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.

Europa-Studie: In Banken türmen sich eine Billion faule Kredite – Nachrichten Wirtschaft – WELT ONLINE

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

Banken-Studie: Bei Europas Banken schlummert eine Billion Euro an faulen Krediten – Banken – Unternehmen – Handelsblatt

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

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