Germany’s economic momentum has faltered; the green shoots are wilting; and combining real economic weakness with the Europe-wide deposit outflows (hurting the ‘financial’ economy), Europe is back in the crosshairs.
Germany, it seems, has had enough with its taxpayers implicitly bearing the burden of the rest of Europe’s profligacy as the final solution chosen for Cyprus clearly shows (especially in light of pending German elections). But with all that ‘stabilitee’ based on one nation’s shoulders, the following chart suggests Europe’s Atlas is about to shrug….
Chart: Credit Suisse
We’re going to need a bigger acronym.
In the beginning, it was just the “Greek debt crisis”. Then markets realized Portugal, Ireland, Italy, and Spain were in bad shape too, and the PIIGS (or GIIPS) were born. But now Cyprus and Slovenia have run into trouble as well, giving us the … SIC(K) PIGS? At this rate, we’re going to have to buy a vowel soon, assuming Estonia doesn’t end up needing a bailout.
The euro crisis is entering its fourth year, and, sorry world, this won’t be its last. Now, its long periods of boredom have gotten a bit longer, and its moments of sheer financial terror a bit less terrifying, ever since the European Central Bank (ECB) promised to do “whatever it takes” to save the common currency. But, as Cyprus and Slovenia show, the battle for the euro isn’t over yet. Not even close.
Here’s the Cliff Notes version of the euro crisis. The euro zone doesn’t have the fiscal or banking unions it needs to make monetary union work, and it’s not close to changing that. In the meantime, the euro’s continuing flaws continue to suck countries into crisis. And their politics get radicalized. Most recently, Cyprus was forced to accept a bailout and bail-in, because its too-big-to-save banks made some horrendously bad bets on Greek bonds. Slovenia looks like it could next on the euro-bailout tour, because, as Dylan Matthews of the Washington Post points out, its too-big-to-save-ish banks made some horrendously bad bets on its own companies. Now, banks make bad bets all the time, but those bad bets can bankrupt you as a country if you don’t have your own central bank. Like euro countries.
Of course, this “diabolic loop” between weak banks and weak sovereigns isn’t the only problem in euroland. The common currency has plenty of other flaws. Here’s why the euro, as it’s currently constructed, is a doomsday device for mass bankruptcy. (How’s that for solidarity?).
1. Too Tight Money
The euro zone isn’t what economists call an “optimal currency area”. In other words, it was a bad idea. Its different members are different enough that they should have different monetary policies. But they don’t. They have the ECB setting a single policy for all 17 of them. That’s a particular problem for southern Europe now, because their wages are uncompetitively high relative to northern European ones, and the ECB isn’t helping them out.
It appears, given news from Italy today, that European depositors are increasingly coming to the realization that deposits in their local bank are not ‘safe’ places to put their spare cash, but are in fact loans to extremely leveraged businesses. In a somewhat wishy-washy, ‘hide-the-truth’-like statement on Monte dei Paschi’s website, the CEO admits to, “the withdrawal of several billion in deposits.” Of course, the reasons why these depositors withdrew their capital from the oldest bank in the world will never be known though of course he blames it on “reputational damage” from their derivative cheating scandal. Apparently the fact that this happened to come about six week after said scandal and the bank’s third bailout, and that the prior two bailouts didnot result in such an outflow of unsecured liabilities (at least not to the public’s knowledge), was lost on the senior management, as was lost that a far greater catalyst may have been the slightly more troubling events in Cyprus in the second half of March. Unsurprisingly, as Reuters notes, the CEO declined to give a forecast on the level of deposits at the end of the first quarter of 2013; no wonder given the bank just doubled its expectations for bad loans and the ‘Cypriot Solution’ dangling over uninsured depositor hordes.
The deal has been struck, and now, Cypriots say, the betrayal is sinking in. Nick Squires reports on how the islanders are goin to need the luck of the gods to avoid plunging off an economic cliff.
As she counts another day’s paltry takings and frets about how to pay the rent, Dimitra Charilaou knows she is a tiny cog in the machine that drives Cyprus’s once thriving economy.
Here is a look at some countries whose banking sectors are gaining scrutiny in the aftermath of the Cyprus bailout.
SLOVENIA: Privately owned banks are suffering from a burst real estate bubble and unpaid property loans. The country — which is only 0.4 percent of the eurozone’s overall economy — has a relatively small banking system and has relied on successful exporters such as home appliance maker Gorenje. But the banks’ troubles are large enough that the government has struggled to borrow to finance its deficits and some think it might eventually seek a bailout loan from other eurozone countries.
The new government of Prime Minister Alenka Bratusek is moving to set up a “bad bank” to take shaky loans and investments off banks’ hands. Analysts at Commerzbank say depositors will not suffer losses in any bank restructuring because the system only needs a billion euros in new capital for this year. Cyprus, which is half the size of Slovenia, needed up to 8 billion euros to help rescue its banks.
Fitch Ratings said last week it didn’t think Slovenia, which is in a recession, would need a bailout. But the agency warned that the quality of the banks’ assets and the capital buffers needed to protect them from future financial shocks are deteriorating.
MALTA: Like Cyprus, Malta is a small island country with a big banking system — eight times annual GDP.
Gerald Celente: Cyprus, The Canary In The Mine