Let’s go back to the IMF’s Global Financial Stability Report that we mentioned last week, but this time let’s take a look at the first chapter, in the section regarding european banks (starting at page 39). And the international institution’s assessment is rather worrisome because, it says, the number of non-performing loans on the european banks’ balance sheets has doubled since 2009, going from 400 to 800 billion euros. Of course, as can be expected, most of those banks are from the most indebted countries (Italy, Spain, Portugal, Greece).
So, an ominous threat looms on the banking sector in the southern countries, and there is a risk of contagion to the northern ones. Are there any reasons to hope for any improvement? No, on the contrary, states the IMF, estimating that 20% to 30% of italian businesses cannot generate enough cash flow to pay the interest on their debt. In Spain and Portugal, it’s even worse with a proportion of 30% to 40%! With debtors struggling, the situation can only get worse.
In Germany and France, « only » 15% of businesses do not have enough cash flow to service their debt. France had record bankruptcies in 2013, and its economy is obviously less performing than Germany’s... one could think that the french banks have the prescience to « turn off the faucet » very quickly as soon as the first signs of problems arise from their client businesses... In any case, the banking sectors in these two countries are less affected on this point.
With the help of those numbers, we can better measure the chronic incapability of QE plans or other LTROs to produce any bounce in the real economy. The real economy is doing so poorly and the banks are already stuck so much with non-performing loans that the last thing to hope for is more loans to businesses! All this money created out of thin air ends up as reserves at central banks or as speculation on the stock markets, but it certainly does not create wealth. This money is primarily being used to make the banks solvent again, while this 800 billion euros of bad loans should have bankrupted them.
Furthermore, these numbers have to be evaluated in the actual context of the lowest interest rates of the last decades. Would these rates increase significantly, so would the cost of that credit, the number of businesses going under would increase still, bad loans would explode, and those banks would be doing even more poorly...
And, finally, these numbers, either for businesses or for banks, show very well that there is no real self-entertained economic recovery in Europe (except in Germany with its exports), and that only consumer spending, supported by public debt, is saving face. Decidedly, the european banking sector is poised to surprise us again...
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Philippe Herlin Finance Researcher / Member of the Goldbroker Editorial Team
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.