Like Asia, European equities have gotten a lot cheaper compared to historical averages. Another simi...
Cyprus Is Just the Beginning
04/05/2013 9:00 am EST
The chickens (of the banking crisis) are coming home to roost in Europe, writes John Mauldin of Thoughts from the Frontline.
European leaders demonstrated a prodigious ability to kick, poke, and massage the can down the road to defuse crisis after crisis, and to indefinitely postpone the inevitable. However, the shock in Cyprus reveals an absolute lack of preparedness in dealing with a problem that had festered for several years.
While there was no official deposit guarantee in place in Europe, the implicit guarantee was €100,000, a number that had become all but sacred during the recent banking crisis. To wake up and find that European leaders not only did not consider this protection to be implicit, but also planned to demand losses from all depositors, was quite the shock. I think this may have been the single worst “call” by European leaders since the beginning of the crisis in 2008.
One of the founding principles of the Eurozone was that a euro anywhere within the zone would be as good as one anywhere else. Euros would flow freely. All for one and one for all.
Except now, euros in Cypriot banks are no longer equal. Not only are they going to be “taxed” (or whatever euphemism they end up choosing—they’re still debating that one—but if it were your account you might call it theft), but deposits will be subject to capital controls.
Basel III standards require European banks to increase their deposit ratios. This European response to Cyprus is going to make that harder for banks in smaller European countries to accomplish.
The chairman of the group of Eurozone finance ministers warned that the bailout marked a watershed in how the Eurozone dealt with failing banks, with European leaders now committed to “pushing back the risks” of paying for bank bailouts from taxpayers to private investors.
It is not just tiny Cyprus or even Spanish banks that will be looked at with growing worry by large depositors. David Stockman had this to say on European banking, and in particular French banks:
"BNP Paribas (Euronext: BNP) is the classic example: $2.5 trillion of asset footings vs. $80 billion of tangible common equity, or 31x leverage. It has only $730 billion of deposits, or just 29% of its asset footings, compared to about 50% at big US banks like JP Morgan (JPM).
"It’s teetering on $500 billion of mostly unsecured long-term debt that will have to be rolled at higher and higher rates. And all the rest of its funding is from the wholesale money market—which is fast drying up—and from repo, where it is obviously running out of collateral.
"The three big French banks have combined footings of about $6 trillion, compared to France’s GDP of $2.2 trillion. By contrast, the top three US banks, no paragon of financial virtue—JPM, Bank of America (BAC), and Citigroup (C)—have combined footings of $6 trillion, or 40% of GDP. The French equivalent of that number would be $45 trillion for the US banks. Can you say train wreck?
"It is only a matter of time before these French and other European banks, which are stuffed with sovereign debt backed by no capital due to the zero risk weighting of the Basel lunacy, topple into the abyss of the shadow banking system where they have funded their elephantine balance sheets.
"And that includes Germany, too. The German banks are as bad or worse than the French. Deutsche Bank (DB) is levered 60:1 on a common equity to assets basis, and its Basel “risk-weighted” assets are only $450 billion, but actual balance sheet assets are $3 trillion. In other words, due to the Basel standards, which count sovereign and other AAA assets as risk-free, DB has $2.5 trillion of assets with zero capital backing!
"This is all a product of the deformation of central banking and monetary policy over the last four decades, and the destruction of honest capital markets by the monetary central planners who run the printing presses.
"Furthermore, this has fostered monumental fiscal profligacy among politicians who have been told for years now that the carry cost of public debt is negligible and that there would always be a central bank bid for government paper. Perhaps we are now hearing the sound of some chickens coming home to roost."
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