The European Banking Authority (EBA) just called for urgent action to be taken in regards to European banks’ bad loans. Because Italy is not the only country having to grapple with this problem: EBA’s chairman, Andrea Enria, is worried that ten European countries have more than 10% in non-performing loans (NPLs), which shows the extreme fragility of their banking system. Those NPLs are loans for which the payments are late for 90 days or more. Here are the NPL ratios of the banks of those ten countries (source: EBA’S Risk Dashboard, pp. 10 and 27):
Bulgaria 13.2% *
Hungary 12.8% *
Romania 10.7% *
Croatia 10.5% *
(* non-members of the euro zone)
We can see already that the banking systems in Greece and Cyprus are factually in default, since almost half of their loans are NPLs – they can only survive with money injections from the EU and the IMF. And several countries are in bad shape, the last four not being members of the euro zone, which adds the risk of exchange (a possible collapse of their currency). With one out of five loans not performing, Portugal’s banking system isn’t far from collapsing. Even Ireland, though it looks like it’s doing better economically, has an NPL ratio to be concerned with.
But the big chunk, of course, is Italy, with 276 billion € in NPLs, according to the EBA, or 360 billion €, according to the ECB (we’ve discussed this before). Furthermore, the “no” victory in the constitutional referendum held last December 4 has pushed Matteo Renzi to resign, which marks the start of a high risk period of political uncertainty. When will the anticipated elections take place? Can Beppe Grillo’s 5-Star Movement – against the euro and leading the polls – win them? These questions are paramount because, of course, a banking crisis followed or not by an exit from the euro would have systemic repercussions on the whole of the euro zone, with France being the first domino likely to fall, as we’ve seen.
And what is the EBA’s proposition to face this threat? Create a European “bad bank” that would gather all the bad loans, would try to upgrade them and resell them within three years. For the EBA, this initiative would be “urgent and achievable” – indicating how dire the situation is. The final losses would be borne by the countries of origin of the loans, with no mutualisation (to which Germany is opposed). Well, this seems to be the plan today, but how could Greece survive without getting, again, money from Europe? The answer is plain: the European taxpayer will foot the bill.
Let’s stand back a little... As we can see, the European institutions have no clue as to how to avoid this potential European banking crisis. We’ve only mentioned non-performing loans, but there are other aspects, such as the low level of equity, the astronomical amount of derivatives with certain banks, the critical situation with Deutsche Bank, etc. Should we use the printing press like the ECB is doing (80 billion euro a month, 60 starting in March)? Should the savers bear the cost, despite the risk of bank runs and political crises, as the Commission prescribes with its BRRD directive? Should we create a “bad bank”, as recommended by the EBA? Well, no one knows for sure, and Europe is marching toward this crisis in indecision and confusion.
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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.