Deleveraging: There never was another choice
Ilargi: I’m under the impression that it’s not all that difficult to see what goes on and why in the financial world these days. Everyone simply keeps talking about what Germany should do, and about eurobonds etc., but a relatively concise overview of a few numbers should be adequate to point out that none of that “solution” talk is based on too much realism.
That’s not to say that it’s impossible that Germany would succumb to the growing pressure to “act”, just that even it it did, not one underlying issue would be solved. Instead, it would mean that the Germans would take the huge risk of taking on enormous losses incurred by other countries and their banks.
Germans may have enjoyed their spot in the safe haven limelight a bit too much to see the mote in their own eyes, but that should not mean they must keep on doing so. All’s not well in Berlin either.
20 European Banks That Are Desperate For A Solution to The Euro Crisis
by Simone Foxman - Business Insider
We took a list of the largest European banks by assets and compared their market cap, common equity, and total exposure to PIIGS debt (thank you for the bank statistics, EBA!). Then we calculated exposure to PIIGS debt (sovereign and private) as a percentage of the banks' common equity. (Notice that HSBC, ING, and even Societe Generale are all absent from this list.)
So far our track record is pretty good--we predicted that Dexia was the most vulnerable bank outside of the PIIGS back in July. If the eurozone crisis continues to escalate, we will see more and more banks bow to the pressure of exposure and become unable to borrow money.
The worst 20 cutoff for our test ended up being exposure equal to about 175% of common equity, but it really gets out of control once you get to the PIIGS banks (#1-9). But Dexia's fall suggests that bank vulnerability is already seeping beyond the periphery into the core (#10-20).
**7 - Bank of Ireland (Ireland)
* PIIGS Exposure as % of Common Equity: 1,385% **
6 - BBVA (Spain)
* PIIGS Exposure as % of Common Equity: 1,566%
5 - EFG Eurobank Ergasias (Greece)
* PIIGS Exposure as % of Common Equity: 1,601%
4 - Intesa Sanpaolo Group (Italy)
* PIIGS Exposure as % of Common Equity: 1,638%
3 - Banco Popular Español (Spain)
* PIIGS Exposure as % of Common Equity: 1,927%
2 - Banca MPS (Italy)
* PIIGS Exposure as % of Common Equity: 4,666%
1 - Allied Irish Banks (Ireland)
* PIIGS Exposure as % of Common Equity: 33,352% **
Ilargi: See the full article for exact amounts. I added them up, and these 20 banks alone (No Société Générale, no HSBC yet) have $3916 billion in exposure, almost $4 trillion. Now we all know that the latest Greek bailout talks included the provision for 50% in writedowns, with the specific note that only Greece could do this.
These are amounts too vast for Germany to insure. It would be madness to do so. Many of these banks will soon come knocking for bailouts. Many of the countries too. Just watch their bond yields go up.
As an increasing number of countries gets de facto locked out of credit markets (no country that has to pay 7% -or even close to it- on 10-year debt can do that for long), so are their banks. European banks try to get rid of trillions of euros worth of “assets”, but can’t find buyers.
There is more.