European bank shares are down for the second day following a last minute bailout package aimed at Italian banks one day before a stress test showed Monte dei Paschi would be insolvent in an adverse scenario.
The ECB’s stress tests published on Friday showed Monte dei Paschi has a huge capital shortfall, with the bank’s Common Equity Tier 1 (CET1) ratio of negative 2.44 percent.
Forget the adverse scenario bit, Monte dei Paschi, Italy’s third largest bank and oldest bank in the world is insolvent in any realistic scenario.
On ZeroHedge provided the Full Details Behind Monte Paschi’s €5 Billion Bail Out but the short synopsis is the same as ever: It cannot possibly work.
Supposedly, a €1.6 billion investment into a mezzanine tranche of Monte dei Paschi from the €5 billion Atlante (Atlas) rescue fund is all it takes to cure some €50 billion in nonperforming loans at the bank.
In total, the Italian banking system has €360 billion in nonperforming loans and Atlas is supposed to take care of the entire mess.
Monte dei Paschi Rescue Hits Bank Shares
Yesterday the Financial Times reported Monte dei Paschi Rescue Hits Bank Shares.
Shares in UniCredit, Italy’s largest bank by assets, tumbled 9 per cent on Monday after the terms of a rescue plan for Monte dei Paschi di Siena suggested that other Italian banks might have to raise more capital.
Under the MPS rescue plan, the Tuscan bank will shift its entire bad loan portfolio of €27.7bn into a securitisation vehicle, priced at 33 cents on the euro.
[How that got to €27.7bn from €50bn is a mystery but these numbers have been bouncing all over the place week to week. Yesterday the FT reported “The rescue is intended to put Monte dei Paschi’s long-running capital concerns behind it. In a two-pronged operation the bank’s €50bn of gross non-performing loans will be moved into a special-purpose vehicle to be securitised for sale.]
People are looking at MPS and saying if that’s the new fair value, then we’re going to need to see capital raises from other domestic banks we thought were safe, even though they ‘passed’ the stress test.
“This is a Monte specific solution and it doesn’t address the sector as a whole . . . it will use the remaining capital in the Atlante fund,” said Rahul Kalia, an investment manager at Aberdeen Asset Management.
[I don’t believe it addresses anything. The market seems to agree].
Lorenzo Codogno, founder of LC Macro Advisors and former chief economist at the Italian Treasury, said: “This first jumbo operation is likely to jump-start a market for NPLs [non-performing loans] in Italy which can become extremely useful in addressing the broader problems”. It could be replicated across Italy’s banking system, he says.
Confidence Shell Game
Instead, debt was repriced lower across the board and more write downs are feared.
Monte dei Paschi Down 16% Today
Monte dei Paschi Down 99.72% Since May 2007 High
It’s not just Monte dei Paschi, or even just Italian banks.
BNP Paribas Daily Chart
BNP Paribas, a French multinational bank is a certified all star compared to German banks.
Deutsche Bank Daily Chart
Deutsche Bank Monthly Chart
What About Commerzbank?
May 1, 2016: Commerzbank Looks to Build on Gains of Recent Years
July 25, 2016: Commerzbank Warns of Decline in Capital Position
In an unscheduled announcement, Germany’s second-largest bank by assets said that its core tier one capital ratio — a key measure of financial strength — had fallen from 12 per cent at the end of March to 11.5 per cent at the end of June.
That is still above regulators’ minimum requirements — but diverges from the 12 per cent that analysts had been expecting, which triggered the impromptu disclosure under Germany’s strict securities laws.
Commerzbank Daily Chart
Race to Zero
I am sure glad “Commerzbank Looks to Build on Gains of Recent Years”.
Are they talking about gains in the race to zero?
If so, percentage-wise Commerzbank is ahead of Deutsche Bank but behind Monte dei Paschi. The last final plunge takes considerable effort however. Monte dei Paschi remains the overwhelming odds-on favorite.
The Financial Times discusses the Vanishing Market Value of European Banks.
“The key to us is understanding this is a profitability issue versus an insolvency issue,” says Hani Redha, a portfolio manager at PineBridge Investments, regarding the sector’s performance.”
I suggest (as does the market) the entire European banking system is on the verge of collapse.
Mike “Mish” Shedlock
Tony Bennett said:
Draghi: Hello, Hank?
Paulson: Hi, Mario.
Draghi: I’m sending the ECB Lear for you.
Paulson: I thought you might be calling. I’ve made copies of my “tanks in the streets” speech … with a few tweaks to ensure the insiders won’t lose a nickel. The suckers, er, taxpayers will fall hook, line and sinker. Just make sure you emphasize “civilization back to the stone age” if insiders have to take the loss.
You nailed it!!
Monte dei Paschi, et al could start some subsidiary banks and offer them to newly arriving migrants, offer only stands if they go back to where they came from… two problems solved.
Ben Franklin said:
Instead, jihadi hordes go nuts, tearing things apart and then Turkey, along with “ISIS,” Hezbollah, and Iran (and possibly Pakistan) invade Greece, Italy, and France.
They cant finance the war…. remember we formed a subsidiary and transferred the bad aset to them.
As long as Draghi keeps manipulating the Euro yield curve — banks will continue to “earn” the 10yr minus the 3m yield spread. In Germany (arguably the least bankrupt EU country) — this stupidity works out to -0.10 **minus** -0.15 … or -25bp spread “earned”.
Banks need about 85-90bp (positive, not negative) to cover costs, and their “profit” is whatever above that. So the “best banks” in Europe are losing 110bp on their asset base.
Before anyone argues something silly — the peripheral countries do not have positive spreads. You have to subtract credit spreads (the risk that they just plain default). The carry spread for Italy or France is even more negative than Germany. The other countries are worse still.
Pension funds and insurance companies are guaranteeing (implicitly) payouts of 7.5% while “earning” -0.10%… they are insolvent too.
No financial institution in the EU is solvent — and that includes the losers at the IMF.
Mish can try to guess which side of the ship will sink below the surface first, but the whole ship is going down. Who knows if China wants to save the EU (I have no idea) — but they can’t (are not able to).
Europe is going to disintegrate back into member states, while France’s shortsightedness guarantees that Turkey will leave both NATO and Europe (becoming a middle eastern failed state).
It doesn’t matter who wins the White House or Congress — NATO is history. The US cannot afford to foot the bill alone, and most of Europe is useless and already in default on NATO promises. A bankrupt EU will be even less able (and probably less willing) to contribute.
Taxpayers are not going to bail this nonsense out… not because the powers that steal won’t try. Taxpayers have already been robbed. Is Draghi really going to try to steal worthless Euros? It doesn’t matter — heads he loses, tails he wins nothing.
Tony Bennett said:
“Europe is going to disintegrate back into member states,”
Yes. IMO, the premium the market has placed on German debt (and some of the other stronger northern tier countries) is a bet on breakup … with gain made on fx exchange. Buy German debt now with euros. Wait for breakup and reprice debt in deutsche marks … which will soar compared to euro. Pay off euro loan and pocket the spread.
Germany will have to print trillions of deutsche marks to save it banks. Once what looked like it will be a strong nation will in one wave of a wand become very weak. Remember it is the countries which have merchantile policies which pay the highest prices when the SHTF.
So I’m not invested in any of these names. Why am I even reading this?
Because it’s a domino ready to fall. You’ll see the overall picture later, when it’s crystal clear you cannot possibly stop the rest from falling.
If you are invested in US dollar assets, this concerns you too. Notice how our markets keep making highs. That is because european and asian investors want to park money in the “safe haven” here. They know they’ll lose it THERE.
Go ahead now, conspiracy theorists. Let’s hear how I’m wrong and it’s all rigged.
Because you are a voyeur…..
alogna john said:
Hello Mish. My daughter and her husband want to move from Rockford to Montana. I know you want to move there as well. Since you have already done the research, could you give us a rough idea of where in Montana you will live? They are very outdoorsy! Thank you very much. Jack
It is about 30 minutes from Glacier NP
International airport close by in Kalispel
Root Hog Or Die said:
If you think there is the slightest potential for nuclear war in this day and age, Montana is about the last place you want to move.
If this link doesn’t work, google “Potential targets of Russian missiles aimed at the US”.
I believe you do not know how to read a map – or understand what it says.
Please read the legend and think again
And of course if you think you would be safe anywhere, you are likely mistaken – but Montana is not a high priority target
That the ECB is indirectly run by the national governments and therefore their financial interests, makes me wonder if there is a centralized reset planned. I could imagine that in the aftermath of a banking wipeout the EU governments will remain the only ‘creditworthy’ customers around, so turning the tables on the European financial framework as its recreation would have to align itself to sovereign issuance first and foremost. That would be a mighty underhand power grab allowing for the forcing of a mutual EU agenda onto any country that had not the wits or courage to leave.
Pure speculation on my part…just the sort of feeling this all brings me.
Lou Mannheim said:
I’m curious why markets are so sanguine about this. I know the expectation is for bailouts but the potential for contamination across the globe and disruptions should raise the risk premium a bit.
What risk premium? Look what just happened in Italy and Monte dei Paschi. Bail out the first domino and rest won’t fall. It works great in theory until investors begin to expect bailouts and they begin to take on more risk and leverage. This is the destabilizing nature of bailouts and depositor insurance. It’s called moral hazard.
Italian Banks have $2 Trillion of Italian government bonds to sell you.
I used to get sucked in on the impending economic Armageddon forecasts. I’m convinced it’s going to happen. I just don’t know what catalyst will start the domino chain reaction or when. So to me it’s all hype until I see the meltdown with my own eyes. The Ringmasters are very clever and may be able to juggle 5 or 6 plates for years. So I’m not sitting on the edge of my chair. Whatever will be will be. But the headlines that the EU banking system is about to collapse is entertaining. And all of us (including myself) love to be entertained.
The issue is: when the ^&() hits the fan, you won’t be able to sell (no bids). So you limit your EU holdings as much as possible (zero if you can).
And you hope that Mish stops playing this “guess the next Hitler” nonsense with Erdogan / Putin / Stay Puff marshmellow man … and tries to look at places where investment might work.
Maybe Trump “fixes” the US (by breaking it the rest of the way, and crippling the corruption under its own weight). Maybe the lying traitor sells the White House and all its contents to ISIS in exchange for a nice Clinton Foundation bribe… ummm, “charitable contribution”.
Either way, arguing about Europe is pointless. Putin is focused on Asia, and just maintains a sizable buffer zone against EU chaos. It would be great if the US could focus on Asia or Africa or something other than the next free-shit-till-we-are-bankrupt lie on TV.
Trump 2016 … or meteor strike 2016… just stop the crap in Washington DC
It gets surreal .
If I had turned up from another planet and just flicked through the charts I would be thinking something like ‘ : Earthling banks collapse but an everyday thing : authors try to add sensation : spectators find sensation out of authors efforts to add sensation : ‘
Guess that would make me guilty too ?
Same here… The CBs have managed to pull the train for nearly a decade now… these guys are capable of doing it for another decade for all I know.
How come when there is way to stop a shooter for killing a few people, we do not seem to have a way to stop the CBs from mowing savers, retirees, prudent investors and in general capitalism…what makes me boil is their temerity to say it is for our own good…
I, too, used to be a worry wart. No longer. Too many people in too many places have the power and control to prop thing up for a long time. They got control of the central banks and the theories they use to explain away the marching orders they’re given. This used to be the thinking of paranoids. Now, it’s business as usual. If gravity were to prevail, the Fed would head for negative rates and a $3 trillion QE binge, including a giant increase in mortgage bond purchases as a proxy for helicopter money. Pump those financial markets. They are the new universal window dressing. No bad news allowed – make sure the media knows how to slant the news if needed.
Cue sound of labored mechanized breathing.
You are about to witness the POWER of this fully operational Central Bank! Fire the zero coupon infinite duration bond weapon!
POOF!! …. hiss…. wheeeze…. cough…. choke.
They will make lots of noise, but the G7 central planners have nothing **effective** left. Zero rates till infinity and it just won’t matter at all.
Install a printing press in every European bank branch.
Pay people to glue money to trees , yeah .
Every toaster comes with a free Draghi .
ATMs that don’t need cards .
Supermarkets have to give you your cash back after you’ve paid .
Get paid to watch TV .
Public access to all bank vaults when banks are closed .
Hand out mattresses pre-packed with notes for free to beat social anxiety .
ECB insures all money against it being lost , no proof needed .
Yeah , give money to everyone so the world keeps going round .
Truth seeker said:
Hi Mish I only know what u and maybe the WSJ tells me about European banks. What about our own banks? It’s hard not to b cynical about stress tests and all this other BS one reads r hears about any banks these days. I wonder how much exposure do our 5 biggest banks have to European banks. Also do our banks still mark their assets, collateral to their models r to the true market prices. What do their energy loans look like now that WTI has dropped 20% from the high? And what about commercial real estate loans, car loans, corporate buy back loans, residential real estate loans, soon to b glutted apartment loans- I’ve given up on student loans. U know I’m a saver who has been screwed by QE thanks to the Fed. Wasn’t the first QE like 600 billion- I remember reading that at the time all the interest earned by savers each year with interest rates averaging about 5% for treasury bonds, bills, and bank CDs was right around 600 billion. Is that correct? That’s why the economies of the world r not growing. Sorry got a little carried away here Mish.
“In my view, we are at a point today that if a systemically important financial institution in the United States were to experience severe distress, it would be resolved in an orderly way,” Gruenberg said.
Article says “Nowhere near normal”
Sack all Euro bank executives of banks demanding bailouts/bail-ins and start again with new management. Executives of banks demanding bailouts have proven themselves to be incompetent.
No more bailouts, bail ins, or printing inflation to bail out bank loans. We need banks that follow sensible business practices, and don’t need bail outs every few years.. Start by sacking Mario, who was in charge of Italian banks when they did silly things, and whose QE nonsense is counter productive. Enough is enough.
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