Alarm Bells Ringing: Behind The Smoke And Mirrors Of The European Banking System

Tyler Durden's picture

Submitted by Erico Matias Tavares of Sinclair & Co.

Alarm Bells Ringing - Behind the Smoke and Mirrors of the European Banking System

Alarm bells in the European banking system have been ringing for quite a while but nobody seems to be listening. The roaring capital markets are just too loud.

But we have been keeping track of a few things.

Private sector lending is dropping sharply in the Eurozone. The latest figures have just been released and the picture is not at all encouraging. Total private sector credit by Eurozone monetary financial institutions has accentuated its negative trajectory last June, with lending to households seeing the largest monthly decline since the height of the great financial crisis in late 2008. Uh-oh.

Periphery back in play? Very recently the second largest private bank in Portugal was caught in the bankruptcy of the Espirito Santo conglomerate, reporting the largest ever corporate loss in the country’s history just last Wednesday, and raising the specter that all might not be well in the Eurozone’s periphery. Now the Portuguese government may be forced to intervene, possibly using a very large chunk of the financial sector stabilization funds set aside during the country’s recent bailout.

BIS issues a(nother) warning. This should not be a surprise. In its 2014 annual report, released at the end of June, the Bank of International Settlements (“BIS”) warned that “banks that have failed to adjust post-crisis face lingering balance sheet weaknesses from direct exposure to overindebted borrowers and the drag of debt overhang on economic recovery”, with this situation being the most acute in Europe. It also stated that increases in government debt ratios in several cases appear to be on an unsustainable path. It appears that debt levels matter for (some) economists after all.

Bad loans rising. Before we had Fitch, the ratings agency, stating last May that in a sample of 124 Eurozone banks which participated in the latest stress test impaired loans increased by an average of 8% in 2013, with no less than 30 banks seeing an increase of 20%. This could have certainly contributed to the massive contraction in private sector credit that we are now seeing on its own. But there’s more.

Emerging dangers. Trillions more in fact. In February Reuters reported that European banks have loaned in excess of $3 trillion to emerging markets – a little less than the entire GDP of Germany, and more than four times the exposure of US lenders to those countries. Fitch chimed in saying that “a handful of large EU banks are materially exposed to more fragile emerging markets.” While direct risks might be manageable for these banks, any contagion might be another story. Is an Argentinean default truly contained? Are Turkey’s problems solved? What happens if the latest EU/US sanctions hit Russian banks or companies hard?

Where’s the capital? Another eye-opener came over a year ago. In April 2013, Jakob Vestergaard and María Retana at the Danish Institute for International Studies published "Smoke and Mirrors: On the Alleged Recapitalization of European Banks", a report partially funded by the World Bank. The title says it all. According to the authors, by using broad capital measures based on risk-weighted assets European banking regulators have overstated the banks’ soundness and resilience in their stress assessments. Accordingly, “recent increases in risk weighted capital ratios have been little more than a smokescreen.”

By focusing on leverage ratios instead, the authors reached some interesting conclusions. The least well-capitalized banking sector among the larger Eurozone countries is not the Spanish or Italian… but the German, closely followed by the French! According to their estimates, a five-fold increase in equity capital is needed in order to reach “adequate” levels of soundness. It is well worth reading the entire report, including the discussion on why regulators seem to be consistently behind the ball on bank recapitalization.

Figure 1: Eurozone Government Debt-to-GDP (Maastricht Definition)
Source: European Central Bank

Sovereign debt jumps. But alarm bells should have been ringing even before that. In the third quarter of 2012, the overall government debt-to-GDP in the Eurozone surpassed 90% for the first time ever, as shown in the graph above. Why is this number important? In “Growth in a Time of Debt”, after analyzing 3,700 annual country data points going back centuries under the most varied macroeconomic conditions (and the occasional spreadsheet error ;), Carmen Reinhart and Kenneth Rogoff found that in countries which are above that 90% threshold GDP growth is generally weak. In other words, from that point on the odds are firmly stacked against us seeing the growth rates necessary to smoothly reduce debt loads that even the BIS agrees are problematic. And several Eurozone countries are way past that level now.

And who were the buyers of bonds in some of the most indebted periphery countries? In April 2012 Bloomberg reported that Spanish, Italian and Portuguese banks increased their holdings of domestic sovereign debt by very significant double digits, mostly financed by the ECB. Much to the chagrin of bond vigilantes, the ensuing decline in the bond yields of these countries virtually up until today might not be a sign of strength and stability – but rather an impressive feat of financial engineering.

That Minsky moment. Over two decades ago, Hyman Minsky described in his “Financial Instability Hypothesis” the interplay between the financial markets and the wider economy, which according to him is at the heart of the business cycle in a capitalist economy with a sophisticated financial system. During the good times increases in asset values often lead to investment and speculative excesses financed through debt. At some point the resulting cash flows can no longer cover those debts, impairing loans and prompting banks to tighten credit availability, even to companies with good credit ratings. This in turn leads to a contraction in asset values and economic activity in general.

And where are we now in the Eurozone? We have already seen the general increase in asset values, so check. And now we can also check bad debts rising and private sector credit contracting. If Minsky was right, what follows is not pretty.

Whether governments and central banks have the power to push back or avoid that fateful moment remains to be seen. But equity markets in Europe are already smelling a rat.

Figure 2: Ratio of Developed Europe Financial Services Stocks to FTSE Developed Europe Stock Index (Monthly)

The share prices of financial services companies in developed European countries have been lagging the general index for developed Europe for some months now, with the ratio dipping below its 10-month (simple) moving average last May – typically a bad omen for the sector and the markets in general.

With so many concerning signs developing since the last financial flare-up in the Eurozone, we can make the case that European banks should have been taking much more proactive steps in recapitalizing their balance sheets, especially with such robust equity markets. But it seems nobody likes to spoil a good party.

Alarm bells should not be dismissed so easily. They are there for a reason. Regulators, politicians, bank managers and investors should all be paying attention.

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hairball48's picture

Yeah, Yeah....We've been hearing this story for years.

cifo's picture

I already started selling.

Vampyroteuthis infernalis's picture

At some point the resulting cash flows can no longer cover those debts...

With modern CBs, this statement should read, "At some point the resulting cash flows and money printing can no longer cover those debts...."

Spigot's picture

US.Gov Debt to GDP is what, 105% now?? We are in the enviable position of being at the top, once again, over 100% Debt/GDP group along with Sudan, Lebanon, Greece, Italy, Portugal, Ireland and Japan.

NoDebt's picture

Japan is in a league of their own.  Which is why it's worth watching them- they'll either be the trigger or the blueprint.  Right now they're looking a bit more blueprinty than triggerish.

debtor of last resort's picture

I took a good look in their eyes, nothing...

THX 1178's picture

They're always squinting

mvsjcl's picture

So did Clint Eastwood, just before bodies started falling.

Skateboarder's picture

The poster child had fallback economies to absorb the effect of the experiment. Now everyone is Japan, and there are no fallback economies, except what BRICS is trying to scrape together, and that's its own secretive perversion of how to keep their people down and out while that union's 'leadership' robs the commoners.

GDP has been proven a busted metric, and therefore no debt/GDP ratio matters anymore.

It all comes down to one big contract somewhere, sometime, going bunk. Then everything crumbles.

The Limerick King's picture



My Eurozone bank isn't right

Its assets are smelling like shite

The ECB test

Said my bank was the best

Get ready for capital flight!!!

Bendromeda Strain's picture

That one needed a Burma Shave type conclusion... i.e.,


Get ready for capital flight!!!


Greenskeeper_Carl's picture

+1, im glad im not the only one who thinks that about this new BRICS bank. Everytime i say something like that i get hit with red arrows, but no one ever responds and tells me why I am wrong. Its not going to be some gold backed currency to do good things for the world by restoring sound money. Its going to be another fiat currency, and its just going to be another central bank, that does the same things all other central banks do- legalized, hidden theft from all its people. This one just won't use the dollar, and gives them a way around the US govs SWIFT system

withglee's picture

Am I not correct in asserting "a gold backed currency" does not exsit anywhere in the world today ... and hasn't for a very long time?

That being the case, you are recommending one ... meaning you'll have to create it. Knowing there is only 1oz of gold per person on Earth, please describe how your "gold backed currency doing good things for the world restoring sound money" works.

Greenskeeper_Carl's picture

it would probably work pretty much how it did throughout human history until the past century or so. And when i say 'gold backed' i mean silver and gold, commodity money that can't be created out of thin air like what we have now.

withglee's picture

Have you ever run the numbers? Today, 1oz of gold is less than $2,000. Since there's only 1oz per person on Earth, that has to balance each average person's  outstanding trades plus their savings. That is what they can demand in gold and silver in such a system. It's only petty cash to most of the people I know ... but maybe a pretty big deal to those in Ethiopia.  Further, adding silver doesn't help hardly at all. There is only 1/5 the value of silver existing as gold, so adding silver would bring you to less than $2,400 per person.

Now, knowing that (the facts) ... tell me how your gold and silver backed sound money system works.

Kirk2NCC1701's picture

@Truthseeker2: "Obama's Ukraine Fiasco Will Trigger US-EU Economic Ruin"

This "Ruin" is deliberate and preplanned... Either

(1) to front-run a shift of the EU toward Eurasia (bad for Anglo-American Alliance and the USD as the GRC), or

(2) to use it as a pretext for a canned solution by the Globalist Banksters in response to a crisis of their making.

By using economic and political events as both cover and pretext, said Globalist Banksters ride in as heroes, instead of the true villains that they are.  So, instead of an asset confiscation, lynching and hanging, they get accolades and maintenance of wealth, power and lifestyle.

Through the use of the internet and social networking, libertarian people can organize to bring the Truth and Genuine Solutions (based on proven, universal and timeless principles) to every household.

Bindar Dundat's picture

Do you think you can ever counter act  chaos?

No single organization could ever manage  billion people within 300 countries,  Even after a full John Fairley <>; war there would still be 4 billion people knocking around without cause so forget the theories of collusion -- can't happen.


Kirk2NCC1701's picture

Ever heard of Hierarchies?  Leveraged Control?  Networks?  Hierarchy of Networks?

That's how Governments, Oligarchs, complex orgs and... the brain even work.  The latter (hierarchy of networks) dominates in the most complex of systems.

free_lunch's picture

There is a lot of distraction going on in the world..  but:

German MEP Helmut Scholz explains why the GUE/NGL group in the European Parliament is calling for an immediate end to negotiations on the Transatlantic Trade and Investment Partnership (TTIP).

Read the article:

Watch the video: 



I don't know how much of this (NWO -Free Masonry - conspiracy) video is truth or fantasy, but it at least stimulates critical thinking:

Illuminati ..NWO..Freemasons for Dummies video


Law abiding citizen

Anybody's picture

Re: Kirk2NCC1701

(2) to use it as a pretext for a canned solution by the Globalist Banksters in response to a crisis of their making.


A very keen analysis Captain Kirk. And hence it will drag on for another century or so long enough for it to be forgotten who the culprits were. Where's First Officer Spock when you need him?

Implied Violins's picture

This is exactly correct. The proof is all here in this brilliant post by Ken at '':

This whole world scene has been created to make the west look like bad guys and then issue in the east as the good guys...but in the end, the people at the very top (IMF/BIS/BRICS) will be in charge - of the ENTIRE WORLD. When this current shitstorm ends people will be so relieved that they won't care to look at the bigger pattern; they will just be happy that they are still alive.

When this shit ends, we can't be satisfied until ALL OF THEM, ALL the bankers and politicos everywhere are GONE.

yrbmegr's picture

We're always predicting disaster here on ZH.  Someday, we might be right about something.

FreedomGuy's picture

I have noted that, myself. Yet, I tend to agree with many of things posited. To me, the core problem is the entire concept of central planning. As central planning grows the true value of everything is lost. The true value of labor, money and products all get lost. In this process there are still winners and losers so things do not break instantly. There were lots and lots of winners in the house pyramiding for a long time. Then in a flash they were all losers. It appears to be starting again. The ability to adapt to government and central planning is enormous so it makes sense to me that there will be ten predictions of disaster to every actual disaster. It is just the magnitude and timing that are hard to predict.

Dick Buttkiss's picture

Along with lying, cheating, stealing, killing, and indoctrinating to render the first four respectable, there's one more thing governments are good at — extend and pretend — the problem being that the longer this strategy "works," the worse it will be when reality finally has its say.

Escrava Isaura's picture

Dick Buttkiss, you said: "extend and pretend..."

Your rhetoric is pretty good at that, too.

Slave's picture

Everybody hates you. Go away.

Greenskeeper_Carl's picture

do yall remember this person trolling unttil recently? apparently he/she has been a member for 4 years, but i don't remember seeing this account until recently, and its always trolling. but yes, please go away

Space Animatoltipap's picture

The own material mind is the actual disaster. 

Spitzer's picture

ZH gets on the Euro hate bandwagon as much as anyone.

El Vaquero's picture

What ZH has missed in its predictions of disaster is timing.  I certainly never thought that we would have carried on this long post Lehman.  One of the reasons for this, I think, is that we need to hit a few problems all at once where any one problem is solvable all by itself, but all of them together overwhelm the system.  That day will come, but the question is when?  If I could answer that with real certainty, I would wait until right before, then take out a credit card with the largest line of credit possible and max it out.


With potential triggering events coming faster and faster, the chances that we'll see something bad are getting higher.  What if war in MENA reduces world oil output by a significant percentage while Russia gets a few more major players on board with bypassing the dollar at the same time?  We're screwed.  Especially if you throw in another banking crisis at the same time. 


I think that one of the problems is that we are and have been in a state of collapse for quite some time.  At first, it was so gradual, we didn't even notice it.  Times were even good at the beginning and the middle of this collapse.  Lehman just ripped the facade off of it.  We've been experiencing the slow grinding part of a collapse for a while, expecting the collapse to be rapid.  I expect that there will be a rapid phase, and I expect it sooner rather than later, but I'm not going out and signing up for that line of revolving credit.  I fully expect to get caught by surprise, but not with my pants down. 

Escrava Isaura's picture

El Vaquero, you said, not my words: "...not with my pants down."

I am here to help your keep your pants... where it should be (covering your ass):

COSMOS's picture

Collapses and world wars have definitely repeated themselves, one good litmus test a guy was saying is when you hear the elevatorguy in a NY giving you advice definitely get out of the market.

Escrava Isaura's picture

I would suggest you to give an ear to the shoeshiner.... You will always get something back...... better.

chunga's picture

Just like being in a boat alone far from the beach. I can handle one problem, maybe two, but more than that and the water starts turning green.

El Vaquero's picture

I think you mean the water starts turning gold.  Or silver.  Boating accidents are funny like that.

COSMOS's picture

Speaking of boating.  That is a good way to drop off the radar.  Sail the Pacific, catch your own fish, and with sail power you dont have to worry about gas payments.  Not only that but no property taxes, and you can maybe do a little charter on the side to make some money on the side tax free.

what&#039;s that smell's picture

....speaking of boating....don't forget pirates, drug runners, large waves, carcinogenic pollution, coral reefs, pesky leaks, sharks, mercury-laden fish, dead calm, and big wind.

...oh yeah....drowning and hypothermia.

tarsubil's picture

I completely agree. If you get around and start looking at the society of the US, it has already collapsed. This country is a complete and total disaster. But it is all behind the phony McMansion walls. The US is not going to last another generation as top dog. It's over. Everywhere I look, the thing is rotten. There are so few healthy people, in terms of physical, emotional and spiritual, in this country it is sad.

The mask will be ripped completely off in the next 20 years and the dark twisted thing underneath will shrivel up in the sunlight.

stocktivity's picture

Vac - That's one good post

Greenskeeper_Carl's picture

according to john williams of shadowstats, if you use a more realistic deflator, such as what the govt used to calculate inflation in 1980, before they started constantly tweaking it to make inflation seem lower than it is, we haven't had real growth since 2005 (I would argue its all been fake since at least 2000). Which means we have been in a technical depression for almost a decade. Whats caught most by surprise is how long they have been able to paper over the problems and fool everyone. One thing ive noticed that may be an indication of things strting to unravel is the way gold is hammered, and how it is losing its effectiveness. Until recently, a few hundred million worth of futures dumped on the market during thin trading hours could knock close to 30$ off the price, and also trigger a brief halt in trading. Now, they are having to dump 1.5 billion at a time to get a signiicant move. But even that ammount, 7 or 8 times what was used last year, doesnt even trigger a stop, or shave more than a few dollars off

El Vaquero's picture

Go back to 1970-1971.  That's when US oil production peaked and Nixon took us off the gold standard.  We've had good times since then, but that was the inflection point.  People had to start working more hours or go into more debt to maintain the same standard of living.  We've had good times since then though.  Then, the employment-population ratio peaked around 1999 or 2000. Another red flag.  We've been in decline for a while, and the tricks being used to maintain the status quo are becoming less effective.


Think about it this way, we can look back now and see that 40 years before its demise, it was obvious with 20-20 hindsight that the Western Roman empire was in decline.  They were debasing their currency and imposing onerous taxes and regulations before the end.  Sound familiar?  What would most Romans have said if they had been told that in 4 decades, Rome would be no more?  One striking difference between today and antiquity to be kept in mind is that transport and communications are much faster.  Any aspect of collapse that depends on the speed of communication or transport can happen much faster today. 

debtor of last resort's picture

Someday, the hedge is just like the 'price' of silver. Keep stackin'

NoPension's picture

I'm learning Spanish. Can't beat em, join em.