EU Taxpayers Brace As Deepening Banking Crisis Means Euro-TARP Looms

Tyler Durden's picture

Authored by Don Quijones via WolfStreet.com, 

If the ECB scales back stimulus, banks face even greater risk of collapse. But now there’s a new solution

Events are moving so fast in Europe these days, it’s almost impossible to keep up. While much of the attention is being hogged by political developments, including the election in the Netherlands, Reuters published a report warning that the European banking sector may face even higher bad loan risks if the ECB begins to scale back its monetary stimulus programs, something it has already begun, albeit extremely tentatively.

The total stock of non-performing loans (NPL) in the EU is estimated at over €1 trillion, or 5.4% of total loans, a ratio three times higher than in other major regions of the world.

On a country-by-country basis, things look even scarier. Currently 10 (out of 28) EU countries have an NPL ratio above 10% (orders of magnitude higher than what is generally considered safe). And among Eurozone countries, where the ECB’s monetary policies have direct impact, there are these NPL stalwarts:

  • Ireland: 15.8%
  • Italy: 16.6%
  • Portugal: 19.2%
  • Slovenia: 19.7%
  • Greece: 46.6%
  • Cyprus: 49%

That bears repeating: in Greece and Cyprus, two of the Eurozone’s most bailed out economies, virtually half of all the bank loans are toxic.

Then there’s Italy, whose €350 billion of NPLs account for roughly a third of Europe’s entire bad debt stock. Italy’s government and financial sector have spent the last year and a half failing spectacularly to come up with a solution to the problem. The two “bad bank” funds they created to help clean up the banks’ toxic balance sheets, Atlante I and Atlante II, are the financial equivalent of bringing a butter knife to a machete fight. So underfunded are they, they even strugggled to hold aloft smaller, regional Italian banks like Veneto Banca and Popolare di Vicenza, which are now pleading for a bailout from Rome, which in turn is pleading for clemency from Brussels.

What little funds Atlante I and Atlante II have left are hemorrhaging value as the “assets” they’ve been used to buy up, invariably at prices that were way too high (often at over 40 cents on the euro), continue to deteriorate. The recent decision of Italy’s two biggest banks, Unicredit and Intesa Sao Paolo, to significantly write down their investment in Atlante is almost certain to discourage the private sector from pumping fresh funds into bailing out weaker banks.

Which means someone else must step in, and soon. And that someone is almost certain to be the European taxpayer.

In February ECB Vice President Vitor Constancio called for the creation of a whole new class of government-backed “bad banks” to help buy some of the €1 trillion of bad loans putrefying on bank balance sheets. Constancio’s idea bore a striking resemblance to a formal proposal put forward by the European Banking Authority (EBA) for the creation of a massive EU-wide bad bank that, in the words of EBA president Andrea Enria, would “make it much easier to achieve critical mass and to create a well functioning market for (impaired) assets.”

Here’s how it would work, according to Enria (emphasis added):

The banks would sell their non-performing loans to the asset management company at a price reflecting the real economic value of the loans, which is likely to be below the book value, but above the market price currently prevailing in illiquid markets. So the banks will likely have to take additional losses.

 

The asset manager would then have three years to sell those assets to private investors. There would be a guarantee from the member state of each bank transferring assets to the asset management company, underpinned by warrants on each bank’s equity. This would protect the asset management company from future losses if the final sale price is below the initial transfer price.

One of the biggest advantages of launching an EU-wide bad bank is that it would avoid the sort of public “resistance” that would occur if it was done at a national level, says Enria. Italian lenders would presumably be able to continuing pricing bad loans at or around 40 cents on the euro on average, even though their real value — i.e. the current value priced by the market — is often much lower. The difference between the market price, if any, and the price the banks end up receiving for their bad debt will be covered by Europe’s taxpayers.

If given the green light, the scheme would pave the way to the biggest one-off bail out of European banks in history. It would be Euro-TARP on angel dust, with even fewer checks and balances and much less likelihood of ever recovering taxpayer funds. According to a banker source cited by Reuters, while Germany has not yet endorsed the EBA plan, the EU documents describe the development of a secondary market for NPLs as a priority. According to Enria, the EBA hopes to finalize matters “at the European level” in the Spring.

The documents also include proposals for a wider “restructuring of banking sectors” as states address the NPLs problem. This “could lead to mergers among EU banks after they offload their bad loans,” a banking industry official said.

In other words, EU taxpayers would have to spend potentially hundreds of billions of euros saving yet more banks from the consequences of their own acts and bail out their bondholders and potentially their stockholders too, with funds desperately needed in other areas. Those banks, once saved and their balance sheets cleansed, would then be handed on a platter to much bigger banks. In return, taxpayers would end up with an even more concentrated, consolidated, interconnected financial system that is even more prone to abuse, corruption, and excess.

The ECB’s policy isn’t about creating inflation but about keeping a financial system and a currency union from collapsing upon each other. Read…  ECB Trapped in its Own “Doom Loop” as Inflation Surges

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EuroPox's picture

This is beyond ridiculous!  Let them go bust, stronger banks can buy the good assets and the crap can be liquidated.  Euro TARP would just be throwing good money after bad.

The game of 'plate spinning' needs to end, or all that will be left, is broken plates.

holgerdanske's picture

that  is the ultimate end in any case!

The unmentionables are just making sure that you are going to be the owner of the plates, when that event occurs.

Nice to have bought all politicians and get laws that just favour you.

 

The French at least have the guillotine, what have the rest got?

EuroPox's picture

Not just 'ultimate' but 'inevitable' - pity they will piss away EUR1Tr getting there.

Arnold's picture

Our Federal Reserve has done it with NPL repackaged as MBS.
They are our toxic asset bank.

https://fred.stlouisfed.org/series/MBST

EuroPox's picture

Sure but it is still just a gift-wrapped turd.

Arnold's picture

My mention of methodology can never be taken as endorsement.

They build walls and AA munitions for people that pass on their financial mistakes to me.

cue in cue's picture
cue in cue (not verified) Arnold Mar 20, 2017 7:42 AM

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I_Am_'s picture

I think there are no plates..only the sticks twirling illusory plates....

TheReplacement's picture

There are no plates.  There is no real crisis or crises.  It is all an illusion to force banking sector consolidation on the backs of the taxpayers and savers.

Does anyone really think that greedy bankers are only in it for the profits?  That is ridiculous.  They are in it for the power too.

Nexus789's picture

An epic number of plates will be broken. 

Debugas's picture

bad loans is a responsibility of the banks that issued that debt

so let them deal with this problem by themselves and if they cannot then let them go bust as they deserve

Ghordius's picture

remember Hank "Tanks in the streets" Paulson?

he asked for an EUR TAARP/TALP, too

EuroPox's picture

He did but he also said "democracy doesn't help" - he would never have been able to force the banks to accept capital injections if that had been under Congressional oversight.  He said you have to move fast and use a bazooka.

There is no way that the leftist micro-managers of the EU (Dijselboom et al.) will stand back and let anyone use a bazooka - they will think they know best ... and that will doom the whole thing to being another very expensive EU failure.

Jubal Early's picture

Paulson was a goldman sachs jew, Ghordius.  I would never make an argument based on the stench emminating from a turd.

The ECB was formed by the Yids in order to use jewish usuray to cement the EU together until hte Kalergi Courove plan was completed.  A Eurpean tarp which was never allowed in its charter (but what do jews care about goy laws anyway) will be used to pay off shabbez goyim to sell out their respective countries.  Something that has been going on since Rosenfeld, Morgenthau and Baruch conquered Europe for the Rothschilds.

Singelguy's picture

Sad but likely very true. The whole thing has to crash and burn before there can be any real change. The good news is that Dijselbloom will soon be gone. He is a member of the party that was virtually wiped out in last week's dutch elections and as such will not be part of the next coalition government.

Drickes's picture

No way Dijsselbloem will be gone soon. His party had a crushing defeat at the elections, so he will be installed full-time head of the Eurozone Group when the new government is formed without his party. EU leaders will "pull a second Tusk" for Dijsselbloem. He is too valuable for Schauble and Merkel.

Drickes's picture

No way Dijsselbloem will be gone soon. His party had a crushing defeat at the elections, so he will be installed full-time head of the Eurozone Group when the new government is formed without his party. EU leaders will "pull a second Tusk" for Dijsselbloem. He is too valuable for Schauble and Merkel.

Dump's picture

Hank Paulson - as crooked as they come.

gatorengineer's picture

Do you think printing a Trillion is going to bother these people?  They could control P that in a few minutes and get back to the hookers and blow.  I thought this was a real problem.

HANGEMHIGHER's picture

We should all register ourselves as banks and get free money and never go bust.

SmedleyButlersGhost's picture

Way too  much work.   Just register as a Democrat and join the Free Shit Army - same result.

SpanishGoop's picture

Not paying much tax in the EU here.

Pweeeeuh.

 

SpanishGoop's picture

"There would be a guarantee from the member state of each bank transferring assets to the asset management company"

 

What if a country doesn't have or doesn't allow national banks to sell NPL's to the asset manager ?

No tax payer liability for that country ?

Batman11's picture

Austerity leaves people with less money to pay back their loans.

So bleeding obvious the elites have missed it.

 

 

Arnold's picture

If it weren't all zeros and ones, you could steal it from the consolidated asset holder and use it to service the past due debt.

Cycle of Life.

gatorengineer's picture

there was NEVER any austerity....  People shouldnt rely on Free shit from the giverment.

Singelguy's picture

Austerity wasn't really austerity. Government just reduced the rate of increase in spending. The real problem is an over taxed and over regulated economy. The 10,000 civil servants in Brussels have nothing better to do than sit around and dream up more regulations to micromanage the EU economy. When you total up all the taxes, the average EU resident is paying 70% of his income to the government. There is little disposable income left never mind the cash to pay interest on loans. The solution is simple. Reduce the size of government, reduce taxes and reduce regulations.

Arnold's picture

Where and when do you want us to help you vote for that?
I'm arranging a bus trip, you need to arrange a friendly polling place.

Ghordius's picture

"Austerity" is just a way to moan about balanced budgets

meanwhile, it's 30'000 civil servants in Brussels. that's the size of a small department in the US, for example the US Treasury Dept.

in context: for a population of 300 million, that's one civil servant every 10'000 citizens

and yes, the average EU resident pays to his national government, which then pays into the EU "kitty" a very small fraction of that "loot"

but 70%? "micromanagement"? LOL

Batman11's picture

Can we put all the EU bankers in the bad bank and get some new bankers in who have a vague idea of what they are doing?

"Prudent lending? Never even heard of it mate" current EU banker.

 

just the tip's picture

is this a seasonally adjusted article?  i ask because this is going on my third year here at ZH, i don't know why my profile says i've been here one, i digress, and every spring these articles about toxic loans and austerity and haircuts regarding the southern european countries struggle with their own banking system, as both struggle with the northern european banking system, seem to dominate the landscape here.  how's that for a run-on sentence?

Let it Go's picture

If things were not already difficult for the Euro-zone they became even more so with the election of Donald Trump. President Trump has dramatically changed the balance of power in Britain’s trade negotiations with the EU. Any hope the Euro-zone is about to suddenly turn the corner is more based on false hope and a wish than a reflection of events on the ground.

The fact is their banks are neither "fixed" or 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

Last of the Middle Class's picture

They will have to inflate it away or lose control. Which do you think they will choose?  TARP on steroids here we come.

Dragon HAwk's picture

Scheme.. I think that word Means, exactly what I think It means

root superuser's picture

System is going to colapse completely and totaly. The more they postpone this colapse, more brutal it wil be once it does happen. For this reason I support this scheme. My parents can enjoy their well deserved pension few years more and I get time to prepare. We need this crisis when it does happen to be hot enough to purge the traitors that enabled it in first place. And getting rid of invaders will be a side bonus.

yogibear's picture

Anyone trapped in the EU are Eurocrat enablers.

Paying for refugees on welfare and destruction of a country's identity.

Vageling's picture

"In other words, EU taxpayers would have to spend potentially hundreds of billions of euros saving yet more banks from the consequences of their own acts and bail out their bondholders and potentially their stockholders too, with funds desperately needed in other areas. Those banks, once saved and their balance sheets cleansed, would then be handed on a platter to much bigger banks. In return, taxpayers would end up with an even more concentrated, consolidated, interconnected financial system that is even more prone to abuse, corruption, and excess."

Abuse, corruption, and excess. That pretty much describes what the EU Collective stands for. Fucking crooks, all of them. 

We extort your money and in return we'll give you a worthless dog and pony show.

And the majority will never know as the EU operates in the shadows and MSM won't say a word.

Singelguy's picture

Instead of keeping the terminally ill cancer patient on indefinite life support, just let him die in peace! The insolvent banks should go bust and their assets seized and sold off at market value. The EU needs the equivalent of the Resolution Trust corporation that the the US government set up in the early 90's to clean up the S&L mess. Then the slate would be wiped clean and new banks could be created but under much stricter capital requirements, i.e., no more fractional reserve banking. It will be painful in the short run but much healthier and less costly to the taxpayers in the long run.

Batman11's picture

Many of the Euro’s problems stretch right back to the beginning; they just didn’t become apparent until the Euro-zone crisis.

The financial sector made an assumption that Germany would backstop all debt within the Euro-zone and set interest rates as if lending to any nation was like lending to Germany.

Later this turned out not to be the case, and caused sustainable debt to become unsustainable debt in many of the nations at the periphery of the Euro-zone.

Everyone could see what was happening, but no one stood up and said there was not going to be any debt pooling.

Many of the Euro-zones periphery nations had been high risk as far as lending was concerned and had previously had very high interest rates.

Central Bankers lower interest rates to encourage spending now and raise interest rates to defer spending into the future.

Spending had been encouraged throughout the Euro-zone periphery and they were only too willing to follow the incentives being given them.

The nations that were most incentivised to borrow and spend by massive falls in interest rates were those that would have the most trouble when interest rates corrected to their normal very high levels.

The mispriced lending within the Euro-zone carried on for many years and the money creation from new debt allowed the countries to really boom, e.g. the Celtic Tiger, Ireland. Housing booms blew up in Greece, Spain, Ireland and Holland. The new money fed back into wages and prices at the Euro-zone periphery increasing the under-lying imbalances already present.

"historically the German D-Mark had been strengthening since its introduction in 1948 against the currencies of its neighbours, and this reflected – and compensated for – increased German competitiveness. Their weakening currencies allowed German trade partners to keep their export industries in business and their workers employed. By introducing a single currency, future revaluations of the German currency were disallowed. This amounted to a de facto future devaluation of German purchasing power, revaluation of the currencies of the other European countries, and hence would render non-German economies less and less able to compete against German exports over time." Professor Werner

The under-lying problems of the Euro-zone were magnified by early mismanagement.

The ECB wasn’t designed as a full Central Bank and didn’t have the power to intervene when interest rates returned to their correct levels without debt pooling. This allowed the suddenly unsustainable debt problems at the periphery to grow with no mechanisms available to deal with them. Bailing out their banking sectors added to their woes and added to their debt problems.

Can we put Humpty Dumpty back together again?

Wait and see.    

silverer's picture

To the people of Europe: I hope the government takes every nickel out of your bank account and jails your stupid asses if you complain. I've never seen a population so deserving of getting fleeced. Just go home, click you unicorn slippers together, and repeat over and over "I voted for this, I voted for this". And in the meantime, be sure and be nice guys and let in more broke, trouble-making immigrants you can give your homes to while you are sent to the tents they bring in.

Pigeon's picture

What makes you think we (USA) are much better? And I sure don't deserve to get fucked over - many of us don't. I didn't vote for all the shit that has happened in the last 16+ years. Hell, if I weren't 10 at the time Nixon took us off the gold standard, I would have had something to say about that, too.

Place the blame directly where it belongs - on the heads of the puppet masters and shithead politicians and lobbyists. And crony capitalists.

waspwench's picture

While I agree that it is long past the time for the people of Europe to find their collective spine, grab their pitchforks and man the barricades the fact remains that we have been, and still are being, systematically lied to. Information has been hidden and there has been obfuscation and organized confusion at every level. The people of the UK, for example, thought they were voting to join a trading bloc. It was never made clear to them that they were signing up to a political union where their sovereignty would be confiscated. Similarly, it is my understanding that the Greek people voted for Syriza in order to leave the EU and Tsipras stabbed them in the back by continuing to accept increasing austerity and further impoverish the country.

The people of Europe have been undermined by their own sovereign governments and their own political leaders. If, however, they cannot now find the rope, the lamp posts and the will to string up these traitors then they will get what they deserve and they will not survive.

NobodyNowhere's picture

This show is coming to every place where economy is run by banksters and the country is ruled by failed lawyers

Econogeek's picture

Great summary, gives the whole picture at 30,000 feet of the EU banking problem.  Thanks ZH & Wolfstreet.  (I always need non-technical talking points to raise with my liberal friends)

oncemore's picture

UK has to run away as soon as possible and as fast as possible.

MaxDemon's picture

France and any other productive country too!

MaxDemon's picture

The key question is who will be bailed out?  If it is the depositors and those who need the banks to keep functioning as processors of exchange or they too fail (almost everyone with a checking or saving account, a credit card, or a relatively small loan, ie most people and many small businesses), then it has to be done (exactly how is a very different question). 

But the management and owners of the banks should never be bailed out. Most of the last few rounds of bailouts were for the managers and owners, which is why nothing is better anywhere.  Consider this, if the top 5% of the employees at a bank were fired, the bank would still be there, the Tellers would still be there, the ATM and back office people who really make the process work would still be there, even most loan officers would still be there.  The people who were gone would be the ones who made all the bad decisions.  The same is even more true for the owners, except to the extent that the banks are owned by pension funds.  But the pension fund managers would then be in line for their own firings. The same goes for all the regulators that watched it happen, not the lower level people who have to do the audits, but the top level who designed this mess.

Soon the management,  owners and regulators left would wise up and stop being so very stupid.

The how to do it question is easy to explain too, but the politicians have failed miserably at it.  The regulators should never let a bank go below it's actual capital.  If it gets too close then declare it insolvent, force the owners to sell at their reduced value, and find some other bank or institution with enough excess capital to take it.  They should be happy to do so since they will get it cheap (due to the former owners loss), unless the regulators make it really unattractive (as they have been doing in the US at least).  It used to work this way, and Bankers were pretty conservative with how they handled other peoples money, because they would get the short end of the stick if they weren't and they knew it.  In some places, like Canada, they still are more or less, and Canada didn't have the massive bank problems as the US and Europe did.

BTW I'm a retired bank VP, having developed security and control systems to safeguard the fiduciary accounts entrusted to banks.  I and every one I know from that world is incredible insulted by what we have seen in the last 10 years; this is incompetence at the highest levels.  Unfortunately it was easy to see it coming, which is why I and many of my peers retired or changed industries.

fiddy pence haff pound's picture

I wonder how they're gonna get Greece

to pay for this one and take full blame,

again. 

Oh, wait a sec