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“New Economic or Financial Crisis” in the Eurozone Could Start in Italy: French Government Frets 

“New Economic or Financial Crisis” in the Eurozone Could Start in Italy: French Government Frets

French banks are heavily exposed to Italy.

“Don’t underestimate the impact of the Italian recession.” This was the stark warning from French Economy Minister Bruno Le Marie in an interview with Bloomberg News. “We talk a lot about Brexit, but we don’t talk much about an Italian recession that will have a significant impact on growth in Europe and can impact France because it’s one of our most important trading partners.”

Italy’s economy as measured in real GDP shrank for two quarters in a row, which puts it into a “technical recession”:

It’s the second time in four months that France’s Economy Minister has expressed deep concern about the Italian economy in public. At the end of October he urged the commission to “reach out to Italy” after the EU’s executive had rejected the country’s draft 2019 budget for breaking EU rules on public spending. Le Maire also conceded at the time that while contagion in the Eurozone was definitely contained, the Eurozone “is not sufficiently armed to face a new economic or financial crisis.”

The French government is now openly worried that such a crisis could begin in Italy. The economies of both Italy and France are tightly interwoven, with annual trade flows of around €90 billion. More important still, French banks are, by a long shot, the biggest owners of Italian public and private debt, with total holdings of €311 billion as of the 3rd quarter of 2018, according to the Bank for International Settlements — up €34 billion from the 1st quarter of 2018.

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

Turkey’s Debt Crisis Deepens, Erdogan Bails out Banks His Way

Turkey’s Debt Crisis Deepens, Erdogan Bails out Banks His Way

Shifting bad consumer & business debts from banks to the public, but the way this bank bailout got packaged is pretty nifty.

Turkish President Recep Tayyip Erdoğan has launched a raft of measures ostensibly designed to reanimate the economy, including offering direct financial support for people with credit-card debt. The plan will enable Turkey’s maxed-out consumers to go to the biggest state-run lender, Ziraat Bank, and apply for debt rescheduling at low rates of interest. “Any retail client from any bank can apply,” Erdogan said.

Credit-card debt is a major problem. Since 2010 consumer credit has increased almost five-fold on the back of low interest rates (at least in certain foreign currencies), government incentives, and loose loan standards. By August 2018, when these pillars supporting Erdogan’s debt-fueled economic miracle began to buckle, outstanding non-housing consumer debt, peaked at 532 billion Turkish lira ($97 billion at today’s exchange rate, chart via Trading Economics):

About half of this amount is credit card debt. About one-third of the credit-card debt was considered to be non performing. A good portion of this debt is denominated in foreign currency, such as the euro or dollar, to get access to the low interest rates available in those currencies. And this foreign-currency debt is now, after the lira’s exchange rate has fallen, very hard to service. In other words, the government’s scheme is likely to have plenty of takers.

“The debts of citizens who are having repayment problems will be collected under a single umbrella, via Ziraat Bank,” Erdogan said. “They will pay off their debt with a loan from Ziraat and will pay it back according to the level of their monthly earnings.”

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

Italy’s New Government Eats Its Words, Joins Bank Bailout Club

Italy’s New Government Eats Its Words, Joins Bank Bailout Club

Well, that didn’t take long. And whatever happened to the Eurozone’s new bail-in rule?

Italy’s government, in its eighth month in power, has already bailed out a bankrupt bank, mid-sized Banca Carige, with public funds. If approved by European Commission and the ECB, it will be the fourth Italian bank rescue in just over two years. As Italian daily Il Sole 24 Ore points out, Italy’s populist government has adopted virtually the exact same playbook to save Carige that was used by its predecessor in the previous three resolutions:

The draft of the new Carige decree is a carbon copy of the one used by the Gentiloni Government for the bailouts of Monte dei Paschi di Siena (MPS), BPVI and Veneto Banca — identical in every detail from the rules on state guarantees to the mechanisms adopted…

It took just eight minutes for Italy’s coalition partners, Five Star and the League, to renege on their flagship promise never to bailout a bank, reports Bloomberg. The new decree will allow the government to guarantee Carige bonds up to a maximum value of €3 billion, making it easier for the lender to retain access to the funding market. The government also wants the option, if necessary, to recapitalize the bank by injecting as much as €1 billion into its coffers despite having lambasted the previous government for doing the exact same thing with MPS.

It’s not yet clear whether the proposed rescue of Carige will contravene EU state-aid rules, which are supposed to impose strict conditions on the “precautionary recapitalization” envisaged by the government. Carige is already under the administration of ECB-appointed administrators after failing to agree to a €400 million capital increase at the end of last year. So if there are any issues it should be easy for European Commission or the ECB to stop the bailout dead in its tracks.

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

QE Created Dangerous Financial Dependence, Italy Hooked, Withdrawal Next, ECB Warns

QE Created Dangerous Financial Dependence, Italy Hooked, Withdrawal Next, ECB Warns

“Who will purchase the €275 billion of government debt Italy is to issue in 2019?”

The ECB, through its army of official mouthpieces, has begun warning of the potentially calamitous consequences for Italian bonds when its QE program comes to an end, which is scheduled to happen at the end of this year.

During a speech in Vienna on Tuesday, Governing Council member Ewald Nowotny pointed out that Italy’s central bank, under the ECB’s guidance, is the biggest buyer of Italian government debt. The Bank of Italy, on behalf of the ECB, has bought up more than €360 billion of multiyear treasury bonds (BTPs) since the QE program was first launched in March 2015.

In fact, the ECB is now virtually the only significant net buyer of Italian bonds left standing. This raises a key question, Nowotny said: With the ECB scheduled to exit the bond market in roughly six weeks time, “who will purchase the roughly €275 billion of government securities Italy is forecast to issue in 2019?”

With foreigners shedding a net €69 billion of Italian government bonds since May, when the right-wing League and anti-establishment 5-Star Movement took the reins of government, and Italian banks in no financial position to expand their already bloated holdings, it is indeed an important question (and one we’ve been asking for well over a year).

According to former Irish central bank governor and ex-member of the ECB’s Governing Council Patrick Honohan, speaking at an event in London, when the ECB’s support is removed, “the yield on Italian government bonds will be much more vulnerable.”

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

Why’s France so Worried about Italy’s Showdown with Brussels?

Why’s France so Worried about Italy’s Showdown with Brussels?

The French megabanks are on the hook.

France was just served with a stark reminder of an inconvenient truth: €277 billion of Italian government debt — the equivalent of 14% of French GDP — is owed to French banks. Given that Italy’s government is currently locked in an existential blinking match with both the European Commission and the ECB over its budget plan for 2019, this could be a big problem for France.

On Friday, France’s finance minister, Bruno Le Maire, urged the commission to “reach out to Italy” after rejecting the country’s draft 2019 budget for breaking EU rules on public spending. Le Maire also conceded that while contagion in the Eurozone was definitely contained, the Eurozone “is not sufficiently armed to face a new economic or financial crisis.” As Maire well knows, a full-blown financial crisis in Italy would eventually spread to France’s economy, with French banks serving as the main transmission mechanism.

France isn’t the only Eurozone nation with unhealthy levels of exposure to Italian debt, although it is far and away the most exposed. According to the Bank of International Settlements, German lenders have €79 billion worth of exposure to Italian debt and Spanish lenders, €69 billion. In other words, taken together, the financial sectors of the largest, second largest and fourth largest economies in the Eurozone — Germany, France and Spain — hold over €415 billion of Italian debt on their balance sheets.

While the exposure of German lenders to Italian debt has waned over the last few years, that of French lenders has actually grown, belying the ECB’s long-held claim that its QE program would help reduce the level of interdependence between European sovereigns and banks.

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

Swedish Central Bank Makes U-Turn on Cash as NIRP is Ending

Swedish Central Bank Makes U-Turn on Cash as NIRP is Ending

Cash is less of a threat to central bank policies when interest rates rise above zero.

Sweden’s Riksbank has become the first central bank in the 21st century to take concrete measures to ensure that cash does not disappear as a means of payment from the financial system. To that end, the Riksbank proposes, in a document published on its website, to make it mandatory for all banks and financial institutions to offer cash services.

The pronouncement comes in response to a recent policy suggestion by the Riksbank Committee that only the country’s six major banks should be obligated to continue offering cash services.

That prompted a backlash from Sweden’s competition watchdog, which argued that the plan would distort competition as it would affect only a few of the nation’s banks. In response, the Riksbank has opted to apply the rule to “all banks and other credit institutions that offer payment accounts.”

There was also a difference of opinion between the Riksbank Committee and the central bank’s senior management on the issue of deposit facilities. While the Committee recommended that banks should only be obligated to provide deposit facilities to businesses, the Riksbank believes it is important for banks to also offer deposit services to individual citizens:

“This is a service that consumers can reasonably expect of credit institutions. There must also be symmetry between withdrawal and deposit facilities. In the Riksbank’s view, there is otherwise a risk that the possibilities for individuals to make deposits will decrease even further in the future. For most consumers, it would also be difficult to understand why they can withdraw cash from an account but not make deposits.”

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

Defiant Energy Policy of Mexico’s President-Elect Rattles Moody’s and Fitch

Defiant Energy Policy of Mexico’s President-Elect Rattles Moody’s and Fitch

But it’s going to be tough; he’ll need more than luck to pull it off.

Moody’s has rated the $2 billion of senior unsecured notes due 2029 that Mexico’s state-owned oil company Pemex is in the process of issuing one notch above junk. Pemex is offering to pay a coupon interest rate of 6.5%. In its report on Friday, Moody’s blamed the company’s “weak liquidity, a heavy tax burden and the resulting weak free cash flow, high financial leverage and low interest coverage; and challenges related to crude production and reserve replacement.”

Moody’s is also worried about the large amounts of debt coming due in 2020 and beyond. And Pemex will continue to be “dependent on debt capital markets to fund negative free cash flow,” it said.

Fitch Ratings downgraded the outlook for Pemex’s debt from stable to negative amid concerns about the incoming government’s proposed energy policies. It rates Pemex three notches above “junk” (BBB+), but only because the company is state-owned. Its standalone credit profile — if Pemex were not backstopped by the Mexican state — is junk, seven notches into junk (CCC).

Fitch has also warned earlier that if Pemex’s credit rating drops, so, too, will Mexico’s sovereign debt rating. Even a small deterioration in credit risk could exact a heavy toll on both the company and the country.

The outlook revision to negative from stable “reflects the increased uncertainty about Pemex’s future business strategy coupled with the company’s deteriorating standalone credit profile,” Fitch said in its report.

Fitch’s downward revision was cited by analysts as one possible factor in the fall of the peso last week to its lowest level in over a month. CI Banco analyst James Salazar said that Fitch’s Pemex assessment is a reminder that the company’s “finances should continue to be handled with great caution so as not to cause additional imbalances that will increase its debt.”

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

Backlash Against War on Cash Reaches the Bank of Canada

Backlash Against War on Cash Reaches the Bank of Canada

A cashless society could have “adverse collective outcomes.”

In recent months, a slew of political and financial institutions have raised concerns about the march toward a cashless economy. They include:

  • The ECB warned that a phase-out of cash could pose a serious risk to the financial system. Depending too heavily on electronic payment systems could expose financial systems to catastrophic failures in the event of power outages or cyber attacks. The European Commission has also backed off is war on cash.
  • The People’s Bank of China announced that all businesses in China that are not e-commerce must resume accepting cash or risk being investigated, and cautioned businesses against hyping the “cashless” idea when promoting non-cash payments.
  • In Sweden, one of the most cashless societies, the central bank and parliament have spoken out in support of cash.
  • Cities too have spoken out, including Washington D.C., whose City Council introduced a bill that sought to ban restaurants and retailers from not accepting cash or charging a different price to customers depending on the method of payment they use.

Now, it’s the Bank of Canada’s turn to sound the alarm. In a paper — “Is a Cashless Society Problematic?” — it outlines a number of risks that could arise if the country went fully cashless.

The premise underpinning the analysis is that at some point in the future individuals and firms decide, of their own volition, to cease using cash altogether. In response, the central bank stops printing physical money because of the large fixed costs inherent in supplying bank notes.

In such a scenario, even though most individuals and firms freely choose to abandon cash, there could be “adverse collective outcomes,” the study warns.

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

Spain’s Supreme Court Flip-Flops on Mortgage Ruling After Just 1 Day Amid Bank Stocks Bloodbath, Legal Shitstorm Erupts

Spain’s Supreme Court Flip-Flops on Mortgage Ruling After Just 1 Day Amid Bank Stocks Bloodbath, Legal Shitstorm Erupts

Plunging bank stocks got the Court’s attention, or something.

That was fast: Spain’s Supreme Court on Friday flip-flopped on its own ruling announced on Thursday that had sent bank stocks plunging.

It started like this: Thursday morning, Spain’s Supreme Court did something nobody was expecting. It ruled that the country’s banks must pay stamp duty on mortgage loans, which would set them back billions of euros in legal fees and compensation while heaping further pressure on their lending business. News of the ruling sent many of the banks’ shares tumbling to new lows for the year while also heaping pressure on Spain’s ten-year bonds.

“The Supreme Court states that the person who must pay the stamp duty in the public deeds of loans with mortgage guarantees is the lender, not the one who receives the loan,” the court said in a document. The court ruling on Thursday, which overturned a previous ruling in the banks’ favor earlier this year, was final, the Supreme Court said on Thursday.

But by lunchtime Friday, the court had decided to suspend the ruling in light of the acute “economic and social impact” it was having — meaning the banks were in trouble!

The chart shows the shares of Bankia, which is 90% state-owned. Following the Thursday announcement, the already beaten down shares plunged 10% at one point. The Friday flip-flop repaired some but not all of the damage:

It’s impossible to tell just how much the total compensation bill would have come to, since stamp duty varies across Spain’s regions. As many as 8 million mortgage customers would have been affected by the court ruling, said the Spanish consumer association Adicae.

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

Italy’s Debt Crisis Thickens

Italy’s Debt Crisis Thickens

But outside Italy, credit markets are sanguine, and no one says, “whatever it takes.”

Italy’s government bonds are sinking and their yields are spiking. There are plenty of reasons, including possible downgrades by Moody’s and/or Standard and Poor’s later this month. If it is a one-notch downgrade, Italy’s credit rating will be one notch above junk. If it is a two-notch down-grade, as some are fearing, Italy’s credit rating will be junk. That the Italian government remains stuck on its deficit-busting budget, which will almost certainly be rejected by the European Commission, is not helpful either. Today, the 10-year yield jumped nearly 20 basis points to 3.74%, the highest since February 2014. Note that the ECB’s policy rate is still negative -0.4%:

But the current crisis has shown little sign of infecting other large Euro Zone economies. Greek banks may be sinking in unison, their shares down well over 50% since August despite being given a clean bill of health just months earlier by the ECB, but Greece is no longer systemically important and its banks have been zombies for years.

Far more important are Germany, France and Spain — and their credit markets have resisted contagion. A good indicator of this is the spread between Spanish and Italian 10-year bonds, which climbed to 2.08 percentage points last week, its highest level since December 1997, before easing back to 1.88 percentage points this week.

Much to the dismay of Italy’s struggling banks, the Italian government has also unveiled plans to tighten tax rules on banks’ sales of bad loans in a bid to raise additional revenues. The proposed measures would further erode the banks’ already flimsy capital buffers and hurt their already scarce cash reserves. And ominous signs are piling up that a run on large bank deposits in Italy may have already begun.

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

Italy’s Debt Crisis Flares Up, Banks Get Hit, as Showdown with the EU Intensifies

Italy’s Debt Crisis Flares Up, Banks Get Hit, as Showdown with the EU Intensifies

Who will blink first?

A serious showdown is brewing in the Eurozone as Italy’s anti-establishment coalition government takes on the EU establishment in a struggle that could have major ramifications for Europe’s monetary union. The cause of the discord is the Italian government’s plan to expand Italy’s budget for 2019, in contravention of previous budget agreements with Brussels.

The government has set a public deficit target for next year of 2.4% of GDP, three times higher than the previous government’s pledge. It’s a big ask for a country that already boasts a debt-to-GDP ratio of 131%, the second highest in Europe behind Greece. To justify its ambitious “anti-poverty” spending plans, proposed tax cuts, and pension reforms, the government claims that Italy’s economic growth will outperform EU forecasts.

Brussels is having none of it. EU Commission President Jean Claude Juncker urged Italy’s Economy Minister Giovanni Tria to desist. “After having really been able to cope with the Greek crisis, we’ll end up in the same crisis in Italy,” he said. “One such crisis has been enough… If Italy wants further special treatment, that would mean the end of the euro. So you have to be very strict.”

On Wednesday ECB President Mario Draghi held a private meeting with Italian President Sergio Mattarella in Rome, at which he reportedly raised concerns about Italy’s public finances, the upcoming budget bill, and related stock-exchange and bond-market turbulence.

The meeting evoked memories of the backroom machinations that Draghi, together with his predecessor, Jean Claude Trichet, undertook to engineer the downfall of Italian premier Silvio Berlusconi in 2011 and his replacement with technocrat Mario Monte, after Berlusconi had posited pulling Italy out of the euro during Europe’s sovereign debt crisis.

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

Loans Sour in Turkey, Inflation Hits 25%, Interest Rates Spike, Fears of Contagion Rise

Loans Sour in Turkey, Inflation Hits 25%, Interest Rates Spike, Fears of Contagion Rise

The economic miracle fueled by foreign-currency debt. 

The Bank of Turkey’s decision mid-September to hike its policy rate from 17.75% to 24% may have temporarily stemmed the rout in the Turkish lira, but the hiatus is now over. This week, the pressure is back on the nation’s currency, which is down almost 40% against the US dollar year to date, as well on its beleaguered banks, 20 of which were slapped with another downgrade by Fitch Ratings.

The lenders, Fitch said, are “more likely to come under pressure as a result of the further depreciation of the Turkish lira (by about 20% against the US dollar since the last rating review), the spike in interest rates (driven by the increase in the policy rate to 24% from 17.75% on 13 September) and the weaker growth outlook.”

The banks affected include foreign-owned subsidiaries such as Turkiye Garanti Bankasi A.S. (half-owned by Spain’s BBVA), Yapi ve Kredi Bankasi A.S. (part owned by Italy’s Unicredit), ING Bank A.S. and HSBC Bank A.S., which were downgraded to BB- from BB, as well as large state-owned banks (B+ from BB-), all with negative outlooks. As Fitch warns, the recent interest rate hike is likely to hurt lira borrowers’ debt service capacity, while exposures to the construction and energy sectors and high borrower concentrations are also “significant sources of risks at many banks.”

As long as the current climate of economic and financial instability continues, these problems are not going to go away. According to data recently published by the Turkish Statistical Institute, economic confidence in Turkey has sunk to a decade-low. Last week the country’s Finance Minister (and President Erdogan’s son-in-law) desperately tried to assure investors that he would, in classic Draghi fashion, do “whatever it takes” to support local banks, but few seem to believe that he has such means at his disposal.

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

President-Elect of Mexico’s Bombshell: Economy in “Situation of Bankruptcy”

President-Elect of Mexico’s Bombshell: Economy in “Situation of Bankruptcy”

And why are Bank of Mexico executives and employees resigning in droves?

Around 200 central bank employees, including 20 senior executives, have left their posts at the Bank of Mexico (Banxico) since presidential elections on July 1 handed a resounding victory to populist Andrés Manual Lopez Obrador (or AMLO). Unsurprisingly, their sudden departure has a lot to do with money.

One of AMLO’s manifesto pledges was to slash salaries for senior government officials and bureaucrats as part of sweeping cost-cutting measures. So far, he’s kept to his word. Last week, Congress, now under the majority control of his party, Morena, passed a law that will make it impossible for any state employee to earn more than the president. The gross monthly salary of the current president, Enrique Peña Nieto, is 209,135 pesos ($11,700). AMLO has pledged to cut the salary in half when he takes over the post on December 1.

The law will come into force in January and will apply to all three federal branches of government as well as regional and local government institutions. This could be a major problem for employees of Banxico, since all of them are considered public officials and many of them earn more than the current president. The average monthly salary of a Banxico board member is 365,000 pesos ($19,400), around 70% more than Peña Nieto’s and over 230% higher than the salary AMLO has pledged to pay himself.

Banxico has refused to comment on the matter but it’s safe to assume that the gathering exodus of central bank employees has at least something to do with AMLO’s plan to slash their salaries. Mexico’s central bank workers, it seems, are less enthralled by the austerity principle when it’s applied to their own income rather than others’.

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

Multiple Online Banking Systems Go Down in the UK

Multiple Online Banking Systems Go Down in the UK

Payment chaos: For bottom-line-obsessed bank executives, IT systems are an expense to be slashed. The results are in.

Internet banking has become a crisis-prone business in the UK, as the online platforms of big banks suffer regular outages and other forms of IT disruption.

Friday morning, the online systems of the Royal Bank of Scotland, Ulster Bank and Natwest — all part of the RBS Banking Group — crashed in unison, leaving millions of customers unable to pay bills or view their balance on their online and mobile accounts. The group has 19 million customers in the UK and Republic of Ireland and 5.5 million active mobile app users.

After around five hours of chaos, the RBS Group announced that the problems had been resolved. The failure had apparently been caused by a “technical glitch” — a word that is being used with increasing frequency by high-street lenders — in a regular update to their firewall. The bank emphasized that it was an “access issue” and there is no evidence that customer data was compromised. But then, it would say that!

On Thursday, it was the turn of the UK’s largest bank, Barclays, whose website and telephone banking service crashed for around seven hours, leaving frustrated customers locked out of their online accounts.

Fed-up customers took to social media to vent their anger, with some complaining that they were unable to access their accounts not only through the Internet platform but also ATMs. Barclays has around 24 million UK customers, though it’s not clear how many of them were affected by the outage.

The bank told customers that they should still be able to make payments to existing payees through mobile banking, though new payees weren’t possible due to the incident. It also claimed that payments into accounts were unaffected by the issues.

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

Credit-Cardholders & Bank Customers Burned Again as New IT Chaos Breaks Out in the UK

Credit-Cardholders & Bank Customers Burned Again as New IT Chaos Breaks Out in the UK

The payments industry deplores it, but cash is starting to look pretty good, and central banks agree: “We do not foresee a totally cashless society”: ECB

This has not been a good year for IT systems in the UK. First there was TSB Bank’s botched IT migration in April, which resulted in millions of customers being blocked from their online accounts. The problems at the bank continue to fester even to this day, 22 weeks later. Then there was the Visa outage in June, which caused chaos across much of Western Europe, but particularly in the UK where consumers are far more reliant on contactless Visa cards. And now there’s British Airways and Lloyds Banking Group.

On Thursday, British Airways announced that up to 380,000 card payments on both its website and app had been compromised during a 15-day data breach. BA says the breach affected bookings made between 10.58 pm on August 21 and 9.45 pm on September 5. The compromised data included the personal and financial details of the passengers that booked during that period.

BA says it was not a breach of the airline’s encryption. “There were other methods, very sophisticated efforts, by criminals in obtaining our data,” BA’s chief executive, Álex Cruz, said.

Some customers have complained of having to cancel cards as a result of the breach while others are considering changing their online passwords. BA launched a massive charm offensive assuring customers who lose out financially that they will be compensated. That didn’t stop the shares of BA’s Anglo-Spanish multinational holding company, International Consolidated Airlines Group, S.A., from falling 5% between Thursday and Friday.

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

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