve this impasse with the Troika before January, any future bank recapitalization schemes will happen after these new laws take effect. And those laws, which impact the entire EU, means a Cyprus-style “bail-in” raiding of Greek bank deposits to help pay for recapitalization will suddenly be required:

    Reuters
    Greece must recapitalize its banks by year end: EU’s Dombrovskis

    ATHENS | By Lefteris Papadimas and Michele Kambas
    Tue Oct 27, 2015 4:39pm EDT

    Greece and international lenders must recapitalize its banks by the end of the year and swiftly finalize an assessment of the country’s bailout-mandated economic reforms, EU Commission Vice-President Valdis Dombrovskis said on Tuesday.

    Unless Greece’s four biggest banks are recapitalized before legislation takes effect in January, depositors will be liable for plugging capital shortfalls, he said.

    “Euro group conclusions on this question are quite clear, that recapitalization of the banks is to take place after the first review, but no later than the 15th of November,” Dombrovskis told Greece’s Skai TV in an interview.

    Dombrovskis – in Athens to discuss the reforms Greece needs to complete under terms of an 86-billion-euro ($95-billion)bailout – said that things would get “more complicated” if that did not happen.

    “Then you need to apply the Bank Resolution and Recovery Directive … which may imply a bail-in,” he said, referring to bank depositors being forced to contribute to recapitalization, similar to a raid on deposits in Cyprus in 2013.

    Greece is talking to the European Commission, the European Central Bank (ECB), the euro zone’s European Stability Mechanism and the International Monetary Fund (IMF) on reforms. But the IMF’s participation in stumping up cash is far from certain.

    “IMF participation also, to a large extent, depends on the debt sustainability analysis and a possible debt reprofiling,” Dombrovskis said.

    Under the deal, Greece is set to receive up to 25 billion euros of international money to recapitalize its banks, three of which are majority-owned by Greece’s bank bailout fund HFSF.

    Disagreements emerged with representatives of lenders in Athens last week over Greece’s reform progress, needed to unlock a sub-tranche of 3 billion euros.

    The biggest disagreement was over the mechanism to tackle non-performing loans at banks. Athens wants protection from foreclosures to cover property values of at least 200,000 euros. Lenders say the threshold should be about 120,000 euros.

    Coming up with an effective mechanism to cope with bad loans is important for Greek banks because of the impact of non-performing loans on capital buffers.

    That’s right, under the EU’s new law, modeled after the Cyprus experience, Greek depositors could end up being “liable for plugging capital shortfalls” in the banks that are on the verge of collapse largely because the Greek economy collapsed. And that eventuality could come about if Greece doesn’t placate the Troika by November 15th:


    Unless Greece’s four biggest banks are recapitalized before legislation takes effect in January, depositors will be liable for plugging capital shortfalls, he said.

    “Euro group conclusions on this question are quite clear, that recapitalization of the banks is to take place after the first review, but no later than the 15th of November,” Dombrovskis told Greece’s Skai TV in an interview.

    Dombrovskis – in Athens to discuss the reforms Greece needs to complete under terms of an 86-billion-euro ($95-billion)bailout – said that things would get “more complicated” if that did not happen.

    “Then you need to apply the Bank Resolution and Recovery Directive … which may imply a bail-in,” he said, referring to bank depositors being forced to contribute to recapitalization, similar to a raid on deposits in Cyprus in 2013.

    So it’s looking like, once again, there’s a busy week of negotiations ahead for Greece and its creditors. And, once again, Greece’s EU brethren are perfectly willing to let Greece know that if it doesn’t rapidly accept the Troika’s potentially highly damaging demands even greater socioeconomic damage will take place instead.

    In other words, a number of major ‘pro-business’ changes are heading towards the EU and especially Greece. And it looks like they’re going to further trash the place. Because it’s business as usual.

    At least France appears to be giving Greece a smattering of public support. Could be worse!

    Posted by Pterrafractyl | November 9, 2015, 9:41 pm
  8. Part of what makes the ongoing Greek Tragedy so tragic is the hellish nature of the situation the Troika has imposed on Greece. Meaningful debt-relief is simultaneously demanded by the IMF and refused by the EU and the one thing the two sides can agree on is that Greece implement the self-reinforcing austerity regime. And there’s no real vision for a future economy that doesn’t involve widespread poverty and insecurity. Just a neoliberal Field of Dreams scenario: if the Troika’s austerity agenda is implemented, Greece will just start prospering under a economic growth will commence. That’s the only plan and it’s a doomed plan which is part of why it’s a hellish situation.

    So, at this point, reduced interest payments on Greece’s debt is the only positive thing being dangled out there for Greece. At the same time, as the article below points out, plans for capping the amount of government debt eurozone banks can hold and eliminating the “zero risk” accounting rules for eurozone government debt are apparently proceeding ahead. And as the article also points out, that means a big sell off in eurozone government debt is probably on the way over the next decade. And that means the weaker countries like Greece could end up paying a lot more in interest as banks are forced to dump government bonds that are suddenly declared riskier and worth less than before. So, to put it another way, Greece had better get at least some significant reductions in debt interest rates just to avoid seeing itself in a new debt-death spiral because the eurozone has found a new way to implement its hellish supply-side revolution across the continent: force the public to pay higher interest on government debt:

    The Wall Street Journal

    Eurozone Could Ease Greek Debt in Future, Not Now, Eurogroup Head Says
    Such action in the future would depend on Athens keeping a primary budget surplus, says Dijsselbloem

    By Gabriele Steinhauser
    Updated Jan. 22, 2016 11:24 a.m. ET

    DAVOS, Switzerland—A planned deal to lighten Greece’s debt burden could see eurozone governments promise to ease peak payments in the future—but take action only once Athens has proven its commitment to running a tight budget, the president of the Eurogroup of finance ministers said.

    The comments, made in an interview on the sidelines of the World Economic Forum here, herald a likely fight in the coming months between Greece’s creditors, the other 18 euro countries and the International Monetary Fund.

    The International Monetary Fund, which financed Greece’s first two bailouts along with the eurozone, has made aggressive action to reduce the country’s debt a precondition for participating in a third rescue agreed last summer. But the currency union’s governments remain reluctant to take immediate steps on Greece’s debt—such as giving it more time to repay eurozone loans or prolonging interest-rate holidays—amid doubts over Athens’ willingness to implement further austerity policies.

    One potential solution to this dilemma is a promise by the eurozone to reduce peaks in Greece’s payment schedule further down the line, said Jeroen Dijsselbloem, the Dutch finance minister who presides over the discussions with his counterparts in the currency union.

    “One (option) is that we simply promise each other. They promise to their European partners to maintain the primary surplus, in other words to run a good budget. And we promise that we stand ready to smooth out these peaks in the future,” Mr. Dijsselbloem said.

    “That would actually be a sensible solution, because the first peak is in 10 or 15 years’ time and it’s very hard to predict how sizable it will be,” he added.

    The magnitude of debt relief will depend on how much Greece’s economy grows in the coming years, Mr. Dijsselbloem said.

    Alternatively, the eurozone could try to calculate now what measures would be necessary and take immediate action to reduce payment peaks, he said.

    Should the eurozone opt for pushing debt relief for Greece into the future it may struggle to get the IMF to get involved in the current bailout. The Washington-based fund says its own rules prevent it from helping the country while its debt is unsustainable. Without relief, Greece’s debt is expected to reach almost 200% of gross domestic product this year.

    Mr. Dijsselbloem said that before eurozone governments and the IMF can start talking about Greece’s debt, the government in Athens must implement a promised overhaul of its pension system and close gaps in its budget.

    Proposals submitted by Greece earlier this month still fall short of creditor demands, Mr. Dijsselbloem said.

    “They’ve put a serious pension reform on the table. It doesn’t add up yet,” he said.

    Apart from the looming talks on Greece’s debt, Mr. Dijsselbloem said he would push for an agreement this year to cap the amount of government bonds eurozone banks are allowed to hold—a move that could lead to a major selloff of these assets in the coming years.

    Once a deal has been found by eurozone finance ministers and the European Parliament, lenders could then be given eight years to cut down their holdings, with the limits to become binding in 2024, he said.

    The question of so-called exposure limits for government bonds has been thrown into the center of a broader tussle within the currency union over the creation of a joint deposit-insurance system for all 19 members.

    Germany and other fiscally hawkish states say curbing banks’ holdings of government bonds—especially those of their home country–is necessary to sever the toxic link between banks and their governments and prevent future bailouts.

    Countries such as Italy and France meanwhile are worried that a unilateral move by Europe to introduce exposure limits could make it harder for some governments to sell their bonds and hurt their economies.

    Under international capital rules, sovereign bonds are considered zero risk, allowing lenders to stash up on them without holding any extra safety buffers. In 2014, the average eurozone bank owned bonds from its home country valued at 118% of total capital—much more than U.S. banks, whose average exposure to U.S. bonds was 14% of equity.

    The selloff of government bonds that would be triggered by caps on exposures could be cushioned by the European Central Bank’s asset purchase program, Mr. Dijsselbloem said.

    “At the moment there is this opportunity,” he said.

    According to a 2014 analysis from Fitch Ratings, major eurozone banks would have to shed around €1.1 trillion ($1.2 trillion) of government bonds if they were required to reduce their holdings to 25% of capital—in line with exposure limits on other assets. If exposure was capped at 50% of capital, the selloff could reach €800 billion.

    Mr. Dijsselbloem said the eurozone would prefer an international rule on the treatment of sovereign bonds on banks’ balance sheets, but, he added, “where we don’t have standards…we will develop them on a regional level.”

    “Should the eurozone opt for pushing debt relief for Greece into the future it may struggle to get the IMF to get involved in the current bailout. The Washington-based fund says its own rules prevent it from helping the country while its debt is unsustainable. Without relief, Greece’s debt is expected to reach almost 200% of gross domestic product this year.”
    That’s the crux of the problem for Greece. High debt and an austerity regime that makes paying it off basically impossible. So the crux of problem is basically usury. And as we saw, as bad as things are for Greece now, the usury schedule isn’t set to peak for another 10 to 15 years and the most the eurozone is offering Greece at this point is a future reduction in interest-rates because they’re concerned any immediate reductions would reduce Greece’s committment to the austerity program:


    The International Monetary Fund, which financed Greece’s first two bailouts along with the eurozone, has made aggressive action to reduce the country’s debt a precondition for participating in a third rescue agreed last summer. But the currency union’s governments remain reluctant to take immediate steps on Greece’s debt—such as giving it more time to repay eurozone loans or prolonging interest-rate holidays—amid doubts over Athens’ willingness to implement further austerity policies.

    One potential solution to this dilemma is a promise by the eurozone to reduce peaks in Greece’s payment schedule further down the line, said Jeroen Dijsselbloem, the Dutch finance minister who presides over the discussions with his counterparts in the currency union.

    “One (option) is that we simply promise each other. They promise to their European partners to maintain the primary surplus, in other words to run a good budget. And we promise that we stand ready to smooth out these peaks in the future,” Mr. Dijsselbloem said.

    “That would actually be a sensible solution, because the first peak is in 10 or 15 years’ time and it’s very hard to predict how sizable it will be,” he added.

    The magnitude of debt relief will depend on how much Greece’s economy grows in the coming years, Mr. Dijsselbloem said.

    “But the currency union’s governments remain reluctant to take immediate steps on Greece’s debt—such as giving it more time to repay eurozone loans or prolonging interest-rate holidays—amid doubts over Athens’ willingness to implement further austerity policies.”
    Yep, the eurozone is taking a “debt-relief only encourages disobedience” approach. And if Greece behaves for the foreseeable future and implements the insane austerity that’s dooming a generation of Greeks to poverty, the Toika will consider cutting interest-rates and/or extending the repayment schedule.

    But even if there’s no escape for Greece, things can obvious get even worse within the the Troikan hell. So let’s hope Greece can at least get the reduced interest-rates set up for when its debt payments peak 10-15 years from now, because it sounds like the new plan to remove the “zero-risk” status of government bonds and cap bank holdings is going to Greece’s public financing, along with the rest of the eurozone’s, a lot more expensive:

    Apart from the looming talks on Greece’s debt, Mr. Dijsselbloem said he would push for an agreement this year to cap the amount of government bonds eurozone banks are allowed to hold—a move that could lead to a major selloff of these assets in the coming years.

    Once a deal has been found by eurozone finance ministers and the European Parliament, lenders could then be given eight years to cut down their holdings, with the limits to become binding in 2024, he said.

    “We will see whether we can get it done,” Mr. Dijsselbloem said.

    The question of so-called exposure limits for government bonds has been thrown into the center of a broader tussle within the currency union over the creation of a joint deposit-insurance system for all 19 members.

    Germany and other fiscally hawkish states say curbing banks’ holdings of government bonds—especially those of their home country–is necessary to sever the toxic link between banks and their governments and prevent future bailouts.

    Countries such as Italy and France meanwhile are worried that a unilateral move by Europe to introduce exposure limits could make it harder for some governments to sell their bonds and hurt their economies.

    Under international capital rules, sovereign bonds are considered zero risk, allowing lenders to stash up on them without holding any extra safety buffers. In 2014, the average eurozone bank owned bonds from its home country valued at 118% of total capital—much more than U.S. banks, whose average exposure to U.S. bonds was 14% of equity.

    The selloff of government bonds that would be triggered by caps on exposures could be cushioned by the European Central Bank’s asset purchase program, Mr. Dijsselbloem said.

    “The selloff of government bonds that would be triggered by caps on exposures could be cushioned by the European Central Bank’s asset purchase program, Mr. Dijsselbloem said.”
    The ECB is going to be mopping up the government bonds sold off by the eurozone banks. At least that’s the plan, and it’s a plan that could involve playing out for a decade or longer. So it will be interesting to see how this plan for capping government bond purchases by banks and removing “zero risk” policies, which are things Jens Weidmann at the Bundesbank has long been clamoring for, impacts the resistance to the ECB’s QE programs, something Berlin has long opposed. Hmmm….how might Jens Weidmann deal with the prospect of accepting an ECB action he’s opposed in order to achieve a government-shrinking policy he’s championed. Well, he might still oppose it

    Reuters

    Weidmann warns ECB not to go too far with government bond purchases

    BERLIN
    Thu Jan 28, 2016 1:04pm EST

    European Central Bank Governing Council member Jens Weidmann warned the ECB in a newspaper interview not to go too far with its bond-buying program as this would have the same effect as buying government bonds directly from issuer countries.

    “If the purchase volume becomes too large, the purchases will have an impact on the secondary market similar to that of direct purchases from the states that are forbidden for us,” Weidmann told Frankfurter Allgemeine Zeitung in an interview due to be published on Friday.

    So it’s looking like the eurozone has a long-term plan to reduce government spending and minimize the “sovereign-banking nexus” by implementing a cap on the amount of government debt banks can hold while simultaneously declaring that debt to be riskier and therefore higher interest. And in order to deal with inevitable sell-off of currently held government debt, the ECB would probably be the chief buyer to cushion the markets. Except this plan relies on the ECB being allowed to carrying out its QE policies for years to come and, of course, Jens Weidmann issued another warning about how the the ECB better now keep buying government bond. And if Weidmann or like-minded eurozone central bankers should manage to derail the ECB’s bond buying over this medium-term time frame, the eurozone debt markets for members like Greece could suddenly get a lot more expensive. And even if things go smoothly, it’s looking like the eurozone has found a new line of attack in its “death by a thousand cuts” war the European public sector.

    It is within this context that Greece is being made an offer of more austerity, no debt-relief, but maybe some lower interest rates. But only in the future and after Greece implements all its mandated austerity. So hopefully Greece manages to find some sort of light at the end of the tunnel in these crucial upcoming debt-relief negotiations, but sometimes the light is just the beginning of the well-lit section of the tunnel where you can finally see writing on the wall…”Lasciate ogne speranza, voi ch’intrate.”

    Posted by Pterrafractyl | February 29, 2016, 12:38 am
  9. Wow. So it turns out the Bundesbank recently requested a bit of a tweak to the eurozone a few weeks ago: The European Stability Mechanism (ESM), the special bailout fund basically run by the eurozone’s Financial Ministers (which means it’s a group the Bundesbank would dominate), should replace the Troika as the financial crisis arbiter for eurozone member states in future crises. The ESM is the new Troika. With enhanced Troika powers because it’s solely calling the shots. Uh oh:

    Bloomberg News

    Bundesbank Proposes Reform of European Crisis Response Mechanism

    Jana Randow

    July 18, 2016 — 5:02 AM CDT

    * ESM suggested as the region’s leading fiscal authority
    * Central bank calls for new bond terms to ease restructuring

    Germany’s Bundesbank proposed reforms to streamline Europe’s response to future fiscal crises.

    The central bank suggests turning the European Stability Mechanism into the region’s leading fiscal authority with competences encompassing those currently carried out by the European Commission and the European Central Bank. It also wants a change in the terms of new government-debt issues to allow easier restructuring and a maturity extension should the country enter an aid program.

    With consensus lacking for a fiscal and political European union, the region’s economic framework must be strengthened within existing treaties, the Bundesbank said in its monthly bulletin on Monday. “Further reforms should aim at anchoring a stability-oriented fiscal policy in member states, limiting systemic contagion effects as much as possible and strengthening financial stability overall.”

    ESM Role

    The Frankfurt-based central bank suggested that the ESM, whose competences are currently largely limited to issuing debt to finance loans to euro-area member states, could take the lead in assessing economic prospects, debt sustainability and financial needs of a country asking for a bailout. Those tasks have so far rested with the so-called troika of European Commission, ECB and International Monetary Fund. The ESM would also oversee any aid program and negotiate between the government and creditors if a restructuring is unavoidable.

    The Bundesbank also suggested terms for newly issued bonds that would automatically extend their maturities for the duration of an assistance program without triggering a credit event.

    Such a change would make it easier to determine whether a country suffers from a short-term liquidity squeeze or a more fundamental debt-sustainability problem, while maintaining the liabilities of investors. At the same time, the firepower of the ESM would be increased — bailout programs could be smaller in size as aid wouldn’t be used to repay maturing debt.
    Faster Restructuring

    A one-step majority requirement for collective-action clauses could be another beneficial change, according to the Bundesbank. If a qualified majority of creditors can agree to a binding cross-maturity debt restructuring, it would speed up the process, neutralize incentives for holdouts and reduce the benefits of acquiring blocking minorities, it said.

    The Bundesbank reform proposal “doesn’t present an immediate or simple solution for problems related to partly still very high sovereign indebtedness of member states, and difficulties with a potential restructuring would only be reduced step by step in the interim period,” the central bank said. “Governments have to use the time to implement the agreed consolidation measures and make their finances more crisis resistant.”

    “The Frankfurt-based central bank suggested that the ESM, whose competences are currently largely limited to issuing debt to finance loans to euro-area member states, could take the lead in assessing economic prospects, debt sustainability and financial needs of a country asking for a bailout. Those tasks have so far rested with the so-called troika of European Commission, ECB and International Monetary Fund. The ESM would also oversee any aid program and negotiate between the government and creditors if a restructuring is unavoidable.

    That’s right, the Bundesbank wants constitution control of the purse-strings in the event of a member state financial crisis. What happens during a eurozone-wide crisis isn’t clear but it’s probably not super great. So a month after the Brexit, the Bundesbank just asked for the powers to take Troikan power. OMFG.

    Also:


    A one-step majority requirement for collective-action clauses could be another beneficial change, according to the Bundesbank. If a qualified majority of creditors can agree to a binding cross-maturity debt restructuring, it would speed up the process, neutralize incentives for holdouts and reduce the benefits of acquiring blocking minorities, it said.

    That sounds scary.

    What’s next? How about Bundesbank chief Jens Weidmann whining about tweaking the QE:

    Reuters

    Possibilities to adjust QE but must not alter design-ECB’s Weidmann

    Thu Aug 4, 2016 2:51am EDT

    Aug 4 There are possibilities to adjust the European Central Bank’s quantitative easing (QE) programme, but it is important not to alter the design, Bundesbank President Jens Weidmann said in an interview published on Thursday.

    “With a view to the programme, there are adjustment possibilities. But from my point of view we must be very careful with the configuration,” Weidmann told weekly Die Zeit.

    The ECB currently buys bonds weighted to each country’s contribution to the central bank’s capital. Germany is currently the biggest beneficiary therefore, but changes would potentially allow other countries to benefit.

    Weidmann said an increase in buying bonds from countries with particularly high indebtedness or bad credit ratings would distance the ECB further from its core mandate.

    “If we grant individual countries special conditions or concentrate increasingly on highly-indebted countries than we will blur the lines between monetary policy and fiscal policy somewhat further,” he told the paper.

    “This can lead to the independence of the central bank being called into question, which is, however, the basis for stability-orientated monetary policy,” he said.

    He added this could increase the pressure in the end to keep interest rates lower for longer than is necessary with a view to prices if highly indebted states could not withstand a rate rise.

    “If we grant individual countries special conditions or concentrate increasingly on highly-indebted countries than we will blur the lines between monetary policy and fiscal policy somewhat further”

    Yes, beware the horrors of the ECB distancing from it’s mandate and blurring the lines between monetary policy and fiscal policy somewhat further by concentrating the QE program on the crisis-ridden countries instead of the current even distribution (that currently benefits Germany the most). But it’s totally a great idea if the ESM gets to become the sole Troika entity in future crises. No pesky Troikan politics to get in the way of raw Ordoliberal malpractice like what the Bundesbank normally advises in a crisis. That’s great. But don’t tweak the QE too much.

    The Troika just because the lesser of two evils. That happened. Wow.

    Posted by Pterrafractyl | August 5, 2016, 10:09 pm
  10. The EU’s banking watchdog, the European Banking Authority (EBA), weighed in on how the eurozone should deal with the mountain of non-performing loans (NPLs) that continue to weigh down the crisis-hit eurozone economies: the EBA called for a a eurozone ‘bad bank’, a publicly-funded entity set up to clean up overwhelmed financial sectors in nations where the situation has never gotten good enough to facilitate an offloading of a massive pile of crisis-era bad loans still on the books.

    The proposed ‘bad bank’ would buy non-performing loans and attempt to sell them for a period, taking a hit if it eventually can’t find a buyer. It’s basically a financial system bailout mechanism for the eurozone. And here’s the provision required to make it a proposal that might get Berlin’s support: the burden of the cost for buying up these NPLs is explicitly not shared across between nations under the proposal. That’s what can potentially get the austerity-bloc on board. Avoiding turning the eurozone into a transfer union where the wealthy nations subsidize the poor – which is likely necessary – is a key goal of Berlin and other pro-austerity capitals. Each eurozone national central bank will finance its own national program to buy non-performing loans (while everyone ignores how many non-performing loans were due to austerity imposed to pay back foreign creditors).

    Keep in mind that the proposal’s non-intra-eurozone-burden-sharing design does nothing to break the potential private bank/sovereign borrowing death spiral that a financial crisis in smaller or weaker member states are especially vulnerable to in the eurozone (in large part a consequence of not having independent banks), but the design does pass political muster. At least that’s what it’s designed to do:

    Reuters

    EU watchdog calls for EU bad bank to tackle soured loans

    By Francesco Guarascio and Huw Jones | LUXEMBOURG/LONDON
    Mon Jan 30, 2017 | 10:43am EST

    The European Union should create a publicly-funded asset management company to scoop up some of a trillion euro mountain of bad loans that has become a brake on economic growth, the bloc’s banking watchdog said on Monday.

    A decade since the start of a financial crisis that forced taxpayers to bail out lenders, the European Banking Authority (EBA) said dealing with so-called non-performing loans or NPLs was “urgent and actionable”.

    Italian banks account for 276 billion euros ($295 billion) of the bloc’s bad loans, by far the largest of any EU banking sector, but 10 EU states have an average bad loan ratio of 10 percent, well above the low single-digit figures seen in the United States and elsewhere.

    In a speech in Luxembourg on Monday, EBA Chairman Andrea Enria sketched out how banks could sell some of their bad loans to a new, pan-EU “asset management company” or AMC.

    So far, the sale of NPLs has been hampered by the lack of a proper market for bad loans, which has resulted in too low prices for NPLs, discouraging banks from offloading them.

    Under the plan, loans would be priced at “real economic value” – an assessed rather than a market price – and the AMC, a concept similar to a “bad bank”, would have about three years to sell on the loans at that real economic value.

    “If that value is not achieved, the bank must take the full market price hit,” Enria said, adding EU rules on bank resolutions, known as bail-in rules, would apply if state aid was required to recapitalize ailing banks, hitting their creditors.

    PUBLIC SUPPORT

    Support from the public sector would, however, be needed to launch the bad bank and who would pay is not clear yet.

    “Some sort of state intervention to help start this process is useful,” Enria said, urging the deployment of public resources to create an efficient secondary market for NPLs that could attract private capital.

    Klaus Regling, who heads the European Stability Mechanism, the euro zone’s bailout fund, welcomed Enria’s proposal and confirmed state support would be required.

    Regling said the new entity should have a target of acquiring up to 250 billion euros of NPLs from EU banks.

    The EBA’s plan does not envisage the sharing of bank risks among EU states, Enria and Regling said, because if bad loans were not sold and recapitalization were needed, the bill would be footed only by the bank’s creditors and the home state of the lender.

    Germany, the EU’s largest economy, has long opposed plans to share bank risks, fearing its taxpayers would end up paying for bank rescues in other countries.

    The EBA’s plan would complement European Central Bank pressure on euro zone banks to sell their NPLs and a European Commission proposal to amend national insolvency regimes.

    While the ratio of bad loans to total loans fell slightly in the third quarter of last year to 5.4 percent, EU banks were still slower than their U.S. rivals in tackling soured loans.

    “The EBA’s plan does not envisage the sharing of bank risks among EU states, Enria and Regling said, because if bad loans were not sold and recapitalization were needed, the bill would be footed only by the bank’s creditors and the home state of the lender.”

    A nationally-funded, no-burden-sharing eurozone program to deal with a heap a non-performing loans. That’s what the EU’s banking watchdog said is needing to address the ongoing non-performing loans problem in countries like Greece or Ireland. And while the ‘bad bank’ plan may not be optimally designed from an economic standpoint due to a lack of burden-sharing, it’s clearly got a political formula that could work and get Berlin’s approval due to a lack of burden-sharing. Or not:

    Reuters

    Germany throws cold water on EU ‘bad bank’ plan to tackle soured loans

    Tue Jan 31, 2017 | 11:17am EST

    Germany sees no benefit in setting up a European ‘bad bank’ to help ailing lenders in some EU countries to offload their soured loans, a German government official said on Tuesday, pouring cold water on a plan prepared by the EU banking agency.

    The chairman of the European Banking Authority (EBA), Andrea Enria, proposed on Monday to create a publicly-funded asset management company to scoop up some of a trillion-euro-mountain of non-performing loans (NPLs). The NPLs have become a brake on the euro zone’s economic growth.

    The plan was quickly welcomed by Klaus Regling, the head of the euro zone bailout fund, the European Stability Mechanism, as a way to address woes that have contributed to lower euro zone bank lending to companies and householders since the financial crisis that hit Europe a decade ago.

    But Germany, the bloc’s largest economy, did not share that view.

    “It is not clear what the added value of a European bad bank would be,” a German government source told Reuters, adding that NPLs are a problem “only in certain countries”.

    Berlin has been traditionally reluctant to back projects intended to share economic and financial risks among euro zone nations, fearing they could result in high costs for German taxpayers.

    More than one-quarter of all EU NPLs are stuck in Italian banks, while in Greece and Cyprus NPLs account for nearly half of all banking loans. Portuguese and Slovenian lenders are also saddled with almost 20 percent of soured loans.

    But in Germany, only 2.6 percent of loans are considered to be at risk of not being repaid, according to EBA figures.

    Enria’s plan is meant to speed up the sale of bad loans by creating a more efficient secondary market where a publicly-funded bad bank, or asset management company, would buy the loans at higher prices than their market value and try to sell them for a limited period, like three years.

    Under the plan, if NPLs were not sold in the foreseen period, banks would need to write them off, and the resulting losses would hit creditors and taxpayers of the bank’s home country in the case of public intervention.

    “It is not clear what the added value of a European bad bank would be,” a German government source told Reuters, adding that NPLs are a problem “only in certain countries”.

    Yes, despite the fact that the proposed ‘bad bank’ wasn’t going to involve intra-eurozone burden-sharing, Germany’s government source shot down the idea a ‘bad bank’ anyway by making the point that only some nations have a problem with non-performing loans. That appears to be the argument.


    But Germany, the bloc’s largest economy, did not share that view.

    “It is not clear what the added value of a European bad bank would be,” a German government source told Reuters, adding that NPLs are a problem “only in certain countries”.

    Berlin has been traditionally reluctant to back projects intended to share economic and financial risks among euro zone nations, fearing they could result in high costs for German taxpayers.

    More than one-quarter of all EU NPLs are stuck in Italian banks, while in Greece and Cyprus NPLs account for nearly half of all banking loans. Portuguese and Slovenian lenders are also saddled with almost 20 percent of soured loans.

    But in Germany, only 2.6 percent of loans are considered to be at risk of not being repaid, according to EBA figures.

    Greece, Cyprus, Italy, Portugal, and Slovenia. Those are the nations with a non-performing loan crisis that just got written off as a triviality. It’s a reminder that the eurozone isn’t just a giant experiment in currency sharing. It’s more specifically an experiment in currency sharing with no burden sharing. And tha means no ‘bad bank’, even a ‘bad bank’ that doesn’t involved burden sharing.
    So as we saw, that ‘bad bank’ idea was floated by the EU’s banking watchdog and immediately shot down by Berlin at the end of January. And then ECB floated the same idea a few days later:

    Reuters

    ECB calls for national bad banks to soak up unpaid loans

    Fri Feb 3, 2017 | 2:50pm GMT

    The European Central Bank’s Vice President called on Friday for the creation of government-backed bad banks to help buy some of the 1 trillion euros in unpaid loans that have weighed on euro zone banks since the financial crisis.

    With lenders in Italy and other weaker economies struggling to find buyers for their bad credit, Vitor Constancio called for a European Union “blueprint” for creating asset-management companies (AMC) compliant with EU rules against bailouts.

    Less than a week ago, Germany shot down a proposal by the European Banking Authority to create an EU-wide bad bank on the grounds that bad loans are concentrated in just a few countries, such as Italy, Cyprus and Portugal.

    “A true European AMC, however, faces difficulties in the present environment,” Constancio said at an event in Brussels.

    “In more immediate terms, a way forward could be the creation of a European blueprint for AMCs to be used at national level,” he added, calling for a “flexible approach” to European rules.

    The ECB has been ratcheting up the pressure on banks to offload their soured credit, which it says ties up capital and curbs fresh lending.

    But the market for European bank loans has not taken off, with transactions totalling 200 billion euros ($215 billion) in the last three years even after including exposures that are being repaid.

    Constancio said there was scope for national governments to step in and fire up that market by injecting capital into banks, guaranteeing securities backed by the non-performing loans (NPLs) — as Italy is doing — or even buying some of them.

    “Securitisation offers another way through which governments may jump-start the NPL market, for example by co-investing, together with private investors, in junior or mezzanine tranches,” he said.

    “As with AMCs, of course, such investment would need to be compliant with state aid requirements.”

    “With lenders in Italy and other weaker economies struggling to find buyers for their bad credit, Vitor Constancio called for a European Union “blueprint” for creating asset-management companies (AMC) compliant with EU rules against bailouts.”

    It looks like the ECB called for pretty much what the EU’s banking watchdog called for, except with more “flexibility”, presumably in the hopes that there’s some sort of quirky ‘bad bank’ set up that Berlin will agree to (not likely).

    And while there’s no indication that Berlin is going to be interested in a ‘bad bank’ proposal any time soon, it’s worth noting that the ratings agency Fitch weighted in on the idea and pointed to three problems with the EU watchdog’s non-burden-sharing ‘bad banks’ proposal: 1. First, EU rules don’t allow it (no burden sharing). 2. Second, German opposition won’t allow it. And 3. the the non-burden-sharing ‘bad bank’ proposals are also going to potentially make weaken the credit ratings of the weakest eurozone members after the public takes on all that non-performing loan debt.

    So that’s something else to keep in mind as the eurozone wrestles with setting up a eurozone ‘bad bank’ to deal with present and future debt crises: whether or not the ‘bad bank’ proposal is a good way to deal with something like a non-performing loan crisis, the non-burden-sharing version of the ‘bad bank’ is probably a bad idea:

    Financial Times
    myFT

    The problem with an EU-wide ‘bad bank’ – Fitch

    by: Mehreen Khan
    February 15, 2017

    Senior European officials have recently raised the prospect of an EU-wide “bad bank” as a comprehensive way to clear a financial system strangulated by bad loans.

    Voices such as the head of the European Banking Authority, the vice president of the European Central Bank and the head of the eurozone’s bailout fund have all publicly raised the prospect of creating a bank that would help wipe lenders’ of their non-performing loans.

    A bad bank would buy up billions of euros of toxic loans from national lenders, aiming to break a vicious circle of falling profits, squeezed lending and weak economic growth.

    But rating agency Fitch has waded in on the debate over creating “asset management companies” as they are known, warning of a plethora of legal and political hurdles encountered by a potential EU-wide scheme.

    One of the biggest problems will be navigating the EU’s legal framework on bailouts and state aid, which prohibit taxpayer money being used to offset losses at failing banks.

    Analysts at Fitch admit that hiving off non-performing loans into a bad bad would be “positive for banking systems in countries with large volumes of non-performing loans (NPLs), helping banks to clean up balance sheets and reducing earnings volatility”.

    Europe’s NPL problem is most acute in its low-growth economies. In Greece and Cyprus, around a half of all loans are non-performing, accounting for a third of all banking sector assets. Italy meanwhile accounts for a quarter of the bloc’s total bad loans at €276bn – the highest ratio of failing assets of any major economy in the single currency area.

    Fitch also pointed to likely German opposition to pooling EU-wide taxpayer funds to help out banks across the eurozone. Berlin has also dismissed any suggestions of eurozone-wide deposit insurance until it has more robust safeguards that its taxpayers will not be footing the bill for weak European banks in the southern member states.

    Looking forward, Alan Adkins, group credit officer at Fitch, said European governments were more likely to set up “blueprint” bad banks at a national, rather than EU wide level.

    “Depending on its size and nature, state support could increase pressure on some sovereigns’ finances, especially if it causes official debt statistics to worsen”, said Mr Adkins.

    “Analysts at Fitch admit that hiving off non-performing loans into a bad bad would be “positive for banking systems in countries with large volumes of non-performing loans (NPLs), helping banks to clean up balance sheets and reducing earnings volatility”.”

    As Fitch points out, a ‘bad bank’ would of course help clean up overwhelmed financial sectors. But when it’s national ‘bad banks’ and not one big shared ‘bad bank’ you just might end up seeing member states facing a sovereign debt-crisis of their own. Which, you’ll recall, is what happened to Ireland after it bailed out the creditors of its biggest private bank.

    So that non-burden-sharing ‘bad bank’ proposal designed to get around German objections that Germany still shot down suggests another stress in store for the eurozone’s austerity-hit nations as the shared currency continues its evolution/devolution journey: there’s a good chance there’s not going to be a ‘bad bank’ for the eurozone. At all. At least not for the current non-performing loan crisis. Those nations like Cyprus or Slovenia or Portugal will have to figure out a different way to address the non-performing loans issue.

    Or maybe there will eventually be a eurozone ‘bad bank’ program set up. But even then it’s probably going to be a bunch of separate national ‘bad banks’ instead of one shared bad bank where the wealthy and poorer states pool their resources and share the costs. And without that burden-sharing the cleaning up those non-performing loans in the crisis-hit nations just might trigger a sovereign debt crisis. Or at least lead to a spike in borrowing costs and don’t expect any sympathy from the ECB when that borrowing cost spike happens. Because that’s how the eurozone rolls when it comes to burden-sharing: the options are harmful help or no help at all and it’s not clear which is worse.

    Posted by Pterrafractyl | February 26, 2017, 10:51 pm

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