Italian banks are trading at enormous discounts to book value.
That implies you believe the book values of Italian banks fully factors in nonperforming loans.
I don’t and neither does reader “Lars” from Europe who pinged me with these thoughts.
We get new Target2 numbers on Monday. Apart from you, nobody seems to be interested in these numbers. Draghi is using a central bank settlement system to finance European banks to the tune of €820 billion, and nobody seems to care. I tried to alert Richard Duncan to the fact that he had forgotten to include Target2 in his numbers, to no avail.
I suspect that Draghi is hoping that the €80 billion monthly QE will help to reduce the Target2 imbalance. Target2 is a financing method used by Draghi to circumvent the democratic process and given the minimal attention Target2 has gotten he has succeeded. But in reality this is sophisticated fraud. Draghi will also resume LTRO, an indication that € banks have funding problems.
The Italian central bank has under Target2 borrowed €250 billion, mainly from Bundesbank. The loan is unsecured, not a single € in collateral. The 250 billion is then lent to Italian banks, all of them insolvent.
Unicredit, the no 1 bank, has book equity end 2015 of €50 billion. The share price was €3.37 yesterday and with 5.979 billion shares outstanding the market value (market cap) of the equity is € 20.192 billion. Monte Dei Paschi has book equity of €9.5 billion and a market cap of € 2.07 billion.
So , based on the free price discovery mechanism, the market´s (smart money) verdict is that Unicredit´s equity is not worth 50 but 20 billion.
All the major Italian banks are in the same situation.
So if one combines the fact that all Italian banks trade at a deep discount to book value (price/book around 0.4 for Unicredit and 0.22 for Monte) , the fact that NPLs are record high and the fact that the banks funding take place through ECBs backdoor, we seem to have a problem.
Mainstream media is not interested in numbers and facts. But that´s not important because the smart money has given its verdict and the only question is how long Draghi can keep his show on the road.
I will post a Target2 update on Monday or Tuesday.
For new readers who do not understand what Target2 is all about please see …
- Discussion of Target2 and the ELA (Emergency Liquidity Assistance) program; Reader From Europe Asks “Can You Please Explain Target2?”
- Capital Flight Intensifies in Italy and Spain; Curiously, Money Flows Into French Banks
Mike “Mish” Shedlock
Western Europeans are delusional.
Eastern Europeans are paranoid.
Russians live on a different planet.
One has to wonder how the end of Euro project will end.
The ECB is just another Central Bank that now finds itself “trapped”, as a result of their serial policy errors.
Currency destruction awaits – and the Germans can sense it – which is why they have suddenly become so vocal in their displeasure with Draghi.
Pingback: Is the ECB Bailing Out Italian Banks Thru The Backdoor Of Target2 ? | David Stockman's Contra Corner
So the bank just took €250 billion in purchasing power from European shoppers, and redistributed it to bankers. Bank oppression of the people continues.
So Italian bank shares are under priced? Time to buy?
This is the current investment strategy. Look for assets of little or no “real” value and then buy and wait for central banks to inject cash. It has worked beautifully before for those with full and absolute confidence in the existing corruption and desperation…..and it’s likely a good bet again…sadly.
Buy the dip with confidence.
Luca Ravioli said:
Would it be better to claim the current speculation strategy?
When you say this have you differentiated between buying banks who’s country’s central bank has the fiat power and those that don’t like the European Union’s banks?
Luca Ravioli said:
Certainly some thing to think about! One might learn some thing. Is it buying low or to high due to ignorance of the situation. What is the history of such things before and in other countries?
Before I learned some accounting and after the 2000 bust I used to ask people this question. If you buy a stock and it later plummets, when was the money lost? When you bought it, some time in between, at the plummet, or an other time?
The evolution of Mario Brothers Games:
Mario World, Mario Cart, Mario Banking, Mario Civil Unrest.
Ron J said:
“Mainstream media is not interested in numbers and facts.”
Of coarse not. They weren’t interested in the stock and housing bubble numbers and facts until after they burst.
In 2001, 10,000 appraisers petitioned the government about appraisal fraud. Never heard a word of it until i read it from Denninger- after the housing bubble had burst. Still have never heard about it from the mainstream media.
Ron J said:
“All the major Italian banks are in the same situation.”
What is the truth about the global banking system? The G20 changed the rules for depositors in November 2014. Who is in the G20? The United States, for one. Why did the U.S. government change the rules for depositors? Not just for the fun of it. The U.S. bankruptcy law was changed in 2005, not long before the housing bubble burst. The bankruptcy law wasn’t changed just for the fun of it. They knew what was coming, thus the G20 knows what is coming. It isn’t just Italy. It isn’t just Europe. It is global.
Why worry about the EEC when we have our very own Italy. Bond default tomorrow.
Ron J said:
“Is the ECB Bailing Out Italian Banks on the Sly?”
What happened to bail-ins? That is supposed to be the rule now, isn’t it- even in Italy? Italy seems to be balking at following through on that, now.
Luca Ravioli said:
One of the first printed books in Italy was on double entry bookkeeping from Venice which had trade contact with India. Perhaps more of them are good at it than the rest?
Luca Pacioli’s accounting text was the last chapter of a math book including Hindu base ten number system.
Bahi-Khata: The Pre-Pacioli Indian Double-entry System of Bookkeeping B. M. LALL NIGAM
I wonder when this New Normal will come to its inevitable end? When they have pumped 100 trillion into the system? More?
The ripple effects have not reached the shores yet but when they will it will be in the form of a tsunami.
Wonder how normal people should prepare for the financial Armageddon? Store food? Carry cash money? What?
Our logistics are so vulnerable with everything else that when the financial collapse will occur a plot of land becomes invaluable. People in the big cities will be the first to suffer and hardest hit.
Personally I hope it wouldn’t get that far but I’m not sure my wishes are granted.
An interesting question .
Target 2 merely records the transfer of credit and debt between central banks on behalf of their customers , transfers that therefore take place under the auspice of national central banks and the ECB . Looked on that way it presents itself as national central banks simply keeping a ledger between themselves of transfers of common currency / debt between themselves , with the ECB acting as the registrar or accountant that formalizes or records the existing balance .
It is not that simple however , as currency transfers between countries demands the placing of collateral by the debtor , if not to back the actual debt (which tends to be the jurisdiction of the national central bank over the local bank as far as I know) then to refinance the outflow of currency . This means that the standards have to be dropped to suit the debtor countries if the creditor countries wish to be repaid (instead of dealing with collecting debt from foreign bankrupt borrowers) . That creates a mutual interest by both sides to head into a trap of sorts – it sounds contradictory , but isn’t while the fate of the two countries are tied to a common currency and its shared accountability .
So where does the slyness come in ?
Firstly let us look at what backs the meaning of Fiat currency , namely sovereign debt , your AAA security that is reference to all else , your source of eternal revenue , courtesy of the tax cow and ever generous narcissistic state and its ‘well meaning’ coercion… force. Your social contract in other words , for those with a progressive mindset.
In the case of the Euro , a common currency , the will , the ‘fiscal endeavours’ , of two or more countries are involved in creating the ‘meaning’ or value of that currency .
These countries sit together at the board of the ECB and decide its policy TOGETHER , according to their founding agreement . That means that Germany at minimum ACCEPTS at each moment the policy decisions of the ECB which it fully participates in . If it did not it would exit , ‘no exit ‘ would become ‘ a previous government had not the right to commit our nation to a foreign enterprise to infinity’ , and it would call in its hand .
However this has not happened (yet) , all countries have at least ACCEPTED the policy decisions of the ECB with regards to collateral , OMT , refinancing . They have implicitly ACCEPTED the TARGET2 payment imbalance , and get no further than to use them as a political tool to try to manage other countries fiscal, economic, financial and political affairs .
Do you imagine exactly how ‘dark’ or vicious this may be ?
Let me explain . We are talking the gradual annulment of sovereignty of nations that have established themselves over centuries if not millennia, the manipulation and the control of the national political and social reigns .
There is a sort of feedback loop that amplifies power to the hands of the creditors , who in a commercialized European economy tend to be Northern producers . They supply the goods , they then supply the private credit , they then hold the debtors , eventually the sovereign ,to the mercy of repayment . They find every reason to accept ALL the collateral , to keep the circuit flowing , the ECB being the guarantor ‘kindly’ buys up the sovereign debt and its leverage at a premium price organized by lower rates .
It is this organization as a whole which is sly , I do not buy the idea that the German state is hard done by at all , that is propaganda only .
So while countries are beating each other into a common state , and the prudent public wonder why their state debt and taxes keep increasing or the value of their savings keep decreasing , and the non-prudent have their eye out for wherever the next windfall may be , and so on , the PTB are building an empire of centralized debt that no country will feel that it is worth trying to escape from . The creditors buy it for their future position of influence , the debtors buy it because they want to be like the creditors .
There ‘has to be’ a limit to this credit line (financed by lower rates and central bank purchases) . It is a political decision … those in power think it is only a political decision that they control … and the ‘higher’ central aim is the introduction of a common fiscal policy and sovereign issuance , which in effect would be a central EU government . There is absolutely no way that this project can be denied , it is not openly advertised as in process , but it is clearly stated from the beginning as the prime objective and all that has gone on since reinforces that perspective .
And so the mutual financial risk which de facto exists due to the common currency and ECB management, which is reflected in Target 2 will most likely be attempted to be morphed into a centralized mutual issuance of sovereign debt that is combined with a harmonized fiscal policy to justify the equal weighting . The creditors will go along so as not to be defaulted on , the debtors so as to maintain their own access to borrowing …. the politicians are already in on the idea obviously and are there to sell it.
Already different ideas have been suggested , from Eurobonds through to a central portfolio of national assets and revenues that would be redistributed to palliate the Target imbalances , along the lines of the US Interdistrict Settlement Account – a pooling of fiscal activity .
… I said BUT , and the reason for that is that the whole of EU has to fit itself in . The only way for that to happen , given the diversity of opinion amongst the public and their nations , is for a perpetual crisis to roll around the continent taking down all political obstacles as they appear , in the hope that at some point there will be a consensus , or there has to be a major crisis which makes EU look like the only place to turn to . This is why I am opposed to the Euro and its influence , its direction is poorly conceived , its end illusive ,it is destructive in its attempts and leans towards an oppressive political scenario , and that is even ignoring the economic consequences of continent wide synchronized manipulated rates . The fact that rule after rule is being broken is evidence enough of the project either being untenable , improvised , or corrupt .
Crysangle, please note that there is no collateral requirement between central banks in the Eurozone. But when the NCB lend to a local bank collateral is required.
Also, the Target 2 imbalance has been created between NCBs without any democratic process.So its wrong to say that “countries” have approved of this arrangement. This is an arrangement that has been decided in the ECB boardroom and far away from any parliament.
The reality of the matter is that Germany is exporting products to many of the Eurozone countries with a sellers credit provided by German taxpayers to the tune of € 600 bn.
On the first point I agree, Target2 is the ‘collateral’ between central banks, it is the ‘imaginary’ credit/debit account that ultimately is backed by no more than the adherance to the accounting principle and monetary union. The central banks and the ECB collectively decide on collateral ellegibility for NCB refinancing and hence new credit/liquidity into the market. This implies one NCB accepts the collateral that another NCB takes on . Same goes with the ECB balance sheet, where refinancing or OMT are liquidity measures where the collateral accepted becomes a common Euro liability in event of non payment.
I do not say countries have decided, the lack of public accountability in any given country is a matter for that country and that country alone. The national procedure that was used to sign adherence to the Euro, ECB, Target2 etc. remains the responsibility of that country. If people in a country do not agree with the legislative or procedural method that their country used to sign that adherence they must challenge the infringement in national law. It can be done. So in effect leaders have signed on behalf of their countries – did they have authority to, were the public properly informed, did they participate in positively accepting this framework.
To another country, or some international floating organisation such as the ECB, the signature of a countries leader counts until it is withdrawn. That means Germans are liable for the signature of the German leader when viewed from outside… for the rest they do not really know or maybe even care.
The sellers credit is therefore the choice of the German people. It could be said that taxpayers accept this for the interest, as well as custom, they will earn, or even to help guarantee repayment of previous credit, gain central or foreign national political control or cash in for foreign assets eventually… Etc.
Politicians are sly and they will get away with what the population allows them to – who do you blame?
In the middle of that are ordinary non- complicit people getting caught out, that is for sure. Here is one link that looks at the transfer mechanism from a financial viewpoint :
Two background articles, that you may have read:
Section ‘ Relation to European sovereign debt crisis and criticism’ in
The “fraud” consist of using a settlement system to circumvent rules and regulations. It´s maybe not “illegal” but it is unethical. Hans-Werner Sinn was the first to reveal this hidden secret and was criticised for it. It was not meant for the public eye. Politicians make the rules in addition to handing “independence” to the central bank. The central bank is simply a clearing central but in the case of ECB it corrupts the system. Bundesbank is not interested in having € 600 bn outstanding to NCBs bankrupt countries on behalf of the German taxpayer. But I guess they accept the Target 2 imbalance in order to save German exports.
This is equivalent to Yellen ordering the Texas Fed to lend to the Chicago Fed through the Fedwire.
As of today the imbalance is € 874 bn with NCBs in Spain, Italy and Greece counting for € 600 bn, and they are all insolvent.
NOBODY apart from Mish (and occasionally The Telegraph) seem to be concerned about Target 2. But one day angry Germans will wake up to the fact that hundreds of billions have been lost by Bundesbank in the south and suddenly the standard of living in Germany will suffer.
I agree on that. It could be said that instead of Germany holding the cards and demanding the ECB and Brussels adapt policy to keep the framework whole, that it is compromised to the ECB in the sense that to adhere to the initial concept would have meant the destruction of the Euro and serious political fallout in Berlin. In other words the trap that Sinn explains. This would put German policy under EU/ECB dictate.
Obviously German politicians ( and those of other countries) have accepted and play along with/take advantage of their role, but this power play behind closed doors is both corrupt, non-transparent, and not representative.
You know why the topic is ignored:
Governments have the attitude that their outstanding sovereign debt need never be repaid.While they own their own currency this may be true. Target2 is understood to be a sovereign issue as its existence relies on sovereign recognition. The Euro is just a financial offshoot that does not even exist without sovereign recognition. These are the big boys, and they will reclaim their sovereign right by force if they choose – there is nothing any other nation can do about that except unfriend them.
And so the battle is drawn, between the progressive EU administration and nationalist power. They co-exist when times are good, but are not ultimately compatible.
Hans K. said:
Dont you know?2018 there is a “BAIL IN”-GERMANY has to BAIL for all the European Banks in the south! That are 12 Billions(I mean Billions im german language-that is 1000 more than a Billion in english)!!!!!!!!
This is the dead of germany.
And did you know what the biggest joke is?In Germany it was forbidden for german banks!