One of the many advantages of advising a large Italian company – apart from getting paid on time – is that every now and then, you get invited to symposiums in lovely parts of Europe’s most beautiful country. This year, the company – a proper manufacturing company that has specialised in design excellence, so that it can charge more than its peers and thrive – is having its shindig in the Italian Alps.
So yesterday, after a discussion on how the European economy is going to fare in the next few years, I decided to try this skiing lark. Needless to say, Paddy isn’t a natural on the slopes either athletically or aesthetically – but neither is the Mayor of London. One of the oddest meetings I have had in many years was sharing a gondola at 2,000 metres with Boris Johnson.
Sometimes you have got to love the English toffs. While the rest of the piste was head-to-toe in the newest, flashest gear (particularly the Russians, who could ‘out-bling’ any self-respecting rapper), yer man Johnson was in a huge old tweed overcoat, a woolly red hat and a pair of cords.
We chatted for a while and then met again in the mountain-top cafe. What interested me most was that the views on Europe of the classically eurosceptic Johnson were almost verbatim the views I had heard earlier that day delivered by profoundly pro-European Italian businesspeople.
There is a sense on all sides that the balance sheets of the European banking system are wrecked. Johnson, a clear supporter of the City of London, was in no way triumphalist about the difficulties that the European financial system faced; quite the contrary. He feared, as the Mayor of London, that the biggest threat to London was chaos in Europe because, as he pointed out, England is in Europe, whether semi-detached or not and whether the UK Independence Party likes it or not. He seemed to think that the political machinery could eventually crank up to address the issue of bankrupt banks, although he seemed pretty vague on how this might happen. Ever the politician.
As the upper-class Englishman in the hilarious red woolly hat and greatcoat bade me farewell and hurtled down the mountain, the contrast between his hopeful attitude and the pessimism of the Italian manufacturers couldn’t be starker.
The core of Europe’s economic problem is not manufacturing, but banking. The easiest way to explain what is happening is that bankrupt governments are guaranteeing bankrupt banks, which are in turn buying up the bonds of these bankrupt governments.
So let’s think about it for a second. The European governments – all running deficits – are using the European Central Bank (ECB), of which they are all exclusive shareholders, to buy the bonds of European banks, and the bankrupt banks are then using this money to buy the debt of the bankrupt governments that lent them the money in the first place.
While this scam is trumpeted as a success by some of our politicians, it is obvious that the bankers themselves don’t believe that this carry-on can go on indefinitely. How do you know that the bankers don’t believe this is sustainable? Well, just look at what they are doing, rather than what they are saying.
Banks here are so nervous about another big bank going under that they don’t trust each other enough to lend to each other. This is the financial proof of the economic pudding. Interbank lending has all but dried up in Europe. Instead of lending to each other, they are putting increasing amounts of your cash and that of other Europeans – close to €500 billion – on deposit at the ECB. So the European banks, the only vehicle the ECB has to finance the bankrupt European governments, are in turn lending money back to the ECB when the ECB wants them to do precisely the opposite – which is to lend the money to us, the citizens, to get the economy going.
Now consider that these banks are lending money to the ECB at just 0.25 per cent. This is below the rate of inflation, which is running across the eurozone at 2.8 per cent. This means that Europe’s big banks are actually willing to lose money rather than lend it into the system. They must calculate that now it is better to lose modest and quantifiable amounts of money on an ongoing basis than risk the whole lot in a ‘European Lehman’.
The likelihood of a European Lehman – or at least the fear of such an event happening on the continent – is probably more acute in Italy than anywhere else right now. A lot of the chat in Milan last week centred on Italy’s largest lender, UniCredit. It is an enormous bank and most of the manufacturers at last week’s symposium banked with it. This is why they were worried.
Most of these companies have been around for generations. They have in many cases survived two world wars, fascism, years of state corruption and they are still exporting and generating enormous profits. Yet the very bank into which they are depositing their cash can’t raise money.
Last Tuesday, in an effort to get more cash in, UniCredit priced a rights issue – an invitation to existing shareholders to buy new shares in a company – at a massive 43 per cent discount to its closing share price. Yes, you read right, a 43 per cent discount. This move sent shares tumbling 37 per cent in the last three days.
No one wants to touch it. We are not talking about some small-time mortgage outfit; we are discussing Italy’s largest bank, the main player in Europe’s largest bond market and the main bank in Europe’s third-largest economy.
As the snow comes down on the pretty alpine village of Champoluc and the light twinkled inside the cosy cafes, the risk of a massive European banking crisis this year seemed closer than ever. Not because this economist says so, but because a banking crisis is exactly what the behaviour of the banks themselves is suggesting.
When a British Eurosceptic in a woolly hat and suave Italian pro-European industrialists are worrying about the same thing, then it is time to pay attention.
David McWilliams offers independent economic advice through
www.economicsclinic.ie
At the heart of the problem is risk. We have spent a decade where there was no appreciation of risk. Instead the ECB has subsidized our fear of risk, and made us immune to it – by mans of absurdly low interest rates. And after a while of living with a subsidy from the EU, the US Fed, the BoE etc. concerning risk, we find risk hits the scene with a vengeance. Whatever we might say about Boris Johnston, he knows what his duty is as Mayor of London – his duty is to London. Basically, he knows what his… Read more »
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I wonder if history is going to repeat itself – think of the failure Creditanstalt in Austria in 1931 and the type of damage that did. And Unicredit is owner of Hypovereinsbank – there could be trouble ahead ….
David, I don’t think this is one of your best articles. You ask us to pay attention to the European Banking Crisis. All of us here are doing that, and even your ordinary Sean Citizen is aware of this. What we want to see is an end to dithering on a political level. We want decisive action. We want an end to the absurd Austerity for the little guy, and Socialism for the big earner with the big house and the big property portfolio (like Frank 40 gaffs Fahey) and the big box of shares. This problem is an opportunity… Read more »
As Deco says, Boris Johnson is just doing his job, and his bobble hat and hair are a part of the image that enabled him to become mayor of London. There is clearly something very very nasty on the UK’s horizon, and they’ve launched a spectacular PR offensive, see for example, http://www.ianfraser.org/economist-losing-plot-with-shallow-pro-city-propaganda/. The difficulty that the UK has is simply that The City is the beneficiary of a global application of Gresham’s Law, that bad money drives out the good. Given their almost non-existant financial regulatory environment, certainly in terms of larger organisations, banks from all over the world open… Read more »
Get rid of fractional-banking system and central banks. Of course do this gradually as Huerta de Soto proposed in his excellent book on Money, Bank Credit and Economic Cycles.
Minimize the government and public spending as central planning is not possible in economy, it is an utopia as all information available is not possible to aggregate and summarize through statistics, as it is done nowdays in economics.
Leave money to people to decide what to spend on and what to do with it.
Wills,
An article by Der Spiegel on Ponzi schemes, and the entire Western Financial situation.
The grafitti by London grafitti artist “Banksky” says a lot about what we have become in the West, and where it has got us.
http://www.spiegel.de/international/world/0,1518,806772,00.html
its too late……
Nail on the Head in this article David – Perfect explanation of how this rotten bankrupt banking/government circuit is doomed
“”The core of Europe’s economic problem is not manufacturing, but banking. The easiest way to explain what is happening is that bankrupt governments are guaranteeing bankrupt banks, which are in turn buying up the bonds of these bankrupt governments.” There you have the beginning of it. The real problem is that the governments, that is, Merkozy, are determined that the irrational process summarized above can be made to work and that it will lead to economic growth. The Italian manufacturers know that this process cannot work, and they feel the politicians are incapable of abandoning this failed process (partly because… Read more »
“The likelihood of a European Lehman — or at least the fear of such an event happening on the continent — is probably more acute in Italy than anywhere else right now.” Lehman was not a US phenomenon – it was SYSTEMIC, and nearly brought the entire system to its knees, like LTCM before, and Freddie Mac/Fannie Mae, AIG. A EU version is also exactly the same looming threat to the entire system. So Geithner is just as worried now as then, explaining Bernanke’s Euro rescue. It is inevitable, as nothing was done to handle the system other than suicidal… Read more »
Maybe Ireland and a newly independent Scotland ought to use Norwegian krone, at least temporarily, as a way to efficiently escape the Euro.
http://www.businessinsider.com/norway-makes-its-second-huge-offshore-oil-discovery-of-the-year-2012-1?nr_email_referer=1&utm_source=Triggermail&utm_medium=email&utm_term=Europe%20Select&utm_campaign=Europe%20Select
David writes …
‘The European governments — all running deficits — are using the European Central Bank (ECB), of which they are all exclusive shareholders, to buy the bonds of European banks, and the bankrupt banks are then using this money to buy the debt of the bankrupt governments that lent them the money in the first place.’
A classic ponzi scheme that has run out of track like Wiley Keyote and is suspended in thin air looking to camera to the viewer for the next sight gag – fall to earth!!
The domino sequence seems to be
1. Greece
2. Italy
3. Portugal
4. Ireland
See: http://gu.com/p/3376g/tw
It could all happen over a long weekend.
Life in Greece.
This is a case of university educated professionals going back two generations to farm the land for a living.
There is a surplus of certain trained professionals in Greece. Not sure if this will attract investment into Greece yet, which might assist the Greek population in getting an improvement to their condition.
This is typical of what we are reading in the US on the EuroZone.
How Austerity Is Killing Europe
http://www.nybooks.com/blogs/nyrblog/2012/jan/06/europe-cutting-hope/
Good morning all, Whilst I understand David’s thesis, I preceive here that despite the tension surrounding the banks Unicredit and Monte Paschi di Siena, there is no chance that either of these banks nor any other within Italy & EZ will be allowed to fail. Allow me to breifly explain my rationale. Three weeks ago the ECB pumped a €500 billion three year swap at 1% allowing the banks to re-establish the normal “contango” on the yield curve by allowing them to earn circa 5%-7% on government bonds or commercial lending for the next three years. This move alone will… Read more »
I have come to believe the entire crisis is a scam , So the primary goal moving forward is self-preservation.
Protect yourselves now
Don’t be silly bonbon. “Alliance” between US and USSR was convenience. Real point of WWII was to spread communism – if you’re in doubt just look at pre and post WWII map of world. To the victor the spoils. USSR spread all over the place both East and West after WWII. Only left Austria by the grace of God. Plenty of communists still with us in different form ie wolves in sheeps clothing, ref EU commission etc… Communism taking alternative route to direct conflict, this stuff has been choreographed and planned and well in advance too. Next stage is total… Read more »
@bonbon, redriversix,
My focus is finance informed by economics and not jurisprudence. Neither the swap nor the US dollar move are illegal in the EZ nor can they be mocked as scams. These measures are the baby-steps toward a monetising of sovereign debt throughout the EZ and are key in allowing credit to commence flowing again, and thus, enabling the EZ economies to achieve stability and ultimately growth. The €500 billion swap wrong-footed the speculators bur steadied the sovereign yields. Expect a lot more of this in the next seven weeks.
APPOCALIPSIS NOW Nature has given us the invoice, and the globalise economy, and political structures, put in doubt whatever hope we had about an intelligent evolution of the human race. The only thing we have to see is how the transition will be, and what and if, there will be a new paradigm worth waiting for. In the meantime we are going to see a lot of destruction, desolation, and dead, some via natural catastrophes, and some via the financial meltdown, but all man made, as a consequence of over-industrialization, over-population, and over-consumerism. EUROPE-USA-And CHINA and the Globalise World EUROPE… Read more »
By David’s reckoning, we are days away from a mega collapse in Italy and …. then what?
I am not interested in the morals/ lunacy/ history of cockups anymore. I would just like a view of what’ll happen next without the bull$hit armageddon histrionics. My concern is a major halt in logistics with consequential hits to energy. Governments will need to flip to protectionist mode and I suspect plans are already in plan…there I have just engaged in bull$hit histrionics.
Theory no more. China is coming to Ireland. Is this a good thing for Ireland, for Europe?
Here’s an article about the Chinese trading zone in Athlone.
http://www.businessinsider.com/chinas-new-european-trade-hub-an-irish-town-of-18000-2012-1?nr_email_referer=1&utm_source=Triggermail&utm_medium=email&utm_term=Europe%20Select&utm_campaign=new-Europe%20Select
A Hilarious report on a Guardian piece- Austerity, le vice anglais is the fetish-du-jour! Merkel and Sarkozy Achieve Utmost Unity in Berlin Summit Jan. 9 –The heads of government of Germany and France met in Berlin today, to discuss how in the world to try to save the utterly bankrupt Euro system–which is of course a physical economic impossibility. So when they announced that they had, yet again, achieved “unity,” one is properly incredulous. More likely, it had to do with what London {Guardian} economics editor Larry Elliott described today as “the masochistic sexual preferences of upper-class Brits” spreading to… Read more »
Anyone who follows the Economist “Schumpeter” column in the should check where “creative destruction” comes from – Sombach. A quick google check should make one wonder if the editors are simply insane? London {Economist}: `We Should Be Nervous’ Jan. 9 The financial oligarchy exposed its psychotic feudal mindset yet again in a Jan. 7 {Economist} “Schumpeter” column headlined “The Dangers of Demonology / Hatred of Bankers Is One of the World’s Oldest and Most Dangerous Prejudices.” “Hurling brickbats and bankers is a popular pastime,” it starts. “…Anger is understandable…. “But is the backlash in danger of going too far? Could… Read more »
David’s artcle says we have a banking problem in Europe. I would qualify further. We have a political and governance problem which is manifested in the increasing instability of the banking system. I appreciate Piombo’s view, but I am not as confident about the level of control the EU/ECB has. My next question: How come the first place for banks to put money is in the ECB? Why not in Chinese assets or Indian or Brazilian? Investment is falling globally. Global commerce is in trouble. the outlook is seen to be poor. I think the whole thing will break and… Read more »
Leading bank economist thinks that the bondholders will have to effectively get burned.
http://www.independent.ie/business/irish/ireland-must-renegotiate-debt-deal-or-face-default-2983523.html
But the clowns in Kildare Street still stick to the official Brussels dictum on the matter.
Be,ow is presented a budget for the United States that solves its problems but you never hear about from the media. Many Democrats are afraid of it because the defense industry has spread itself out to all 50 states, becoming an important source of good local jobs and local tax revenues. In the state of Rhode Island (the smallest state) the defense industry accounts for 4% of its economy (which is in serious decline) at an average salary of $70,000, considerably above RI and national average incomes. Surely some serious, socially democratic group in the Irish Dail and the EU… Read more »
Deco, John, Paddy and the rest of ye. http://www.facebook.com/pages/The-Land-league/346709032025061?skip_nax_wizard=true This is my contribution being a Mayoman. Namawinelake has ( and God knows who or she is) has and is producing some fantastic stuff about the reality of the economy. David McWilliams has consistently exposed himself to systematic abuse from those who foolishly believe they have got the inside track to a derailed train. God Love them. They know not what they do. Yer man below in Limerick, Lorcan Roche kelly, is sadly missed here from the olden days when this blog was pretty much factual. In other words, you didn’t… Read more »
The Mafia are now Italy’s largest business.
http://www.telegraph.co.uk/finance/financialcrisis/9006027/Mafia-is-Italys-biggest-business.html
Of course we have our very own maFFia in this country, and they were doing a roaring trade in the construction trade in the reign of Il Berti….or Bertosconi as he was also known….
For your amusement.
http://www.independent.ie/national-news/were-middle-class-get-us-out-of-this-constituency-2985051.html
A new form of lobbying.
Euro Banks Are All Insolvent Jan. 10 — The European Central Bank (ECB)’s money printing burst of Dec. 20, when some 523 banks borrowed 489 billion euros ($625 billion) in 3-year money at 1%, has now come to its hyperinflationary, illiquid, and insolvent full circle. This money printing was equal to 5% of the GDP of the whole Euro zone, in a single day’s central bank outburst. But as of Jan. 9-10 overnight, the big banks’ reserves on deposit at the ECB (earning only 0.25%) hit another record 481 billion euros, or 98% of what the ECB lent them. The… Read more »
The sooner the european/bric/transatlantic banking nonsense blows up the better – cannot see it going any other way. No one will get their money back – bondholders/ hedge funds etc are all going to get a 100% haircut – if they are lucky. I suspect within 1 year we will all be at the same level…ZERO. May I sincerely hope we all will be looking at one another when the smoke and dust clears.
http://nohouseholdtax.org/
Deco –
George Monbiot on David Cameron:
“David Cameron’s proposals for addressing executive pay have the same function: they are designed to be as ineffective as possible while creating an impression of action(8). Yesterday he announced that he wants to scrap the top rate of income tax, making the people who caused the economic crisis even richer and the poor poorer(9). Those who contest the destructive practices of the feral rich, by contrast, are harried by draconian laws and paranoid policing.”
http://www.guardian.co.uk/commentisfree/2012/jan/09/bankers-protesters-squatters-cameron
My suspicions may have been correct. It’s all bluff and bluster from Cameron – no substance.
[…] budget Greece told to restructure its debt Independent Scotland would struggle for AAA rating Europe?s Slippery Slope Tremors from Australia?s crash will reach our shores Hungary’s debt downgraded to […]
Would just like to send my warmest congratulations to the staff at La Senza for their victory over those vulture liquidators.From what I hear support was given by many people throughout the world.The staff who held the “sit-in” have proved that direct action is the only way to beat these buggers.The staff gave them the fingers and said KNICKERS to them. The Vita Coretex staff are still holding firm and I sincerely hope that they win the victory that they justly deserve. Now lets all sit up and take note.It appears that 45% of the householders have accepted that they… Read more »