In the last few weeks two developments – related to key issues for the health of the global economy – have been unfolding. The first deals with European banks, and the second with the trajectory of oil prices. Last month two major Spanish banks (Santander and Intensa Sanpaolo) were allowed to buy out failing rivals for €1. Shareholders were wiped out and junior bondholders lost their investments, while senior bondholders and depositors were protected. Of course, such arrangements contradicted the resolution arrangement agreed upon almost two years ago, in which the EU authorities showed some determination to avoid bailouts at taxpayers’ expense. The theatrics of the EU played out again last weekend, when EU authorities allowed the Italian government to bail out two failing banks (Veneto Banca and Banca Popolare di Vicenza) by injecting €17 billion into them.
The abolition of the rules may bring into question the institutional authority which the EU was hoping to establish as a serious endeavor where rules simply rule, ignoring the politics and the mentality of advancing regional clientele’s vested interests by violating the rules of meritocracy and thus undermining growth prospects. We have been arguing for years that the EU’s banking sector is facing serious problems (non-performing loans/NPLs, overvalued assets, collateral holes, derivatives exposure, and so on) that could eventually lead to a global financial implosion, especially when combined with Chinese financial tremors due to a debt hangover and inability to meet obligations.
The graphs below show a fraction of the NPLs in Italy and Spain. The size of the NPLs as well as the magnitude of their share as a percentage of total loans is also reflected in the ECB’s latest announcement on Monday that the extraordinary accommodative and expansionary monetary policy will continue.
John E. Charalambakis is the Managing Director of the BlackSummit Financial Group.