So, Can Europe Nationalize All Of Its Troubled Banks? Place Your Bets Here

Reggie Middleton's picture

In a discussion that I had in the comment section of one of my articles there came the topic of whether bank runs are possible in Europe. Well, I believe we've already had some devastating one's (ex. Northern Rock) but if one takes the continent only or the EZ in particular, we still have a significant systemic threat. The gist behind the argument is that if the true economic capital is weakened to the point that depositors/creditors/counterparties make a run for it, the sovereign nation in which it is domiciled will simply nationalize it. Hmmm... Let's take a look at how that might work out, as excerpted from Overbanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe March 2010

I will attempt to illustrate the "Overbanked" argument and its ramifications for the mid-tier sovereign nations in detail below and over a series of additional posts.

Sovereign Risk Alpha: The Banks Are Bigger Than Many of the Sovereigns



Imagine the Swiss nationalizing just UBS and Credit Suisse, whose assets constitute 500% of the Swiss GDP. THAT'S JUST TWO BANKS!!! Imagine if the entire banking system got into trouble from daisy chaining European defaults??? 

This is just a sampling of individual banks whose assets dwarf the GDP of the nations in which they're domiciled. To make matters even worse, leverage is rampant in Europe, even after the debacle which we are trying to get through has shown the risks of such an approach. A sudden deleveraging can wreak havoc upon these economies. Keep in mind that on an aggregate basis, these banks are even more of a force to be reckoned with. I have identified Greek banks with adjusted leverage of nearly 90x whose assets are nearly 30% of the Greek GDP, and that is without factoring the inevitable run on the bank that they are probably experiencing. Throw in the hidden NPAs that I cannot discern from my desk in NY, and you have a bank that has problems, levered into a country that has even more problems.


If BoomBustBloggers remember, I went on a tear with my theory of European bank runs last summer. Reference:

I strongly suggest that any interested in the topic peruse the links above if they haven't already done so. They drive the point home. And on the topic of Greece and bank runs, ZH runs Greek Bank Deposit Outflows Soar In January, Third Largest Ever

According to just released data from the Bank of Greece, January saw Greeks doing what they do best (in addition to striking of course): pulling their money from local banks, after a near record €5.3 billion, or the third highest on record, was withdrawn from the local banking system. As a result, total bank cash has now dropped to just €169 billion, down from €174 billion in December, and the lowest since 2006. This is an 18% decline from a year ago, or €37 billion less than the €206 billion last January, and is a whopping 30% lower than the all time deposit highs from 2007, as nearly €70 billion in cash has quietly either left the country or been parked deep in the local mattress bank.


Were the big Greek banks effectively nationalized already? Don't the depositors and counterparties/creditors know that Bank of Greece and the ECB have their backs. I mean, come on now. Paranoia is simply going too far. MG Global account holders may be getting some of their monies back, as is somebody who had an account somewhere in Lehman. I remember when I made this warning about Bear Stearns back in January of 2008 (2 months before Bear Stearns fell, while trading in the $100s and still had buy ratings and investment grade AA or better from the ratings agencies). Nobody wanted to listen: Is this the Breaking of the Bear?


Once again, do I have a crystal ball??? Or just a spreadsheet??? After all, the ECB just injected a record amount of junk collateral backed, near ZIRP liquidity into the European banking system - Helicopter Ben style - a half trillion Euro worth, or 3/4 trillion dollars or so. And to think, many believe Hip Hop music and iPhones to be one of the biggest US exports:-) Of course, everybody on the sell side sees this as bullish - reference Cascade is to Domino as Greece is to Por… and Does Anyone See This Emergency As An Eme… for a more common sense approach to this ECB bailout of bailouts. As for just why such a massive liquidity injection was necessary? Well, as this excerpt from the subscriber edition of the BNP Paribas report is marked...





'Nuff said! Subscribers, as (not if, but as) this breaks, these are the companies trading at the valuations that are most shortable/profitable in my opinion...


European Insurance

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supermaxedout's picture

Why bet on something what is already a common knowledge since more than 3 years.

In 2009 Switzerland introduced a legislation that the government can nationalze the "bank infrastructure" of its banking giants while letting the rest go to hell. To save UBS or Credit Suisse is a job waiting for Uncle Sam if he prefers to do so. The Eurozone is not going to lift a finger. The bailout of UBS and Credit Suisse is the final bailout since nobody feels obliged to do so. So these banks will go to hell or Uncle Sam cranks-up the printing press once more. This should not be a problem for Mr. Bernanke.

chinaboy's picture

Kingdom comes! Europe is going to be a wholesale commie?

whoisjohngalt11's picture

Yes that is, and was the plan...

Augustus's picture

March 2010 is Last Year's News from Last Year.

If the country does nationalize the bank, they still have not solved the fundig problem for the withdrawals.  The individual countries cannot print euro.

If there is a current bank run, where is the cash going?  Euro ramians relatively strong against USD, so it is not comming to US.

YesWeKahn's picture

With Bernanke, all bets are off.

GeneMarchbanks's picture
'So, Can Europe Nationalize All Of Its Troubled Banks?'

Reg you gotta be more careful with your wording since Europe is a continent and continents cannot nationalize anything. Aside from that the individual nations and their banking systems are so different that superficial analysis doesn't really allow for looking into the plumbing so-to-speak. Europe and its banking system is too ingrained into TBTF as the ISDA ruling today shows.

Europe ain't your Black Swan, keep looking.

Stuck on Zero's picture

The U.S. Nationalized all its large banks and ...  oops.  Got that wrong.  The banks took over the U.S.  Which brings up a search for a word.  If Nationalization is a sovereign government taking over an industry, then what is it when an industry takes over a sovereign nation? Corporatization?  Bancoup?