Biggest EU Banks Embark On The Mother Of All Debt Binges

Tyler Durden's picture

Submitted by Don Quijones via WolfStreet.com,

Spain’s three biggest banks, Banco Santander, BBVA and Caixa Bank, have got off to a flying start this year having issued €8.6 billion in new debt, seven times the amount they sold during the same period of last year. The last time they rolled out so much debt so quickly was in 2007, the year that Spain’s spectacular real estate bubble reached its climactic peak.

Santander accounts for well over half of the new debt issued, with €5.12 billion of senior bonds, subordinate bonds, and a newfangled class of bail-in-able debt with the name of “senior non-preferred bonds” (A.K.A. senior junior, senior subordinated or Tier 3) that we covered in some detail just before Christmas.

Investors beware...

This newfangled class of bail-in-able debt was cooked up last year by French-based financial engineers in order to help France’s four global systemically important banks (BNP Paribas, Crédit Agricole, Groupe BPCE and Société Générale) out of a serious quandary: how to satisfy pending European and global regulations demanding much larger capital and debt buffers without having to pay investors costly returns on the billions of euros of funds they lend them to do so.

That’s what makes senior non-preferred debt so ingenious: it pretends to be simultaneously one thing (senior), in order to keep the yield (and the cost for the bank) down, and another (junior) in order to qualify as bail-in-able. What it amounts to is a perfect scam for big banks to bamboozle bondholders – usually institutional investors like our beaten-down pension funds – into buying something with other people’s money that doesn’t yield nearly enough to compensate them for the risks they’re taking.

Put simply, if a bank is resolved, holders of these instruments could lose much or all of their money, similar to stock holders. According to Olivier Irisson, executive chief financial officer at Groupe BPCE, France’s second largest bank, it’s a “very good compromise for investors and banks.”

Judging by how they’re selling, yield-starved investors seem to agree. After the new bonds were rubber stamped by the Banque de France in mid-December, investors gobbled up €1.5 billion of Credit Agricole’s senior non-preferred 10-year bonds despite only receiving about 45 basis points more than they would get on traditional senior debt and about 65 basis points less than on subordinated.

Voracious Appetite

Société Générale quickly followed CA’s lead, issuing €3.5 billion of 5-year dollar-denominated notes. Investors lapped it up. During the same week BNP Paribas sold €1 billion of bail-in-able debt, a mere drop in the ocean compared to the €30 billion of senior non-preferred debt it hopes to raise by 2019. BPCE issued its first non-preferred deal in the second week of the year, a €1 billion six-year trade that attracted $2.4 billion of orders. It then launched an even riskier samurai (yen denominated) non-preferred trade, and most investors were not put off by the A- rating.

“2017 will be the year of senior non-preferred,” said Vincent Hoarau, head of financial institutions syndicate at Crédit Agricole. Europe’s biggest banks certainly have a voracious appetite for new funds. The European Banking Authority recently estimated a €310 billion gap in all the region’s banks meeting their total loss absorbing capital requirements before the 2019 deadline. And much of that gap is expected to be filled by senior non-preferred bonds.

The European Commission has already endorsed the financial instrument, rating agencies have also lent their approval and the ECB can’t wait to come up with “a common framework at Union level“. However, the legislation permitting its issuance is currently only in place in France and is not expected to be passed elsewhere in Europe before the second half of 2017, at the earliest.

But certain banks have already jumped the gun, including Holland’s ING and Spain’s Santander, both of which have begun issuing senior non-preferred bonds despite the fact their issuance has not been officially sanctioned by each bank’s respective national regulator. Even more ominous, Italy’s fragile superbank, Unicredit, has also expressed an interest, though it will probably have to wait for Italy’s banking crisis, of which it has a major part, to blow over (assuming it can) before joining the party.

A Staggering Volume of Debt

Even by today’s inflated standards, the volume of debt the G-SIBs hope to issue in the next two years is staggering. Santander alone intends to issue between €43 billion and €57 billion, in order to meet the capital requirements that are scheduled to come into effect for the world’s 30 biggest banks on Jan 1, 2019. That’s between 60% and 75% of Santander’s entire market cap. And if everything goes according to plan, most of that debt — between €28 billion and €35.5 billion worth — will be issued in the form of senior non-preferred bonds.

For the moment there’s little concern over investor appetite, says Demetrio Salorio, global head of debt capital markets at Société Générale Corporate & Investment Banking. “The investor base is keen,” he says. “They are far more at ease with the instrument than they were 18 months ago.” Spreads could even tighten, he reckons.

All of which is testament to just how desperately starved of yield institutional investors have become in the NIRP environment as they’re trying to get their hands on financial instruments that offer virtually no security in exchange for the slimmest of additional returns.

But the investor pain, when it’s time for it, should relieve taxpayers and the public. When the bank collapses and is being resolved or recapitalized, these bondholders are supposed to get bailed in and lose some or all of their investment. This would protect taxpayers at least to some extent from getting shanghaied into doing that job. And if institutional investors who take that risk don’t get paid enough for taking that risk, so be it. It’s just pension funds and retirement nest eggs under their management that will take the hit.

Unless, of course, the government, under political pressure, decides to bail out those bondholders anyway with taxpayer money, as they’re doing in Italy’s banking crisis at the moment, on the pretext that these bondholders were naive retail investors who were missold a similar version of bail-in-able junior bonds. And so it would be back to square one.

In Italy, the insider blame game has begun. Read…  Italy’s Banking Crisis Is Even Worse Than We Thought

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misalkin's picture

Would be nice to know exactly who wasted 8.6 billion euro buying those bonds.  

  calling them an investors is a bit silly.

 

 

 

 

Ghordius's picture

if you are French, or Spaniard (and in some cases other nationalities, too), it might be your pension fund, so, ultimately... you

bought possibly by the same pension fund manager board that bought all that sliced/diced CDO stuff that was used to fuel the "Everybody Ought To Have A Home" frenzy in the US that went so damn sour and ultimately created the last serious financial crisis

and there you have it: they have to buy something. at which point you could ask what is better: a RE frenzy far away, governed by a polity that might or might not be very kind in a crisis to foreign "investments" or something more near to home? decisions, decisions

JohnGaltUk's picture

This will become the biggest meltdown in human history. We read about the bulb bubble and chuckle, hell at least the dutch got a plant they good grow and admire. We are are going to be left with pieces of paper with a worthless promises written over them. Could be handy getting your fire started if you dont have kindling.

Lets hope we dont go full Mad Max.

YouJustMadeTheList's picture

Eureka! Watson come quickly I need you. I've invented the perpetual motion machine!

Ghordius's picture

yes. and... no

the problem here is that yes, the "global" bond bubble is liable to burst

but... bond bubbles burst in a different way from other bubbles. and very often sovereigns prefer to take the option to sacrifice some of the value of their currencies instead of sacrificing some of the value of the bond bubbles

when the US subprime bubble was pricked by the decision of some megabanks to gang up on one of them... TARP, TALP and other measures amounting to some 1'000 billion were done/taken

de facto, those private "bonds" (actually often more complex debt instruments) got support by... other bonds, this time US Treasuries

as a reminder, lots of european pension funds got hit, nevertheless

and Hank "Tanks in the streets" Paulson was livid when he realized that Washington could not push the european countries to do an Euro-Tarp/Talp

but... the FED and the ECB found "a way" to calm the waters: a gigantic 1'000 billion swap between them. it took over one year to get that thing slowly down

interestingly, it's still seen by some as the FED "saving" the ECB, or something

but the problem was in the dollar markets across the Atlantic, specifically all those megabanks in London and elsewhere that desperately needed dollars, and asap, just to fill the huge gaps from the subprime crisis

so yes, debt bomb. aka bond bubble bursting. but it's very unwise to think you know in advance how it detonates, and what the end-results will be. the history of debt bombs detonating is full of very surprising twists and turns

GreatUncle's picture

By process of elimination it is not the likes of us so it must be them!

Could be the elites have figured out the only way to keep this all going is they are now pumping their ill gotten gains into their own system extending it into the future. You could do the same with QE whereby you CTRL-P, hand it to the treasury to pay the interest on the debt and let it go on forever.

The have nots that are us in society in any eventuality will lose, not being able to obtain any of this.

Ghordius's picture

"Judging by how they’re selling, yield-starved investors seem to agree. After the new bonds were rubber stamped by the Banque de France in mid-December, investors gobbled up €1.5 billion of Credit Agricole’s senior non-preferred 10-year bonds despite only receiving about 45 basis points more than they would get on traditional senior debt and about 65 basis points less than on subordinated."

this is the kind of news that makes financial reporters and many economists... salivate. and chant "growth, growth, growth"

nevertheless, I don't see where this otherwise excellent article leads, or tries to lead. at the end, banks can only lend to people and firms willing to borrow. most of this new credit is for RE, whereas the Spanish RE market is recuperating quite nicely after a long spell of relative quietness. and bonds have a tendency of getting problems years after they have been issued

note the involvement of the Banque of France, in this. no, not the ECB, of which the Banque is part/shareholder, but the BoF itself

meh. do you remember the US "Junk" bond frenzy?

GreatUncle's picture

+1 Ghordius for the growth bit ... they will take any growth they can in a stagnted / contracting world.

Singelguy's picture

The most interesting point is that all this new debt will be dollar denominated. Unless they are certain that the ECB is going to buy up 100% of it, the banks are taking considerable risk. IF LePen wins, and Merkel loses the euro will most likely fall which will place a greater burden on those banks to make the interest payments. Furthermore, it seems the Fed is likely to increase interest rates this year, further strengthening the dollar.

JohnGaltUk's picture

Sub prime BONDS, who would have thought!!!

Suleyman's picture

Sub prime BANK bonds, who would have thought!!!

Fireman's picture

Urupp will need another 600 million migrating Soros Golems from USSA'S serial judaic wars in the Muslim oil patch before it is reduced to the state of Modi's backward Third World India where the fleeced sheeple have been scanned, impoverished and corralled in their electronic sheep pens awaiting slaughter. Otherwise the globalist wet dream of cash kill WILL not happen in Urupp even with the inevitable flushing of Count Draghi's toilet paper €uro. Germany, where currently 80% of all financial transactions involve cash, will not be conned into accepting a so-called digital Deutschmark when the €uro dollah is finally dumped.

US "AID"... like napalm only "better"!

https://www.youtube.com/watch?v=mA3Nt5bLrFs

 

https://kafila.online/2016/11/17/death-by-demonetisation-satya-sagar/

Iconoclast's picture

It's happening again, only this time it's different and there really is no saviour. The banks are on a full tilt, death march; expecting their governments and wider society to back stop and socialise their losses, but after NIRP and QE to infinity there's nothing left. There is no magic bullet this time, the engorged monumental debt will collapse the system from within.

InsaneBane's picture

This is exactly what they want, total enslavement and debt is their ally..

Batman11's picture

Bankers are given the privilege of creating money out of nothing for loans which they can charge interest on.

In reality it provides a mechanism for you to borrow your own money from the future and the interest you pay is the charge for this service. You pay the initial sum, plus the interest, back in the future and get to spend that money today on a house or a car or whatever.

This mechanism has an interesting effect on the money supply as the money comes into the economy immediately and is only removed slowly by the repayments. Very slowly, in the case of long term mortgage debt.

Debt is like a very powerful drug and the immediate high is fabulous, money to spend now on a lovely house. The hangover is long and painful, the 25 years paying for that lovely house.

Neo-liberalism is based on debt and the crack cocaine high of debt leaving an impoverished future.

Party now Spain, the hangover comes later.

It is new debt and money creation of housing booms that makes them feel so good, the new money from the new mortgage debt pours into the general economy feeding a wider boom in the economy.

Leverage up the debt in a housing boom with more debt from derivatives and you get 2008.

Look at the money creation in that boom.

http://www.whichwayhome.com/skin/frontend/default/wwgcomcatalogarticles/images/articles/whichwayhomes/US-money-supply.jpg

Take the crack cocaine of debt and party till the bubble bursts, the hangover then begins.

All the new debt has repayments and as the economy is saturated with debt already, little new debt is being taken out.

The repayments destroy money, make the money supply contract and the whole things goes into reverse, this is debt deflation.

You now have a black hole sucking money out of the general economy.

Reach for the asprin.

Batman11's picture

The impoverished future, that is already in place, is something those at the top are looking to escape from.

New Zealand anyone?

Iconoclast's picture

Operates trade deficits, average house price in Auckland $600k (USD), average wage $35k (USD), personal debt to income 170%...

There is no nirvana.

Batman11's picture

Globalization a set of half-baked ideas that were never going to work.

The elites have noticed and are now buying New Zealand real estate to run away.

They liked the rewards for success but are not so keen on responsibility for failure.

They are going to leave it to those lower down the scale to carry the can.

Neo-liberalism has achieved the same results throughout the West, hollowed out economies where those jobs that used to exist in the middle have been off-shored.

The triumph of an ideology that didn’t actually work and was rolled out globally by an overconfident elite that didn’t bother to check it actually worked first.

The disappearance of the middle class is even more obvious in the US, they are further ahead.

It was a set of ideas that were incomplete and never even remotely resembled joined up thinking.

Let’s offshore jobs to increase profits.

What jobs are going to replace them?

We didn’t think about that.

Let’s have mass immigration.

What about the requirements of a rising population on housing, health care and education?

We didn’t think about that.

Let’s have a multicultural society and go to war in the Middle East.

Won’t this upset our resident Muslim population?

We didn’t think about that.

Let’s use monetary policy to control the economy.

Won’t this have the side effect of real estate booms and busts?

We didn’t think about that.

........ ad infinitum ......

Al Tinfoil's picture

Barnum & Bailey, Extend & Pretend, Printed from Nothing, Backed by Nothing, ZIRP, NIRP, Bail-ins, Bail-outs, Unpayable Debts, Unlimited Credit, Playing Markets with Other Peoples' Money, and the Public Purse on the hook for it all - The Monetary Danse Macabre goes on.

 

Iconoclast's picture

Yep and the inevitable result is cash bans, confiscation, a re set to zero as fossil fuels are depleted, rendering our consumerist society finished.

BritBob's picture

The UK has opted for a hard Brexit especially when one country (or part of a country in Belgium) can stall negotiations for so long. Spain could act in a similar fashion over Gibraltar and has the cheek to maintain its Gibraltar sovereignty claim. Claim?

Gibraltar - Some Relevant International Law: https://www.academia.edu/10575180/Gibraltar_-_Some_Relevant_Internationa...

So it looks like a quick hasta luego !

 

Let it Go's picture

The fact is the Euro-zone banks are neither "fixed" or is the system healthy. Greek debt it again an issue. Italy is deeply in debt, unemployment is high in many countries especially among the youth population, and refugees continue to flood in adding more stress to an overburdened social system. The article below delves into these problems.

 http://brucewilds.blogspot.com/2017/02/euro-zone-woes-continue-enshrouded-by.html

Know shit's picture

If the banks would buy gold with that money and made sure they actually owned it ( hold in their hands), it would be a smart move.
Yes I know silly me, but sometimes dreaming is nice..

Take care.

angry_dad's picture

the chinx and russians have been buying up all the gold hand over fist

JailBanksters's picture

Bank A loans money to Bank B, Bank B loans same money to Bank C, Bank C loans same money to Bank A

And repeat

What could possibly go wrong ?

hendrik1730's picture

For the banks, nothing. They get bailed out anyway, by means of "new" products like that senior-junior-bail-in stuff. Only a complete idiot, a central banker or a corrupt pension fund manager buys shit like that.

angry_dad's picture

The debtor nations have finally learned a valuable lesson;

If you owe a bank a million dollars, they own you

If you owe a bank a billion dollars, you own them

Macavity's picture

I hereby declare war on euphemisms. How well would senior non-preferred BS have sold under its true economic name, "fixed-term, non-voting, non-ownership*, downside-only shares"?

* voting rights and company ownership are triggered when there is no value in the bank

Macavity's picture

Perhaps the most telling thing is that the Spanish banks issued these without regulator approval. A race not to be the first (country) to the bottom?

whatsupdoc's picture

Hey!  I only clicked to see a bigger picture.  I wanna see the cartoon writ large please !

MikeOz's picture

ALL IS GOOD PEOPLE. WE PRINTED TRILLIONS OF WORTHLESS FIAT CURRENCY TO MAKE OURSELVES FILTHY RICHER THAN EVER! 

WHEN IT IMPLODES, WE WILL MAKE YOU.......BAIL US OUT AS WE ARE TOO BIG TO FAIL!

Signed

Bankster's Inc