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Sharp Dose of Deja Vu for Italy’s Teetering Banks.

In a speech that did little to calm investors’ nerves, Italy’s finance minister said yesterday that he was “strangely optimistic” about Italy’s economic outlook. Senior eurocrats in Brussels are far from convinced. “Italy’s accounts are not improving,” blasted European Commission Vice-President Jyrki Katainen at a press conference yesterday.

The financial situation in Italy, according to Katainen, is due to get worse with Italy’s deficit in 2018 now predicted to be €3.5 billion more than previously stated by Paolo Gentiloni’s administration in the spring. “The only thing I can say in my name is that all Italians should know what the real economic situation in Italy is,” he said.

That real economic situation includes the fragile health of the nation’s banking system which continues to teeter on the edge despite the controversial rescue last summer of Monte dei Paschi di Siena (MPS) and the resolution of the Popolare di Vicenza and Veneto Banca, which left over 40,000 businesses in Italy’s wealthy Veneto region starved of credit.

It’s pretty clear that investor concerns about the health of Italy’s toxic debt-laden banking system have not been put to rest. Today’s developments will hardly have helped steady nerves after mid-sized lender Carige, with assets of €26 billion, scuttled a capital increase demanded by European authorities when it failed to get the backing of a banking consortium led by Credit Suisse, Deutsche Bank, and Barclays to underwrite the deal.

In a statement, Carige said it had called a board meeting on Thursday morning to discuss “the next steps.” The shares of Genoa-based Carige, which had already lost roughly half its value over the past year, were suspended on Milan’s stock exchange. They closed on Wednesday at €0.17 a piece. The board had fixed a price of €0.10 euro per share for a capital hike of €560 million demanded by regulators.

…click on the above link to read the rest of the article…

The Price of Chaos Rises in Spain

November 9, 2017

The Price of Chaos Rises in Spain

The longer the toxic process between Catalonia and Spain drags on, the wider the gulf grows.

During a visit yesterday to Barcelona, the organizers of the Mobile World Congress, the world’s biggest mobile event, warned the City Council that unless the political situation stabilizes in Catalonia, they will be looking for an alternative venue after 2018. Barcelona has hosted the annual event every year since 2006 and it brings in billions of euros to the city each year, much of which ends up in the pockets of local taxi drivers, hoteliers, owners of bars, restaurants and brothels, Airbnb hosts and, last but not least, the thousands of professional pickpockets that flock to the city for the four day event.

John Hoffman, the chief executive of GSMA, the association that organizes the Mobile World Congress (MWC), could not have chosen a worst day to visit Barcelona. As part of a general strike to protest the incarceration of pro-independence ministers and leaders and the imposition of direct rule from Madrid, thousands of picketers had blocked dozens of roads across the region including the main freeway connecting Spain with France, causing massive traffic jams.

High-speed train links between Barcelona and France and Barcelona and Madrid were also put out of action after hundreds of protesters moved onto platforms and railway lines in Barcelona and Girona chanting ‘Freedom, Freedom.”

At midday thousands of protesters occupied Barcelona’s Sant Jaume square in front of the city’s town hall, a traditional assembly point for Catalonia’s separatist movement. The chant “Squatters, get out” rang out in allusion to the take-over by central government authorities of Catalonia’s regional government.

…click on the above link to read the rest of the article…

Financial Storm Clouds Gather Over Italy

November 5, 2017

Financial Storm Clouds Gather Over Italy

Wishful thinking may not be enough.

The financial markets have been exceedingly calm in Italy of late. At the end of October the government was able to sell €2.5 billion of 10-year debt at auction at a yield of 1.86%, the lowest since last December — an incredible feat for a country that four months ago witnessed a major bank bailout and two bank resolutions, and that has so much public debt that it spends €70 billion a year to service it, the world’s third-highest.

And there’s the ECB’s recent decision to slash its bond buying from roughly €60 billion a month to €30 billion as of Jan 1, 2018. Then there’s the over €432 billion of Target 2 debt the government owes the ECB, the growing likelihood of political instability as elections approach in 2018, the recent referendums for greater fiscal and political autonomy in Lombardy and Veneto and serious unresolved issues in the banking sector.

Monte dei Paschi di Siena may still be alive as a bank, but it’s not out of the woods. Last week its stock resumed trading after ten months of being suspended from Italy’s benchmark index, the FTSE MBE. Shares opened on Wednesday at €4.10, then rose 28% to €5.26. But it didn’t stick. On Friday, shares closed at €4.58.

It’s a far cry from the €6.49 a share the Italian government paid in August when it injected €3.85 billion into the bank to keep it alive. It spent another €1.5 billion shielding some of the bank’s junior bondholders, whose debt was converted into equity. As part of the rescue, the Tuscan bank was forced to present a plan to cut 5,500 jobs and close 600 branches until 2021, in addition to transferring 28,600 million euros in unproductive loans and divesting non-strategic assets. Investors clearly have their doubts.

…click on the above link to read the rest of the article…

Spain Just Lit a Fuse Under Catalonia — its Richest Region

November 4, 2017

Spain Just Lit a Fuse Under Catalonia — its Richest Region

Acute uncertainty is like sand in the gears of the local economy.

It’s amazing how fast the wheels of the Spanish justice system go round when the establishment wants them to, and how slowly they revolve when it doesn’t, which is usually when members of the same establishment — senior politicians and civil servants, bankers, business owners, or even royalty — are in the dock, which is happening with disturbing regularity these days.

On Thursday we saw Spanish justice at its fastest. In the dock was the recently sacked vice president of Catalonia’s separatist government, Oriol Junqueras, and seven other elected representatives of the breakaway region who stand accused of a litany of charges, including rebellion, which carries a maximum sentence of 30 years’ imprisonment.

The counsel for the defence had less than 24 hours to prepare the case. After just a few hours of hearing preliminary evidence, the National Court Judge sent half of Catalonia’s suspended government to jail without bail. On Friday,the same judge issued an international arrest warrant for Carles Puigdemont, the disputed Catalan president who fled to Brussels on Monday, as well as four other former ministers who did not show up to court on Thursday.

Catalonia’s separatist politicians are paying a very high price for overplaying their hand. As we warned months ago, many in the Catalan government had hoped that threatening to declare independence unilaterally, or even following through on the threats (which it kind of did on Friday), might be enough to push the Spanish government into having to compromise. It was a massive bluff, and it’s hugely backfired.

…click on the above link to read the rest of the article…

Catalonia and Spain Enter Dangerous Uncharted Territory

October 28, 2017

Catalonia and Spain Enter Dangerous Uncharted Territory

Emotions are running high on both sides of the divide.

Today was one of the strangest days of my life. I woke up in a constitutional monarchy called Spain and will go to bed, the same bed, in a newly proclaimed republic. Catalonia’s impossible dream has finally come true, but it could be extremely short lived, and it could have very damaging long lasting consequences.

Spain’s Senate responded to the Catalan parliament’s declaration of independence this afternoon by ratifying the activation of Article 155 of Spain’s Constitution, the nuclear button everyone has been waiting for. This will allow the central government to take full rein of the region’s institutions and levers of power, including parliament, the police force, the exchequer (already done), public media, the Internet, the education system, and telecommunications — at least in theory.

There is no telling just yet how Mariano Rajoy’s government intends to stamp its authority on 2.5 million of the Catalans now in open rebellion, or for how long. Given the law’s ambiguity, there are few constraints on its application, but trying to subdue a region where most of the 7.5 million-strong population are hostile to the basic notion of direct rule from Madrid is going to be a tall order, especially if the EU, which refuses to recognize Catalonia, expects Rajoy’s government to bring Catalonia back into line through “the force of argument rather than the argument of force.”

The force of argument is not exactly Rajoy’s forte. In all likelihood, his government’s first act will be to try to arrest the Catalan president, Carles Puigdemont, suspend his ministers, and assume direct authority over the regional government. To do that, it will probably have to take full control of Catalonia’s regional police force, the Mossos d’Esquadra.

…click on the above link to read the rest of the article…

The EU Just Did the Big Banks a Massive Favor

October 26, 2017

The EU Just Did the Big Banks a Massive Favor

“Testimony to the iron grip the financial industry’s lobby still exerts on governments and legislators.”

The European Union’s executive arm, the European Commission, made a lot of bank executives very happy this Tuesday by abandoning its multi-year pledge to break-up too-big-to-fail lenders. Despite the huge risk they still pose to Europe’s rickety financial system, big European banks like Deutsche Bank, BNP Paribas, ING, and Santander can breathe a large sigh of relief this week in the knowledge that they will not have to split their retail units from their riskier investment banking arms.

Breaking up the banks would remove much of the risk from today’s government-backed banks, such as derivatives and other instruments that were heavily involved in the Financial Crisis. Without these hedge-fund and investment-banking activities, even large banks would be smaller, less interconnected, and could be allowed to fail without jeopardizing the entire global financial system.

According to the Commission, such a drastic measure is no longer necessary since the main rationale behind ring-fencing core banking services from investment banking divisions — i.e. to make Europe’s financial system less disaster prone — has “already been addressed by other regulatory measures in the banking sector.” That’s right: Europe’s banking system is already safe, stable and secure. Bloomberg:

The proposal, which hasn’t progressed since 2015, was made to boost financial stability and safeguard taxpayers from the risk of future bailouts. While the commission and the conservative lead lawmaker on the file said this goal had been achieved by other laws on supervision and resolution, the socialist lawmakers backing the “Bank Structural Reform” bill disagreed.

“The too-big-to-fail financial behemoths still pose a danger to financial stability, to the taxpayer and to clients,” German Social Democrat Jakob von Weizsaecker said in a statement. “The withdrawal of the BSR file marks an unfortunate turning point in the European agenda on regulating large banks.”

…click on the above link to read the rest of the article…

Catalonia’s Political Crisis Snowballs into an Economic Crisis

October 21, 2017

Catalonia’s Political Crisis Snowballs into an Economic Crisis

Independence would be “horrific” and amount to “financial suicide,” said Spain’s Economy Minister. But financial suicide for whom?

It’s not easy being a Catalan bank these days. In the last few weeks the region’s two biggest lenders, Caixabank and Sabadell, have lost €9 billion of deposits as panicked customers in Catalonia have moved their money elsewhere. Many customers in other parts of Spain have also yanked their savings out of Catalan banks, but less out of fear than out of anger at the banks’ Catalan roots.

Moving their official company address to other parts of Spain last week may have helped ease that resentment, allowing the two banks to recoup some €2 billion of deposits. But the move has angered the roughly 2.5 million pro-independence supporters in Catalonia, many of whom have accounts at one of the two banks. Today they expressed that anger by withdrawing cash en masse.

Many protesters made symbolic withdrawals of €155 — a reference to Article 155 of the Spanish constitution, which Madrid activated today to impose direct rule over the semi-autonomous region. Others opted for €1,714 in a nod to the year 1714, when Barcelona was captured by the troops of King Felipe V, who then proceeded to suppress the rights of rebellious regions.

Some bank customers withdrew a lot more than that. The council of Argentona, a small town outside Barcelona, closed its accounts at Caixabank and Sabadell and transferred all €2.25 million of its funds to a branch of the Dutch lender Triodos. If other institutional or business customers follow Argentona’s example, Caixabank and Sabadell could have a big problem on their hands.

…click on the above link to read the rest of the article…

ECB Suffers from “Corporate Capture at its Most Extreme”

October 15, 2017

ECB Suffers from “Corporate Capture at its Most Extreme”

Many of these banks are implicated in the biggest financial crimes.

No single institution has more influence over the lives of European citizens than the European Central Bank. It sets the interest rates for the 19 Member States of the Eurozone, with a combined population of 341 million people. Every month it issues billions of euros of virtually interest-free loans to hard-up financial institutions while splashing €60 billion each month on sovereign and corporate bonds as part of its QE program, thanks to which it now boasts the biggest balance sheet of any central bank on Planet Earth.

Through its regulatory arm, the Single Supervisory Mechanism, it decides which struggling banks in the Eurozone get to live or die and which lucky competitor gets to pick up the pieces afterwards, without taking on the otherwise unknown risks.

In short, the ECB wields a bewildering amount of power and influence over Europe’s financial system. But how does it reach the decisions it makes? Who has the ECB’s institutional ear?

The ECB has 22 advisory boards with 517 seats in total that provide ECB decision-makers with recommendations on all aspects of EU monetary policy. A new report by the non-profit research and campaign group Corporate Europe Observatory (CEO) reveals that 508 of the 517 available seats are assigned to representatives of private financial institutions.

In other words, 98% of the ECB’s external advisors have some sort of skin in the game. Of the nine seats not taken by the financial sector, seven have gone to non-financial companies such as German industrial giant Siemens and just two to consumer groups, according to the CEO report.

In response to questions by CEO, the ECB said that its advisory groups help it to gather information, effectively “discharge its mandate”, and “explain its policy decisions to citizens.”

…click on the above link to read the rest of the article…

Catalonia Crisis Far From Over Despite Market Surge

October 11, 2017

Catalonia Crisis Far From Over Despite Market Surge

Hopes that Catalonia’s woes could be contained are fading.

On Tuesday night, for the briefest of moments, Catalonia’s government severed its ties with Spain. The region’s president, Carles Puigdemont, declared independence from Spain at around 7.40 p.m., Spanish time. Then, roughly ten seconds later, he put it all on hold, to the visible dismay of many of his fellow travelers.

The markets were pleased, interpreting the suspended declaration of independence as a retreat from the brink. The Spanish stock index IBEX 35 surged 1.5% on Wednesday, and is up 3.4% in five trading days, making up a big part of what it had lost over the prior four trading days. It remains 7% below its year-to-date high at the end of April.

For many other aspiring nation states, the key to independence lay in getting enough votes on the UN security council. But if Catalonia’s bid for self-determination ever made it to the UN, it probably wouldn’t garner enough support from the Security Council, for the simple reason that an independent Catalonia could encourage other separatist regions in the EU to launch similar bids.

So why did Puigdemont change the script at the very last minute? According to the Catalan government’s chief spokesperson, Jordi Turull, he did so in response to pressure from key international mediators that are insisting on dialogue between Barcelona and Madrid. “[They] said that if we did this they would be willing to act,” said Turull, who refused to reveal the identity of said mediators.

The problem is that Madrid has shown absolutely no interest in dialogue, for two main reasons:

…click on the above link to read the rest of the article…

Catalonia Chaos Begins to Squeeze Spain’s Financial Markets

October 5, 2017

Catalonia Chaos Begins to Squeeze Spain’s Financial Markets

Bank shares plunge. Money is already on the move.

Spain’s biggest political crisis of a generation, which has led to the complete breakdown of communication and understanding between its government in Madrid and the separatist region of Catalonia, is finally beginning to take its toll on the country’s financial markets.

Spain’s benchmark index, the Ibex 35, slumped nearly 3% following its worst day of trading since the Brexit vote last June. Spain’s 10-year risk premium — the differential between the yield on its 10-year bonds and the yield on Germany’s 10-year bonds — soared to 129 basis points. And that’s despite the fact that the ECB continues to buy Spanish debt hand over fist.

But it is the banks that have borne the brunt of the pain this week. On Monday, the first trading day after the independence referendum, they lost €4.84 billion in market value. Over the past five trading days, shares of the two biggest Catalan-based banks, Caixabank and Banco de Sabadell, have plunged respectively, 9% and 13%.

So tense is the situation that the CEOs of each bank felt compelled to release a statement today reassuring customers that they have all the means and tools necessary to protect their interests. Their contingency plans include the option of abandoning their base of operations in Catalonia and moving elsewhere — to Madrid in the case of Sabadell and Mallorca in the case of Caixabank.

But it wasn’t just Catalan banks that were caught up in today’s rout. Important Spanish banks with somewhat less exposure to Catalonia also saw their shares plunge. Santander, Spain’s only global systemically important bank, was down 3.8% on the day’s trading; BBVA, Spain’s second bank which has important operations in Catalonia after acquiring the failed saving bank Catalunya Caixa in 2015, fell 3.6%; and Bankia was also down 3.6%.

…click on the above link to read the rest of the article…

Dark Days Ahead for Catalonia

September 30, 2017

Dark Days Ahead for Catalonia

It isn’t just about what happens on Sunday; it’s about the ensuing days and weeks.

The next 72 hours could be crucial not only for Catalonia, but also for the rest of Spain and Europe. For now, the cards are overwhelmingly stacked in Madrid’s favor. The central government enjoys the outward support of all European institutions, key Western partners and has the full power of the law on its side as well as the full arsenal of state repression at its disposal.

After confiscating millions of ballot slips and thousands of ballot boxes, and launching what Wikileaks’ Julian Assange has termed the “world’s first Internet War” against Catalonia, freezing telecommunications links, occupying telecoms buildings and censoring hundreds of websites, the Rajoy administration has made it logistically difficult, if not impossible, for the region to hold a credible referendum.

Spain’s constitutional court even went so far as to ask Google to shut down the app that allows Catalans to see where they have to vote on Sunday. Even the two main civil associations behind Catalonia’s push for independence have begun to tamp down expectations, conceding that the police operations have made it “very difficult” to hold a meaningful vote.

Now, all the government in Madrid has to do is sit back, watch and enjoy as the referendum’s organizers struggle to achieve a turnout even close to that of the purely symbolic consultation it held on November 9, 2014. Then, on Monday or Tuesday, Rajoy, with a small dose of humility, can launch political negotiations with Catalonia’s representatives from a position of strength.

But he probably won’t.

The Spanish government’s strategy so far has been to use the full extent of Spanish law to crush each and every attempt by Catalonia’s independence movement and regional government to organize this vote. It’s unlikely to stop now, when it’s winning.

…click on the above link to read the rest of the article…

The Steep Price of Disaster in Mexico

September 25, 2017

The Steep Price of Disaster in Mexico

Rescue efforts in Mexico are beginning to wind down after a trepidatory (vertical) earthquake unleashed destruction and bedlam in Mexico City and the two central states of Puebla and Morelos on Tuesday. The temblor took place 32 years to the day after a horrendous quake killed at least 10,000 people in Mexico City in 1985.

Thankfully, the number of victims this time is many magnitudes lower, due largely to improved building standards and enhanced public awareness in the wake of the ’85 quake. Nonetheless, the death toll is close to 300 with thousands more injured. And for survivors the financial toll is just beginning.

Just as happened in 1985, the response of civil society to the latest disaster has been astounding. As CNN’s Mexico correspondent Susannah Rigg reports,rather than rushing away from danger in the immediate aftermath of the quake, many people ran towards it, in order to help others who may be trapped in collapsed buildings.

All over the city, people began forming human chains to help remove debris while other volunteers, including the so-called “topos” (moles), a famous volunteer group that formed after the 85 quake, burrowed into the loose wreckage in search of survivors. So far these groups have helped rescue scores of people, including eleven school children, from the debris. Social media has also played its part by helping send people to where they are most needed.

It’s this kind of solidarity that is keeping Mexico going. In fact, in some areas there are so many people helping out that willing volunteers are being told that no more help is needed. Hospitals are providing free care to the quake’s victims, architects and structural engineers are assessing the structural health of buildings free of charge, and therapists are offering free counselling.

…click on the above link to read the rest of the article…

It Gets Ugly in Catalonia

September 22, 2017

It Gets Ugly in Catalonia

Spain’s “ships of repression” are coming to help out.

Madrid’s crackdown on Catalonia is already having one major consequence, presumably unintended: many Catalans who were until recently staunchly opposed to the idea of national independence are now reconsidering their options.

A case in point: At last night’s demonstration, spread across multiple locations in Barcelona, were two friends of mine, one who is fanatically apolitical and the other who is a strong Catalan nationalist but who believes that independence would be a political and financial disaster for the region. It was their first ever political demonstration. If there is a vote on Oct-1, they will probably vote to secede.

The middle ground they and hundreds of thousands of others once occupied was obliterated yesterday when a judge in Barcelona ordered Spain’s militarized police force, the Civil Guard, to round up over a dozen Catalan officials in dawn raids. Many of them now face crushing daily fines of up to €12,000.

The Civil Guard also staged raids on key administrative buildings in Barcelona. The sight of balaclava-clad officers of the Civil Guard, one of the most potent symbols of the not-yet forgotten Franco dictatorship, crossing the threshold of the seats of Catalonia’s (very limited) power and arresting local officials, was too much for the local population to bear.

Within minutes almost all of the buildings were surrounded by crowds of flag-draped pro-independence protesters. The focal point of the day’s demonstrations was the Economic Council of Catalonia, whose second-in-command and technical coordinator of the referendum, Josep Maria Jové,was among those detained. He has now been charged with sedition and could face between 10-15 years in prison. Before that, he faces fines of €12,000 a day.

…click on the above link to read the rest of the article…

Catalonia’s Defiance of Spanish Authority Turns into Rebellion

September 17, 2017

Catalonia’s Defiance of Spanish Authority Turns into Rebellion

“Do not underestimate the power of Spanish democracy.”

With these words, eerily reminiscent of a line once spoken by Star Wars villain Darth Vader, Spain’s Prime Minister Mariano Rajoy brought to a close a week of frenzied drama. It began with a foiled attempt by the Spanish police to close down the official website for the Catalan independence referendum. As often happens with web-based raids, the official site was up and running again within minutes, albeit with a different domain name.

Next, the Public Prosecutor’s office ruled that the referendum is now illegal “beyond all doubt” and instructed the Civil Guard, National Police, Catalan Police (Mossos d’Esquadra) and local police forces to act to stop it. It also launched criminal investigations against the entire Catalan government, the Speaker of the Catalan Parliament, the leaders of two separatist municipal associations and more than 700 Catalan mayors (representing 75% of Catalonia’s municipalities) for agreeing to cooperate with the planned plebiscite.

On Friday, Spain’s Finance Ministry joined the fracas by introducing a motion that would hand Madrid much greater control over how Catalonia spends its money in an effort to block the regional government from using state cash to pay for an illegal independence referendum. It has also frozen Catalonia’s monthly advance of the national liquidity fund (FLA), worth some €1.4 billion a month, and demanded that banks report any transactions related to the referendum vote to the central government.

The ultimate goal is to turn the Catalan regional government into an empty shell of an institution — one that has no autonomy, or for that matter any practical function or purpose.

…click on the above link to read the rest of the article…

The Next Spanish Bank Teeters, at Worst Possible Time

September 11, 2017

The Next Spanish Bank Teeters, at Worst Possible Time

The timing could not have been worse: just as Spain faces its biggest constitutional crisis in over 40 years with Catalonia’s independence vote, another bank has begun to wobble.

Liberbank, Spain’s eighth largest lender, was spawned in 2011 from the shotgun marriage of three failed cajas (savings banks), Cajastur, Caja de Extremadura and Caja Cantabria. The new bank’s shares were sold to the public in May 2013 at an IPO price of €0.40. By April 2014, they were trading above €2, a massive 400% gain.

But by April 2015, the stock had started sinking. By May 2017, it was trading at around €1.20. Then came the collapse of Banco Popular in early June, which took many investors (but not WOLF STREET readers) by surprise, triggering a further crash in Liberbank’s stock as shareholders feared they would be next.

Scenting blood, short sellers began piling in, and just as the stock entered free-fall, the government intervened by imposing a temporary ban on short selling. The stock stabilized and even began to recover. By mid-July it had recrossed the psychological €1-threshold. Rumors began circulating that the short-selling ban would soon be lifted.

But in late August, after reaching €1.07, the stock’s progress began to waiver. At the beginning of this week Liberbank’s shares once again became a penny stock. Someone knew something…

Indeed. On Wednesday evening, the bank announced that it would expand its capital by €500 million, and these brave shareholders would be diluted. The response was to sell: shares plunged over 12% on Thursday and a further 5% on Friday.

The fear is understandable. Spanish investors are still smarting from Santander’s hurried takeover and bail-in of Banco Popular. For the first time since the Global Financial Crisis, shareholders and subordinate bondholders of a failing Spanish bank were not bailed out by taxpayers. Speculators were shocked and appalled.

…click on the above link to read the rest of the article…

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