Five days ago the Telegraph reported Santander Buys Struggling Spanish Bank Popular for €1.
The Article called it a “watershed deal masterminded by EU regulators to avoid a damaging collapse.”
Reality is quite a bit different as two more Spanish banks are in serious trouble.
First, let’s finish some details about Banco Popular from the Telegraph article.
Santander will tap its shareholders for €7bn in a rights issue to raise the capital needed to shore-up Popular’s finances in a dramatic private sector rescue of Spain’s sixth-largest lender. It will inflict losses of approximately €3.3bn on bond investors and shareholders but crucially will avoid a taxpayer bailout.
The last-ditch Popular rescue is significant because it marks the first big test of the Single Resolution Board (SRB), the Brussels body that was established two and a half years ago to deal with banking meltdowns in a way that shields taxpayers.
There has been growing concern about loss-making Popular amid fears it would collapse under €37bn of bad property loans it has made. Customers have been withdrawing deposits in a run that has seen billions of euros pulled in recent weeks.
With Popular’s position looking increasingly precarious, the European Central Bank decided overnight that the lender was “failing or likely to fail” and called in the SRB, which orchestrated the forced sale to Santander.
Liberbank and Unicaja Hit by Contagion
CityAM reports Investors wary of Spanish banks Liberbank and Unicaja after Banco Popular troubles.
Liberbank’s share price fell 41 percent to €0.68 (60p) last week, as Santander rescued Popular by buying its rival for a nominal €1.
Meanwhile, the initial public offering (IPO) of Andalusia lender Unicaja, due this summer, could also be hit.
The Sunday Times reported that Liberbank, which was formed in 2011 by the merger of three failed savings banks, had seen the value of its riskiest bonds collapse by 60 percent in recent days.
Eurointelligence has some interesting comments via email.
There is No Contagion… Oh, Wait!
Despite the fact that the European single resolution board indeed acted swiftly and decisively, the Financial Times relays concerns that “the congratulatory backslapping that greeted” the resolution of Popular may not be justified. In particular, there are questions over the slowness of the reaction of the single supervisory mechanism. Moreover, the celebratory observations that there had been no contagion may also have been premature. Since the market opened on Wednesday with the news of the resolution of Popular, the stock of Liberbank, one of Spain’s small former cajas, has lost 48% of its value including 20% and 19% drops on Thursday and Friday, erasing the gains of an entire year.
The situation has moved Spain’s securities regulator CNMV to consider a ban on short-selling of bank stocks, according to Cinco Días. Speaking of short positions, another story by Cinco Días goes over the various mechanisms for going short (equity derivatives, put warrants, and old-fashioned selling of borrowed stock). Those that have borrowed stock “over the counter” to sell and whose contract does not specify cash settlement by differences but rather delivery of the borrowed stock will actually lose out, because the stock has been delisted and so they cannot buy it back at €0 to settle the contract.
Manuel Conthe wonders in his Expansión blog whether the existence of the resolution mechanism actually encourages bank runs. This for two reasons: the risk of an eventual bail-in of uninsured deposits motivated large depositors including public institutions to withdraw their deposits; and the possibility that a resolution would lead to a firesale, as it happened, may have motivated potential buyers to hold off in Popular’s failed attempt to sell itself.
As we had noted from the FT, Popular drew emergency liquidity assistance from the Bank of Spain last Monday and Tuesday, in the amounts of €2bn and €1.6bn respectively. To appreciate the extent to which Popular was scraping the barrel of its liquidity, consider that according to El País the Bank of Spain had valued the collateral presented by Popular on Tuesday at 10% of face value.
This brings us back to the question of whether the supervisor acted in a timely manner. We think not. The fact that Popular got to the point of resolution with no liquidity left meant that any plan the SRB may have had for a resolution other than by sale of the whole bank could not be executed without public liquidity assistance, which would have triggered a bail-in of 8% of Popular’s balance sheet. We estimate that this would have been under €13bn, compared to the €8bn of equity and subordinated liabilities that were in fact wiped out. If the SSM had shut down Popular earlier, the SRB would have had maybe €1.6bn (on Monday night) or €3.6bn (on Friday night) to play with, allowing maybe a good-bank/bad-bank split (bridge institution and asset separation in the language of the BRRD). As it was, there was no choice but a firesale. And if Santander had walked away from it, Spain’s FROB would have had a problem.
- The ECB accepted collateral at the last minute that was worth 10 cents on the dollar.
- Regulators did not see this coming until the last moment when the bank asked for assistance.
- Delays in recognizing the problem made matters worse for investors who did not manage to get away.
- Investors are now worried about two other Spanish banks.
Investors ought to be worried about all of Spain’s banks, and of course Italy’s banks too.
Leverage, Debt, Structural Problems Not Addressed
Leverage is excessive, structural problems have not been fixed and the ECB has repeatedly kept its bond purchases alive.
ZeroHedge reported on June 8, The ECB Has Almost Run Out Of German Bonds To Buy.
Bloomberg reported in March ” It will take until at least the end of next year, and possibly into 2019, before the ECB starts to remove stimulus in earnest and raise interest rates.”
Will there be anything bond assets left to buy in 2019?
Meanwhile, despite the fact that leverage, excessive debt, demographics, the Euro itself, and productivity differences between European countries are the problems, the only solution the ECB has is to encourage more lending in hopes of fueling inflation.
Economic Challenge to Keynesians
Of all the widely believed but patently false economic beliefs is the absurd notion that falling consumer prices are bad for the economy and something must be done about them.
I have commented on this many times and have been vindicated not only by sound economic theory but also by actual historical examples.
My article Deflation Bonanza! (And the Fool’s Mission to Stop It) has a good synopsis.
And my Challenge to Keynesians “Prove Rising Prices Provide an Overall Economic Benefit” has gone unanswered.
There is no answer because history and logic both show that concerns over consumer price deflation are seriously misplaced.
Deflation May Boost Output!
The BIS did a study and found routine deflation was not any problem at all.
“Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the BIS study.
It’s asset bubble deflation that is damaging.
And in central banks’ seriously misguided attempts to fight routine consumer price deflation, central bankers create very destructive asset bubbles that eventually collapse.
When those bubbles burst and they will, it will trigger debt deflation, which is what central banks ought to fear.
For a discussion of the BIS study, please see Historical Perspective on CPI Deflations: How Damaging are They?
Economically illiterate writers bemoan deflation, as do most economists and central banks. The final irony in this ridiculous mix is central bank policies stimulate massive wealth inequality fueled by soaring stock prices.
It’s madness. Another deflationary asset bust is coming.
Mike “Mish” Shedlock
Keep an eye on the two in Italy likely to get hoovered up as a rescue rather than bail-out/in, Popolare di Vicenza and Veneto Banca.
I can’t see any of this causing uncontrolled contagion, either Spain or Italy. Looks bad but business as usual.
That’s what Bernanke said about the subprime problem in the US.
These problems have been known about for a long while.
It’s not unexpected or surprising.
Who is shocked?
Somewhere in the background it has been decided the time is right to address some of the weaker players and take them out.
It’s not an avalanche. It might become one but it isn’t yet.
The “big one” will be something that catches people off guard.
I take it back, there are consequences that we can only hope someone has made allowance for. Junior Bonds will be stressed and solvent but smaller issuers could feel the consequence. It could become their problem.
Not that straightforward, this is just one facet of numerous other ‘sideline events’, recent or underway, which affect the financial system nationally and wider, and that all bear on each other in some way.
To put it another way, no one is wholly in charge, and many that think they are, aren’t.
Banking is a great business to be in. You can basically throw away other peoples money and never have to worry about the consequences.
David Baker said:
Here’s a question: have there been any studies that have looked at the extent to which consumer price deflation has been correlated with various types of asset deflation–and what the relation has been timeline-wise?
Tony Bennett said:
2 components of CPI I know are going to deflate – vehicles and housing.
Housing makes up 42% of CPI
Transportation makes up 15% of CPI
Why I fully expect to see a year over year decline in overall CPI sometime in the coming bust.
All of the asset busts of the last 40 years, with the exception of gold and silver, have fully recovered.
ironically, it’s different this time…
Tony Bennett said:
“the Bank of Spain had valued the collateral presented by Popular on Tuesday at 10% of face value.”
This goes beyond “where were the regulators?” … there has to be a back story … bribes? fear of Contagion? (other banks with similar assets) … To allow collateral to sink so low.
Waiting until the time was right or at least better?
Behind this there is some narrative and once better cleared up it will be Italy next.
Well most toxic assets (almost all realty) were dumped into the SAREB
which has kept most of it off the market, and has a long resolution schedule, which it is falling well behind. Similarly the FROB
which is has only eased through the mergers but whose accounting is running heavy losses.
The whole exercise was delusional to whatever degree, but aimed at retaining something of a financial system. The assets Popular has left to claim emergency lending are obviously useless, anything of worth will have been previously pledged with the ECB. I think there are clauses on NCB lending that automatically apply heavy discounts also.
The short of it is maybe that all eligible assets that are worth anything owned by Spanish banks are already fully pledged, that the attempts at resolution are in a permanent stall because the economy has not picked up in a sufficient way, and the overhang of excess property and private debt is still there.
This is not to do with how the everyday economy seems better or not, it is still only starting to climb out of its lows, it is the size of the financial overhang and major fundamental dislocations in existing asset worth that make the first seem trivial.
The Spanish are master at squeezing every inch of leverage out of whatever legislation they are working with. I think Santander is the only entity left with the weight to get what it wants, and even it is not immune to EU or global fluctuation or decision.
Take the last three paragraphs as ‘maybe’, I am not an accountant and the above perception is only taken from those who are and who dare to question the official narrative.
In this article the opinion is that the show looked like a corporate take-over once Popular had finished using up all its credibility to acquire funds
Stuki Moi said:
As long as the sheeple remain indoctrinated enough to time and again fall for the nonsense that a “collpasing” bank is somehow a bad thing, banksters will continue to take people’s money, pocket it, and then sit back and be “rescued” from the oh-so-horrible “collapse” of the institutions they so incompetently have mismanaged.
Exactly as lemonade-standsters would do, if they were the ones arbitrarily selected to be “rescued” by way of a gun to others’ heads, if they were the ones systemically mismanaging their businesses.
which continues to emphasize bill black’s contention that, The Best Way to Rob a Bank Is to Own One
i’ll also add, describing bank fraud as mismanagement is a wee bit of a whitewash
Don’t expect anything less than madness, it’s what humans do the best.
Just look at the number of wars over the last 200 yrs.
Medex Man said:
But… but… but… but… this can’t be right!
Draghi did everything the Keynesians wanted and then some. Zero interest rates, often negative rates. Quantitative easing. Buying worthless toxic waste at par.
The “committee that saved the world” assured us that the subprime contagion was well contained, the Greek debacle was solved once and for all, Italian banks are perfectly solvent, Spanish banks too!!
Let me guess: that fraud Draghi will not accept any responsibility for his latest bubble
Jarhead John said:
Get Out of Debt Quickly My Friends…
Yes, bring on some good CPI deflation. The people need more purchasing power.
Enough with bankers confiscating goods from the people, and redistributing those goods to the financial sector. Enough with bankers printing serial mania, and banks then demanding to be bailed out of the mania deleveraging.
The current economics does not account forthe faster turnover of goods and especially services due to technology and deflation in macro levels….
what did J.p. morgan say during the panic of 1907 ?
I do not invest in third world countries like Spain, Italy, and France. I learned my lesson when I lived in France and worked for the French government.
Mike Bravo said:
Deflation increases real wages, ceteris paribus. Why do you think the criminal elite are working overtime to import cheaper labour or export jobs?
They do not really care if people has increasing or decreasing real wages (actually they prefer increasing wages since it makes people vote for them). The real problem for them is the increased burden of debt during deflation, which puts in danger the capacity of government to spend.
That’s what they are terrified of.
Mish, your sound argument deserves global recognition.
The lack of transparency is staggering. Shotgun weddings as panacea? Likewise for Italian banks?!?
What the ECB doesn’t bail out, the Fed will. Contagion is only a concern if the banks think they won’t be bailed out. They know they will, so contagion is a thing of the past.
These “private for profit, socialize the losses” cartel member central banks are running the scam of ALL TIME, and all you keep talking about is “inflation & deflation”. The world’s LARGEST INSIDER TRADING SCAM is RIP ROARING its way thru the capital markets each and every day, and with each passing day, the RULE OF LAW becomes worth less and less, until finally, when your stocks and bonds reach their apex in valuation, YOU will have NO more ownership of YOUR assets because there will be NO more rule of law remaining to protect you from the very same corrupt and criminal government you supported.
“Every election is a sort of advance auction sale of stolen goods.” – H. L. Mencken