Submitted by Mark J. Grant, author of Out of the Box,
There is no European Banking Union. This is a good place to start. It does not exist which is why all of the ballyhoo and discussion in the Press is of such little importance. This grand scheme is nothing more than theory at this point and not a very good theory at that.
Under any scenario presented some plan does not go into place for five years. The legislation could be changed, altered or retracted seventeen times during this timeframe. So when it comes to the next sovereign or banking crisis in Europe there is no Greek template, no Cyprus template and the reality is that there is no template at all for anyone to follow or for investors to rely upon. So for the next five years it will be the whim of the European Union that will dictate what measures should be taken.
This reality has contagion and fallout attached. The risk of owning subordinated debt, preferred stocks and equity in European banks is now incalculable. No one has any idea if another Cyprus conclusion might be forthcoming so that the differentiation between owning American securities and European securities is huge in my opinion. While the risk factor cannot be quantified it is still quite apparent to me that there is much more risk now in owning European securities and also that the market has not, at this point, adequately priced in this risk.
If you have money in a European bank, a depositor either as an individual or a corporation, if you own securities from equity to senior debt, if you have any kind of repo agreement; you are now in a position of heightened risk.
Both Greece with its retroactive clause changes and Cyprus with its seizure of assets, conversion of deposits to equity and the freezing of accounts with capital controls inaugurated, demonstrates one thing clearly; there was no due process of law at least as we know it in the United States. In each of these examples it was political whim that dictated the decisions and for the next five years there will be nothing different. For the next five years it will be politics devoid of the Rule of Law that will decide how anyone is treated when there is a crisis and given the financial condition of the European banks I can virtually assure you that new crises will be forthcoming.
Let's stick to just what we know. Greece, Cyprus, Ireland, Portugal, Spain, Italy and France are in trouble. I am not discussing the markets here but their underlying economic condition. Each of these countries are in a perilous state. If one major bank in any of these nations gets in trouble then you have no idea and I have no idea how the EU might respond. Is it to be the Greek template, the Cyprus template or some new scheme that will be implemented in a late night furry of political decision making? What can be said with accuracy is that there is no template for these decisions and that there will not be one during the next five years!
As usual there will be money made for those that get the timing right. Certain speculators will profit. As usual there will be money lost for those that get the timing wrong. Certain speculators will suffer.
What is of the utmost importance to understand though is that the discussion of a banking union has not led to the creation of one and that a massive amount of risk remains on the table for those that do business with the European banks. Any kind of business. I repeat, any kind of business.
"There was a tiny pop, and the place where Sirius’s head had been was flickering flame once more.”
-J.K. Rowling, Harry Potter and the Order of the Phoenix