Bad loans are a real problem for European banks, as the ECB has often stated. According to its own data, non-performing loans (NPLs) amount to close to €1 trillion on the Euro zone banks’ balance sheets, or 6.2% of their total loans, whereas they account for only 1.3% in the United States and 0.9% in the United Kingdom. This cruel comparison should have us worrying.
European banks have succeeded in getting the regulatory authorities to not mandate them to account for those bad loans at fair value, meaning in losses to their net value, which would reduce their equity, even though it is recommended in the International Financial Reporting Standards (IFRS). By reinstating those bad loans on their balance sheets (thanks to JP Chevallier) the debt leverage ratio is deteriorating some more. In France, the leverage reaches 23.3 for Crédit Agricole, 29.0 for BPCE-Natixis, 38.3 for BNP Baribas and 38.9 for Société Générale (in other words, 1 euro of equity for 38.9 euro of liabilities!). The Lehman Brothers bank had a leverage ratio of 32 when it defaulted in September 2008.
Someone has already acted on the premise that this mountain of debt standing on a little pin of money would soon collapse: the planet’s biggest hedge fund, Bridgewater, which manages more than $160 billion, just bet $22 billion on a decline of stocks in the banking sector and other large corporations (Zero Hedge). Since last fall, the hedge fund has been accumulating short positions against 59 large European corporations. They include Italian and Spanish banks, Deutsche Bank, BNP Baribas, ING, insurance leaders Axa, Munich Re, Allianz, as well as large industry stocks that would certainly crater with a banking crisis. Bridgewater is known to act according to macro-economy analyses. The hedge fund considers that the current rise of long term interest rates will have a negative impact on the banks already – to the point – impeded by their bad loans, precisely.
If you don’t have $22 billion to wager like Bridgewater, don’t worry and just buy some physical gold, which constitutes also an excellent way of positioning oneself against unstable debt.
If Bridgewater wins its bet – if the banking crisis occurs – we will see European governments make a fuss about “ruthless and lawless capitalism”, “ultra-liberalism”, the “law of the jungle” etc... A convenient scapegoat. However, it is their own crony capitalism that has led to this insane risk-taking by the large banks, their incestuous relations where one goes from government to the private sector, the permanent conflict of interests between politics and finance, and bankers who are never liable for their banks’ equity.
Ray Dialo, Bridgewater’s CEO, can smell a good deal and he is quite brazen. On March 4, risk filled legislative elections will be held in Italy. We will soon know where to stand.
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Philippe Herlin Finance Researcher / Doctor in Economics
Philippe Herlin is a researcher in finance and a doctor in economics of the Conservatoire National des Arts et Métiers in Paris. A proponent of extreme-risk thinkers like Benoît Mandelbrot and Nassim Taleb, and of the Austrian School of Economics, he will be bringing his own views on the actual crisis, the Eurozone, the public debts and the banking system. Having written a book on gold that has become a reference (L’or, un placement d’avenir, Eyrolles 2012), he wishes to see gold play a growing role in our economies, all the way to its full re-monetization.