The $3 Trillion Hole - Why EM Matters To European Banks

Tyler Durden's picture

How many times in the last few days have we been told that Turkey - or Ukraine or Venezuela or Argentina - are too small to matter? How many comparisons of Emerging Market GDP to world GDP to instill confidence that a little crisis there can't possible mean problems here. Putting aside this entirely disingenuous perspective, historical examples such as LTCM, and ignoring the massive leverage in the system, there is a simple reason why Emerging Markets matter. As Reuters reports, European banks have loaned in excess of $3 trillion to emerging markets, more than four times US lenders - especially when average NPLs for historical EM shocks is over 40%.

The risk is most acute for six European banks - BBVA, Erste Bank, HSBC, Santander, Standard Chartered, and UniCredit


As Reuters notes,

European banks have loaned in excess of $3 trillion (1.83 trillion pounds) to emerging markets, more than four times U.S. lenders and putting them at greater risk if financial market turmoil in countries such as Turkey, Brazil, India and South Africa intensifies.




But the exposure could be a headache for the industry as a whole, just as it faces a rigorous health-check by the European Central Bank, aiming to expose weak points and restore investor confidence in the wake of the 2008 financial crisis.


"We think EM (emerging markets) shocks are a real concern for 2014," said Matt Spick, analyst at Deutsche Bank. "When currency (volatility) combines with revenue slowdowns and rising bad debts, we see compounding threats to the exposed banks."




An emerging markets crisis could hit banks in a variety of ways - a collapse in local currency can hurt reported earnings or capital held in the country; loan losses can jump as interest rates rise; or income from capital markets activity or private banking can fall.




The biggest risk is that a jump in interest rates sparks defaults on loans, analysts added. Often a credit shock follows or replaces a currency shock, as happened in Argentina in 1999-2002.




they still have about 12 percent of their assets in emerging markets, and about a quarter of their earnings come from the region as often the businesses there are "unusually profitable", Deutsche Bank's Spick said.




...emerging market turmoil could also have a broader, indirect impact on revenues in investment banking and wealth management.


"A significant increase in volatility in EM bonds and FX may result in volumes drying up and hence a potential for a material slowdown in EM fixed income revenues," said JPMorgan analyst Kian Abouhossein.


He estimated the investment banks of HSBC and Standard Chartered each generated $2.1-2.2 billion from emerging markets, while Credit Suisse and Deutsche Bank made about $1.1 billion each.


Dismissing the "rotation from EM to DM" meme - we previously noted...

The ironists among market punters will even attempt to construe all this as a reason to buy more developed world stocks on the premise that the money flooding out of such places as Thailand, the Ukraine, Turkey, and Argentina will be parked in the S&P and the DAX (perhaps overlooking the fact that the purchase price of these now-unwanted positions was most likely borrowed, meaning that their liquidation will also extinguish the associated credit, not re-allocate it).


The Goldilocks lovers will also tend to assume that any such disruption will serve to delay the onset of genuine tightening and may even induce further ill-advised stimulus measures on the part of the major central banks. Certainly Madame Christine Defarge – that tax-sheltered tricoteuse who knits beside the guillotine set up for the hated bourgeoisie – has already begun to militate for such a response.


For their part, the biddable are already trying to drown out the noise of the Cacerolazo by making the fatuous argument that the EMs account for such a piffling portion of world GDP that their fate should be a matter of complete indifference to the rest of us.


Needless to say this is a touch disingenuous at best. Their share of end consumption-biased GDP may be lower, but they account for an equivalent fraction, if not a small majority, of global industrial production – and they have been responsible for an even bigger proportion of its growth this past decade. Ditto for trade and ditto for resource use.

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TBT or not TBT's picture

The even bigger story:  Europeans lend outside of Europe because they can't get adequate return IN Europe.

Adequate for what?   To support their pension plans and insurance schemes, given their deathbed demographics, crushing taxes and regulation.    And we're following them since the elections of 2006.

LawsofPhysics's picture

We have been the "united states of europe" for quite a while.  At this point everybody thinks their shit doesn't stink.

ArkansasAngie's picture

All of that off shored Bernanke money that the European banks got had to go somewhere productive.  Chasing yields to the ends of the earth.


Might prove a little difficult for Yellen to repo back.

Oh regional Indian's picture

COuple of points.


1) How much of money went and sank in Dubai? Because they are reflating Dubai furiously for the Dubai 2020 world Expo. This is first hand info. Long abandoned projects are being revived. Are they still foolishly throwing good money after bad? THey have a plan. Same for India. Current interest rates vary from 10% (excellent credit worthiness) to 18-24% (newbies, low income). Such a long way to fall (interest rates that is) and so many people yet to be en-snared.

2) Anyone interested should search for and read the Santander story via the enigmatic Mr. LaRouche via his LARouche PAC website. Brilliant analysis.


tip e. canoe's picture

this one?

Banco Santander, which is controlled by the British royal household's Royal Bank of Scotland,

true or tinfoil?   seems to be a lot of overlap btw the 2, though no definitive link.

Oh regional Indian's picture

Dead link. And yes, his stuff always sounds tin-foily (kind of a David Icke meets Global Political subterfuge). I like what they write and say, always deliverd in a level, well researched fashion. 

TBT or not TBT's picture

"Europe" is a faith-based cult of big government.  

The crazy in cults is not to be underestimated.  Even in apocalyptic cults that have set an upcoming calendar date for an apocalypse, failure of the apocalypse to arise on that date merely generates more cognitive dissonance, which always leads to even stronger faith, and deeper adherence to the cult.   Until the end game comes from an external source, or something like a suicide.  The betting, in Europe's case, should be on suicide, but hedge your bets.

nuclearsquid's picture

"$3 trillion dollar hole"


euphamism for Yellen's stink box?


Vampyroteuthis infernalis's picture

You can't paper this over forever. Someone will demand assets with true value.

disabledvet's picture

that's already being it always has is the USA...through massive quantitative production "which you are free to be in dolares." that includes a massive explosion in the production of energy unlike anything seen in human history.

you wanna monkey hammer interest rates to zero and offer "paper promises" because "we're all broke anyways"?

wrong answer.
these money center banks (there are now only two: JP Morgan and Citi) now have pristine balance sheets to not only lend into this recovery...but also to do the necessary debt restructurings of the most massive industrial colossus ever seen in human history.

in short...these interest rates can be driven FAR lower even as "global pricing power wanes under the butterfly wings of an intransigent dollar."

I happen to believe that Taper is the "weapon of choice" to effect this result...a more "normative" form that realizes both the precarious nature of the American "consumer" but also "proposes" a solution by simple "sweat equity."

to the extent to which any asset has any value it will have to be existed in and somehow "maintained"...otherwise the bulk of all real estate assets will simply reset to zero and the ability of the bulk of State and local Governments to finance even a life guard...let alone a pension plan..will be rendered irrelevant.

midtowng's picture

It's ironic that the death of the Euro might come because of EM's rather than because of the PIIGS.

TBT or not TBT's picture

Or, meta, because Germans financed the PIIGS purchase of German goods and services at interest rates more appropriate to far more reputable characters. Before the euro, northern europeans lent to southern ones at far higher rates and they were careful about the terms. The sudden lack of lending prudence at the dawn of the euro still has mostly to do with Germany's deathbed demographics though. They're making all sorts of foreign bets for lack of domestic investment returns of size and return to back up pension and insurance funds. In the case of southern Europe, the returns may appear, but only in nominal, not real terms. Europe is going down. Recall that European financial entities also ate it in the American real estate bubble collapse. They were in that game out of desperation. Europe has limited investment opportunities.

jonytk's picture

meh, the demise of the Euro has been greatly exagerated, the more Eurs that go abroad to EM, the more they can buy from Europe. The cheaper the Eur, the greater the german exports, that , as we all know, are the ones holding together the puzzle.

fijisailor's picture

And the FED is on the hook for those EU banks.  Party time again.

LawsofPhysics's picture

How will this be handled?  Please, just like it always has been, more freshly printed fiat will fill the "hole" until supply lines finally crack and the world goes to war...

hedge accordingly.

stocktivity's picture

Some big head honcho will come out and say "We will do whatever it takes". Problem solved. Rally on !  It's all Bullshit!!!!

Colonel Klink's picture

Rut Roh, looks like we're going to need a bigger Eurozone!  Quick, make good use of your money and bail out Greece again!!

Randoom Thought's picture

So, the banks should write off the loans and forget about them ... Obviously debt money that is created out of thin air can be disappeared in the same way, with a couple of keystrokes and the bank balance sheet is simply "adjusted". It is not as if debt money is a tangible asset like a business or metals.

Hmmm, but if the EM banks just disappear the debt, with the currency still being in circulation somewhere, that would mean that the banks don't have control over the EM countries and there is extra money to pay off interest floating somewhere ... such as dilemma?!?

Jubilee, anyone?

fijisailor's picture

Yeah Argentina tried disappearing the debt.  Hasn't worked out to well for them yet.  Now they're losing foreign reserves like crazy trying to stabilize.

Randoom Thought's picture

I think you are missing the point. The banks have the ability to disappear the debt with no repercussions. The debtors do not have the ability to disappear the debt with no repercussions.

commoncourtesy's picture

Help, I need to find my own Cestui Que Vie Trust (STRAWMAN) before the Banks empty it!

Please be kind this is my first post.

commoncourtesy's picture

Thank you very much. I am still trying to figure out who in the world is Robin Hood. Unfortunately most of the supposed good guys are corrupt and Bankers have turned into robbers. You all appear knowledgeable on here, but more importantly you support each other as a community. Well done.

fijisailor's picture

If the banks just delete the assets on their balance sheet no one will care about the value or income stream from those assets?  What about share holders?  Where do you think Argentina got those loans?  They tried to force the banks to write them off and the banks said no. That's why Argentina's national training ship was confiscated.  While it would be nice to see a jubilee it is not really going to happen unless it is forced from the borrowers side (default).

Rafferty's picture

It goes beyond shareholders. The EMs bought lots of stuff with money that they're not going to repay.  That stuff has been used up or is otherwise irrecoverable.  Somebody gets caught down the line.  Most likely producers paid with devalued currency.

Unknown Poster's picture

I believe writing off all of a banks assets is called bankruptcy.

LawsofPhysics's picture

Bingo.  Unless you can steal from the population at will to bail yourself out of course.  Where is that traitorous fuck Hank "tanks in the streets" Paulson these days anyways?

booboo's picture

"they still have about 12 percent of their assets in emerging markets, and about a quarter of their earnings come from the region as often the businesses there are "unusually profitable", Deutsche Bank's Spick said."

Vice is profitable and LEGAL for banks.

Lux Fiat's picture

Interesting that Deutsche Bank provided the chart data, but are not on the chart.   Have they been reducing exposure after Merkel suggested that sovereign nations look within before approaching the EU with hat in hand? 

Edit/Correction:  It was the Bundesbank that followed in the IMF's footsteps and broached a bail-in before requested a bail out, although Merkel has voiced similar thoughts.

Winston Churchill's picture

So the ECB is even moarer bankrupt.

Looks like the ECB may have to work down from

used condom wrappers as colateral.

Just lucky they took all those loans off the banks hands, I guess.

Monti suicide next ?

Randoom Thought's picture

There is no such thing as a bankrupt bank in a system where that bank has the ability to create debt money out of thin air. They want more, they just create more. Only debtors have consequences, which is really amazing if you think about it. The bank creates money that costs them absolutely nothing and in lending it to someone creates a claim on real assets.

I can't do that. You cannot do that. Even the US government cannot do that. To gain on claim on your assets, the government has to create a tax that you cannot pay or a regulation that you cannot comply with.

Lux Fiat's picture

To gain on claim on your assets, the government has to create a tax that you cannot pay or a regulation that you cannot comply with.

Hmmm... suddenly the flurry of toxic regulations and legislation over the last few years makes a lot more sense.  Thank you for a fresh perspective.

youngman's picture

The European banks will be selling this crap to you and me soon...packaged in some pretty name product....out of London where there is no rules..

pashley1411's picture

Coming to a TBTF bank near you.

Why we should have wiped out the big banks in 2008, their lenidng is bonus driven, from the top on down, and let the taxpayer pay the losses.   You can't fix that, its now in the corporate culture.

Theta_Burn's picture

I keep seeing "Santander bank" in these grim headlines

Should i be worried? here in Jersey, Santander is the parent of Sovereign bank, mine, and regretably, Im all in..

In a Santander failure, FDIC in full force?


Winston Churchill's picture



tip e. canoe's picture

perhaps FDIC carrying a spoonful of MyRA while saying eat your peas, bitch?

winston, how are the repo rates doin?

Winston Churchill's picture

Its the volume on revese repos by the FedRes, not the rate.

Something has to be fed into the maw of the SBS, and

that mouth seems to be getting very picky about what is

acceptable colateral ,for the SBS repos, at the banking interface.

They are running out of good colateral, exactly what happened in

2008/9.That ended well I recall.

tip e. canoe's picture

thanks for the clarification & update

jonytk's picture

Worry do not, it's separate, also the exposure of Santander is mainly due to adquisitions and money invested in south america, mainly to open branches. They don't give risky mortages.

smacker's picture

They'll hold it all together until the pan-EZ Bank Resolution Directive takes effect. Then it'll be account holders and savers who get bailed in.

GVB's picture

I wonder if the ECB planners have taken into account FED taper action and its EM implications when setting up their AQR tests...

q99x2's picture

Long live Germany

NoWayJose's picture

The sad truth is that there are no more 'European banks' - the 'so called' European banks either have offices in the US so that they can tap the free money from the Fed, or they have all manner of derivatives and swaps and leveraged products set up with US banks, or they have cheap money from the ECB which actually is just money funneled from the Fed to the ECB.  Because regulators in both the EU and US have let government backed 'banks' become giant market manipulators and speculators rather than being real banks, the whole global financial system is inter-linked and is waiting for either an emerging or developed country to default -- or for one of the 'too big' banks to get caught on the wrong side of a big leveraged trade.  With the markets no longer heading in just one direction, the chances of one or both of these things happening is now much, much greater.

Kirk2NCC1701's picture

From the standpoint of Currency Wars, my question is whether a crash (or deliberate sacrifice) of the Euro would help the survival of the USD as the GRC (Global Reserve Currency).

I'm betting it would help, as the desperate and panicked would flock to King Dollar as the "safe haven" currency that's large enough to absorb all these people.  Exactly what the Fed and its shareholders want.

commoncourtesy's picture

Things are not that simple.

USD is the world reserve currency, America is the only country in the world that doesn't have to pay for it's imports in a foreign currency. Because Dollars are accepted everywhere in the world, the USA does not need to export anything. Unlike other Countries who have to maintain a balance of payments, the U.S/Fed can't go broke because it can simply print dollars to pay for its bad debts. Here is the crunch...China, Brazil and other Countries have figured out what is happening and it appears they are taking steps to phase out the dollar.

I also read individual states in America are sick of being manipulated, Bankrupt and in debt at the hands of the Fed and have filed the proper paperwork to make the various states “independent sovereign nation states" a “Process of Notification” and sent it off to The International Court of Hague. This frees them from the Corporation of America and their controllers - that is the (British) Crown Empire and the City of London Corporation. It’s basically stating that “I’m not responsible for my debts any longer”  Senior Bankers are supposedly being arrested.

The Crown is the directorate of the corporation. The City/The Crown Corporation is a City State, not subject to British Law; it has its own courts, its own laws, its own flag, its own police force – exactly the same as the Vatican city state and Washington DC Columbia. Together they make up three Empires. The City of London also has its own Mayor (not Boris) .





Winston Churchill's picture

I believe the Lord mayor of the City is a haberdasher this year.

I hear they can be maniacle with a pair of scissors when drunk.

Plenty of available info on the web ,about the worshipful trade guilds

that own the city of London corporation(council).Bankers/stockbrokers

are not among them.

You are conflating several completely different things;

"Better to remain silent and let everyone think you are a fool,than

speak out, and remove all doubt'.

SKY85hawk's picture

re:  individual states in America. . . have filed the proper paperwork to make the various states “independent sovereign nation states" a “Process of Notification” and sent it off to The International Court of Hague.

Your vague, unsubstantiated statement sounds like the bleatings of the Redemption movement from the late 1990's,

Some supporting citations w/b more credible to your unusual statement:

1- Where did you read this?  Supply a link for others to read.

2-Which States? Other than Wyoming

3- Proof that the 'Process of Notification' is REAL under Common-law or the UCC, ANND Supply a link for others to read.

4- How can US Persons be protected by the Hague? Supply a link for others to read.

5- What response was received from the Hague?   Supply a link for others to read.

6- How long until rule changes are published in the Federal Register?

falak pema's picture

the evolution of the EM hole, in the fracked crater-like topography of all the gruyere holes of the whole global fiat volcano aperture, is now a question of appreciation : Which hole out of all the other holes is THE hole to jeopardize the whole of the global hole; by generating the incredible angst, like the sucking sound of disappearing dark matter of fiat vanishment.

We will then be left naked, lying on the beaches of the world, like grounded crabs ready to be roasted.

Maybe we don't give Draghi enough credit for his squid pedigree.

He has an invisible cape that will make him vanish before the whole hole makes us vanish into its giant vortex.

A tale of holes is a tail of a scalded cat on a hot tin roof. Ouch!

Iam Yue2's picture

"European companies with strong exposure to emerging markets dropped again on Friday, with Austrian lender Erste Group

down 2.4 percent and global brewer SABMiller falling 1.4 percent. The two firms derive about two-thirds of their revenues from emerging markets.

According to data from MSCI, European companies have a much bigger exposure to emerging markets than U.S. or Japanese companies, about 24 percent overall for firms listed on the MSCI Europe index , versus 15 percent for the MSCI United States index and 14 percent for the MSCI Japan index ."