This is part two of our recap of the European Bank Exposure analysis that we released last year in anticipation of a total refresh next week encompassing all of the interesting turns of events. In order to get a full appreciation of the gravity of the capital trap that the European banking system is in, and by extension the European commercial real estate markets, I humbly request that you review the last four BoomBustBlog posts on this topic before you move on, including the videos of my keynote presentation at the ING CRE Valuation seminar in Amsterdam. The video walks through the capital trap quandary that the European banking system is in from a bird's eye level. In this article we will drill down to the street level by illustrating a French bank featured in last year's analysis:
- Over A Year After Being Dismissed As Sensationalist For Questioning the ECB's Continued Solvency After Sovereign Debt Buying Binge, Guess What!
- Click, Clack, Click: The Sound of Falling Dominoes Behind The Door of the Eurocalypse!
- LGD 100+: What's the Possibility of Certain European Banks Having a Loss Given Default Approaching 100%?
- Greece Reports: "Circular Reasoning Works Because Circular Reasoning Works" - Or - Here Comes That Default!!!
- Eurocalypse Cometh! Principal Haircuts, Serial Bailouts, ECB Insolvent! Disruptive Sound Of Dominoes In Background Going "Click, Clack"! BoomBustBloggers Instructed To Line Up Bearish Positions Again!
It has been my belief that the global market crash of 2008 brought upon by the US mortgage/housing market bubble bursting has never finished. Massively collaborated attempts at global finance central planning have stalled the plans of Mother Markets, but her wrath cannot be held at bay. Reference Do Black Swans Really Matter? Not As Much as the Circle of Life, The Circle Purposely Disrupted By Multiple Central Banks Worldwide!!! for my complete take on the situation. In the meantime, let's look at what French banks did to claw for yield as the US bubble popped in the 2007/2008 period. As derived and excerpted from Euro Bank Soveregn Debt Exposure Final - Pro & Institutional (934.65 kB 2010-05-13 00:11:32):
As can be seen from above, it is not only the US who has piled leveraged unit of fiat currency upon leveraged unit of fiat currency in an attempt to spin gold out of spider webs. Indeed, you can't even blame just the members of the PIIGS anymore, either, for although they gorged on debt - someone had to supply said debt and there is still such a thing as risk management and/or due diligence. No?
What is the result of throwing pound after pound of leveraged fiat currency meat into the hungary maw of an overweight European brown bear who is naught to give it back nor make good use of it? Let's ask one of the banks from year's report...
As you can see, the haircut estimtes we used last year actually pale as compared to what Mother Market is enforcing this year. With that in mind, remain cognizant that the numbers you are about to see were based upon proposed losses that are nearly half of what they are today! The update to this document will have the more recent loss figures for the banks, using a realistic methodology, and not the "delay and pray" accounting smoke and mirrors currently reported as results by many banks - and as allowed by their regulators. For those who wish to access our most up to date figures, there are subscriber-only online spreadsheets illustrating NPV of losses from probable restructuring scenarios:
- Greek Default Restructuring Scenario Analysis
- Greek Default Restructuring Scenario Analysis with Sustainable Debt/GDP Limits and Haircuts
- Portugal’s Debt Ridden Finances: An Analysis of Haircuts, Restructuring and Strategy – Professional Analysis
- The Spain Sovereign Debt Haircut Analysis for Professional/Institutional Subscribers
- Ireland Default Restructuring Scenario Analysis with Sustainable Debt/GDP Limits and Haircuts
Whoa!!! A 63 Texas Ratio when losses were half of what they are now????!!! As Americans, and TExans from the S&L Crisis area know, a Texas Ration of 100% generally means no more bank!
Where would said Texas Ratio madness come from? Why, exposure - of course!
Remember the mark to market game being played as detailed in Is Another Banking Crisis Inevitable? and as illustrated in the Amsterdam ING Conferene video...
Well, as I explained in both New Amsterdam (Haarlem, Manhattan) and Amsterdam (Netherlands), this restructuring thing is going to spike rates, which will in turn spike cap rates, whick flatten commercial real estate in a very big way. Guess who's exposed to all of the above...
As a sneak preview of the stuff we're putting out next month, check the exposure creep...