Much of the analysis that I have seen fails to put enough weight on the bad loan/NPA issue in each country's respective banking system, which essentially is the cause of most of the countries' particular malaise to begin with. I have thrown together a crude, rudimentary chart to put this into perspective...
When comparing these sovereigns using metrics that encompass more than the usual suspects, you get a clearer picture. The bank bailouts were expensive, arguably too expensive. It may have been better to let them fail in the market and nationalize them. Notice how the nations with the highest NPAs are doing the worst. In addition, one should remain cognizant that the "extend and pretend" game has allowed hundreds of billions of "phantom" NPAs to roam free in each of these countries' GDPs unrecorded. I believe there may be some surprises left in quite a few of the German banks. We will probably see if I'm right over the next few quarters. See German Recovery Stalls Unexpectedly in Fourth Quarter:German gross
domestic product showed no growth in the final quarter of last year,
official data showed on Friday, leaving Europe's largest economy on a
weak footing going into 2010.
All one really has to to is follow the banking losses. They are deeply concealed in the Spanish banks, but are now coming home to roost (From Bloomberg: BBVA Fourth-Quarter Profit Plunges 94% to $44 Million on Asset Writedowns). As was illustrated by Speigel online below:
National deficits have increased in many countries belonging to the European common currency.
Even Speigel states: European Union Sees Threats to the Euro - Late last year, it became fashionable to predict the dollar's demise. This year, however, shaky state finances within the European common currency zone have many worried about the future of the euro. Even the EU thinks the monetary union could be in danger.
Notice how all of the big deficits also have big bank NPA chunks as a percent of their GDP? I warned of this just over a year ago, focusing on Spain and their busting housing boom. See The Spanish Inquisition is About to Begin...and the original forensic report and macro analyis of Spain's housing bust from January of 2009, Those of you who attended the
BoomBustBlog Boat rides should have heard me express my opinions that I
believed the Pound, Euro and oil would all head sharply southward."
Below are excerpts from an excellent article on Spain from the blog "A Fistful of Euros":
The impact of the stimulus
package can also be seen in the seasonally adjusted unemployment numbers
supplied to Eurostat by the Spanish Statistics Office (INE).
Unemployment (which hit 19.3% in September - see chart below) has been
rising continuously since mid 2007, but the sharpest increases were
registered during the fourth quarter of 2008 and the first quarter of
It is very hard to see any real
difference in the trend rate of increase between the second and third
quarters of 2009, and we should expect this trend job attrition rate to
continue until it once more accelerates under the impact of either the
government being unable to continue funding the stimulus, or the banking
sector having a financial crisis (possibly induced by someone being
forced into trying to sell some of the housing units they are
accumulating only to discover that there are no buyers, since the market
is effectively dead)...
is to say, credit is once more starting to flow freely round the French
economy, while here in Spain banks continue to accumulate reserves,
lending generously to the government, while money for struggling small
companies and for young people looking to buy homes is hard to find.
What is more, if we look at the chart below (which was prepared by
Dominique Barbet and Martine Borde for PNB Paribas) we will see that the
stock of unsold new homes – which was in any event never very high in
France, maybe 100,000 in the spring – is down by 20% as sales steadily
pick up again, while here in Spain we continue to play a guessing game
to decide just how many (more than a million surely) such properties
there are here, and the number is growing, not declining, since real new
sales to private individuals (as opposed to newly completed properties
contracted two years or so ago, or exchanges between developers and
banks) are almost non existent at this point. Everyone knows prices will
fall further, and are waiting for them to go down...
Then on Friday we had the key
piece of information, which confirmed what many of us already suspected,
since Markit PMI data for October retail sales made plain the presence
of very divergent trends across the Eurozone, with ever more robust
growth in France contrasting with falling sales in Germany and Italy. As
Jack Kennedy, economist at survey organisers Markit Economics said
“While the sense of growing optimism should be treated with some caution
– it appears the increase in sales was also supported by widespread
discounting and the continuation of the government’s car scrappage
scheme – the outperformance of France relative to Germany and Italy
offers further evidence that it is France that is leading the Eurozone
And here, with this very
outperformance comes the problem, since the ECB policy rate will be set
to target average eurozone inflation, which will certainly be lower than
inflation in France, and possibly significantly lower. Which means the
ECB policy rate will be below the one which the French economy will, in
Between 2000 and
2008 the structural dynamics of the Eurosystem were different from now.
Spain was the “exceptional student”, with above-average growth, and
inflation which was consistently over the Eurozone average, and for long
periods above the ECB policy rate. This had the consequence, of course,
that French inflation was nearly always below the average. Now things
have changed. We are coming out of recession with a eurozone divided
into three groups. French growth is becoming robust, while Germany and
Italy are dependent on exports and just keeping their head above water.
Spain, on the other hand, fails to recover and continues to contract.
This is what makes the current situation critical, since starting in
2010 France will have an inflation rate over the EU average, and in all
probability over the ECB interest rate. Which means that if something
isn’t done, and soon, to force the situation in Spain, and produce a
recovery, France will have negative interest real rates during a sharp
economic rebound, with all the risks that that implies...
Only last Wednesday Norway became the first western European
country to raise interest rates since the start of the financial crisis
after its central bank reported finding “signs of renewed growth” in the
global economy. Central bankers from across the global, from
Washington, to Sydney, to Delhi and to Oslo are all now busily telling
us they are going to take increasing account of future accelerations in
asset prices in an attempt to avoid repeating policy mistakes that are
presumed to have inflated two speculative bubbles in a decade – and left
the entire Spanish economy in a lamentable state. If France had its own
monetary policy I have no doubt La Banque de France would be itching to
follow the Norges Bank and raise rates, but there is one small problem,
La Banque de France has no capacity to decide on monetary policy in
this way, and herein lies the heart of what is now Europe and the ECB’s
While denied by the EMU members, it appears to be without a shadow of a doubt that fractures are showing in the monetary union. The Euro was not well concieved. It gets worse. The stresses to the Euro will also come from well outside of the European Union. Many of the Euro countries have significant exposure to central and eastern European countries who are significantly more fragile than the one's mentioned above. This exposure will easily daisy chain through Europe if it were to ignite. Well, the CEE countries primary trading partners are in the Eurozone, and as the Eurozone slows down, the chances of CEE issues increases. That will be the subject of my next Pan-European Sovereign Debt Crisis post and I will have several specific banks on a detailed watchlist for paying subscribers to download, which should help you ahead of the curve.
As I stated in parts one and two of this series, although Greece is in bad shape, it is a drop in the bucket in comparison to the problems abound in the other countries.
In the news:
We have some sell side guys stealing ideas from my blog :-)
|... Credit-default swaps insuring against losses on company bonds in Greece, Portugal ...
underlying securities or the cash equivalent should a company fail to adhere ...
The inevitable "vig" to be paid on pushing out these sovereign bonds:
... cash equivalent should a company or country fail to adhere to ... The spread on
With all of the needs for sovereign debt issuance, the private sector will most assuredely get crowded out. This is probably worse than it sounds, since most banks are still coddling significant hidden losses and NPAs (even though many are reporting profits and paying bonuses), hence will not be lending anytime soon. There will be no recovery without available credit, and if there was ample credit supply available (which there really is not) the sovereign nations will be soaking it up anyway.
From part two of the Pan-European Sovereign Debt Crisis: