PwC: European banks are sitting on 1.05 trillion euros of non-performing loans
A study of European banks by the consultancy Price Waterhouse Coopers is making the rounds in the German-language press. I haven’t seen the study itself but it was released by PwC in Frankfurt earlier today. Hence the interest in German-language media. The articles focus mostly on the large increase in non-performing loans in Greece and Spain, while Germanys NPL volume has stagnated.
I think the undertone that the media want to convey here to German readers is that the bank situation in Greece and Spain is deteriorating. The readers can make what they will of that but knowing this will impact German economic policy regarding bailouts and support for periphery governments and banking sectors.
Today and yesterday, Credit Writedowns highlighted the bank run problem in Spain. See TARGET2 replacing other sources of funding for Bank of Spain and Redenomination risk in Spain causes bank deposit run as house price slide accelerates. My view here is that the capital flight is driven largely by so-called redomination risk, what ECB head Mario Draghi calls ‘convertibility risk’. That’s why Target2 balances are building and why people believe this could be a risk to Germany if the euro falls apart. Mario Draghi spoke briefly about this in his press conference announcing his intention to potentially support euro area sovereign bond markets with "unlimited" liquidity at the short end of the curve.
The connection between bank NPLs and redenomination risk is the debt deflation that capital flight driven by redenomination risk has caused. As capital moves out of the euro zone periphery into Germany, it sucks money out of periphery banking systems and puts pressure on the credit systems and therefore on asset prices there. And so losses build on the balance sheets of periphery banks. This is a debt deflationary spiral that ends with significant defaults from the deadweight loss of artificial money scarcity.
The euro zone is set up so that capital is free to move within the zone, much as it can within the United States as a single currency area. However, in the US, there is zero risk that a state will secede form the union and redenominate in a weakened currency. In Europe, that risk is palpable. And so, the natural thing for savers to do is to protect their wealth by moving their assets out of regions of the currency area that have redenomination risk (Portugal, Ireland, Italy, Greece and Spain) into areas that have less redenomination risk or that would see currency appreciation in the case of redenomination (Germany).
This capital flight will only end when redenomination risk is taken off the table. But since Greece’s exit from the euro zone will always be a major topic of conversation, redenomination risk will remain – and not just for Greece but the entire periphery. And that means more mounting NPLs as debt deflation takes hold. This is an economic disaster for Europe.
This version of the European NPLs article says that German bank NPLs are not going up, whereas they are in Spain and Greece. The number for German banks (not including the bad banks set up for Hypo Real Estate and WestLB) is 196 billion euros
The German-language press is all over this story. I have seen it in at least four German, Austrian or Swiss news sites. They report on a PwC study that shows that the volume of bad loans in Europe has almost doubled to 1.05 trillion euros. The numbers of NPL (non-performing lonas) are 136 billion in Spain and 40 billion in Greece
"Antonis Perris, a musician unemployed for more than two years, was desperate. Perris wrote in an online forum late one night that he had run out of money to buy food and cursed those responsible for the economic crisis in Greece. “I have no solution in front of me,” he typed. The next morning, Perris took the hand of his ailing 90-year-old mother. They climbed to the roof of their apartment building and leapt to their death."
United States
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Doug Short shows us that the data don’t support a recession call based on the four things the US recession dating committe looks for: retail sales, income, production and employment
Congress Approval Ties All-Time Low at 10%
"Ten percent of Americans in August approve of the job Congress is doing, tying last February’s reading as the lowest in Gallup’s 38-year history of this measure. Eighty-three percent disapprove of the way Congress is doing its job."
US Drought Continues to Intensify – CNBC
Good video outlining the situation with corn and soybean crops in the US
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"The proposed new mortgage credit report hopes to combine traditional consumer credit information from FICO, with less traditional reporting from CoreLogic’s CoreScore."
USA TODAY/Suffolk University Poll: Stay-at-home Americans disgusted. – USATODAY.com
"A nationwide USA TODAY/Suffolk University Poll of people who are eligible to vote but aren’t likely to do so finds that these stay-at-home Americans back Obama’s re-election over Republican Mitt Romney by more than 2-1. Two-thirds of them say they are registered to vote. Eight in 10 say the government plays an important role in their lives."
The Untold Story of Municipal Bond Defaults – Liberty Street Economics
FT Alphaville » More on banks and housing
"Last week we wrote about how US lending standards for mortgages have continued to tighten — in severe contrast to standards for other kinds of loans. This was reinforced by the Fed’s senior loan officer survey for July, but we didn’t take a very close look at other parts that also shed some light on what’s happening with banks and the housing market. CreditSights, however, just summarised those bits in an excellent short note from this morning. You can find the whole thing in the usual place, but we’re posting the highlights below"
Europe
Suicides in Greece Rise Since Before Crisis Began – WSJ.com
"Recorded suicides have roughly doubled since before the crisis to about six per 100,000 residents annually, according to the Greek health ministry and a charitable organization called Klimaka. About 40% more Greeks killed themselves in the first five months of this year than in the same period last year, the health ministry says."
Why Germans love the enigmatic Angela Merkel | Jochen Hung | Comment is free | guardian.co.uk
Greece seeks two-year austerity extension – FT.com
"Greece is seeking a two-year extension of its latest austerity programme aimed at improving the country’s debt sustainability and prospects for a return to growth, according to a document obtained by the Financial Times."
BBC News – Finland mulls over its eurozone future
""The Euro or Not?" That was the question posed by the front page of a recent edition of Finland’s leading news magazine, Suomen Kuvalehti."
China and Australia
RBA wags the dog on housing affordability | | MacroBusiness
House prices in Australia look unaffordable when compared to other countries.
China’s July lending adds to the gloom | | MacroBusiness
Australia Business Confidence Masks Weak Economy – WSJ.com
Elsewhere
Grandma’s Marijuana Farm in Swaziland Is Family Payday – NYTimes.com
"Swazi Gold, a highly potent and valuable strain of marijuana that is sought after in the thriving drug market of next-door South Africa. In a field deep in the forest, atop a distant hill in this arid corner of tiny Swaziland, Khathazile grows Swazi Gold to keep her growing brood of grandchildren fed, clothed and in school."
The benefits of learning a second language
Los países que te ponen más difícil conseguir trabajo si eres extranjero – ABC.es
According to this article, Brazil, the US and Canada do the most to keep standards high to keep out foreigners looking for work.
Tech
Samsung Witness Says Apple Saw His ‘Tablet’ Long Before IPad – Bloomberg
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