Growing worries about the global economy are behind Europe’s banking crisis, but European investors are also unsettled by some of the troubles that have been unleashed at home.
A cold wind blows from the City of London to the banks of the Main River in Frankfurt…and it has nothing to do with winter. Indeed, the coolness sweeping across the continent’s financial capitals is due to the worsening economic situation in Europe, even as analysts and market officials revise their estimates for 2009 downwards and banks are raising new suspicions about the health of their balance sheets.
The devastation of the European economy in just a few days (especially in Britain) was not without amazement. On January 19, British Prime Minister Gordon Brown unveiled a new scheme to provide banks with an unlimited insurance scheme against additional losses of several billion pounds and a fund of £50 billion (equivalent to 73 billions of dollars) so that they buy good quality but illiquid securities. However, if the latest bailout had one effect, it was to make investors even more anxious: shares of banking giants such as Barclays (BCS) and the “new” bank Lloyds (LLOY. L), resulting from the merger, organized by the State,
The continent’s financial institutions are also suffering from heightened investor anxiety. Shares of the bank loyal to Germany, Deutsche Bank – or Banque Allemande in French (DB) – have fallen more than 27% since the institution announced on January 14 that it will report an unexpected loss of 6, 3 billion dollars that it suffered in 2008 after ceasing to expose itself to risky financial investments. As for shares of France’s largest bank, BNP Paribas (BNPP.PA), they fell nearly 30% during the same period. Even Spanish bank Santander (STD), despite its prosperity, fell 12% last week.
The common factor behind the meltdown in the banking system is growing concern about the European and global economies. What is certain is that Europeans are still concerned about possible exposure to bad American debt (from risky hedge funds to money placed in the fund pyramid plotted by banker Bernard – nicknamed “Bernie in the U.S. – Madoff But now, with Europe’s declining gross domestic product, rising unemployment, and spiraling opinions about the market, investors are increasingly anxious about issues affecting the continent, such as the danger posed by local loan defaults, asset downgrades,
IT’S FAR FROM OVER
“Last year, it was the banks that almost sank the economy. From now on, it is the economy which threatens the banks, ” observes Pete Hahn, professor at the Cass business school of City University in London and former manager of the bank Citigroup (C). “We are not at all ready to see the end of the tunnel”.
In no European country is the economic situation worse than in Great Britain. Last October, the State injected 50 billion pounds sterling (equivalent to 69 billion dollars currently) into British banks. However, the country is currently burying its third consecutive quarter of negative growth, and most economists expect UK GDP to shrink by at least 2% this year. Over the past 18 months, unemployment has climbed two percent to 6.1%; as for domestic prices, they fell by 16% in 2008, and the level of consumer confidence has never been so low for 30 years.
For banks, these findings translate into a new visible risk on their balance sheets. Unprofitable loans are on the rise, and dozens of companies are closing every day. No banking institution has been more affected by such damage than the Royal Bank of Scotland (RBS.L – la Banque Royale d’Ecosse in French), which was still thriving a year ago when it launched a takeover bid friendly on the Dutch bank ABN Amro. On January 19, the RBS group (which is now 70% owned by the British state thanks to an emergency bailout launched last year) announced annual losses which could amount to 28 billion pounds sterling (38.6 billion dollars), a record sum in the history of British companies.
Investors were not reassured by state support and sent RBS shares down 66% in just one day. The bank is now worth just $6.8 billion, down from $80 billion a year ago. “UK domestic bank stocks are extremely risky right now,” said analyst James Irvine of brokerage firm Dresdner Kleinwort in London.
THE CRISIS OF THE IRISH BANKING SYSTEM
Le même constat s’applique certainement à l’Irlande, qui était l’un des succès économiques de la zone euro pendant la dernière décennie, mais qui s’est récemment heurté à un mur. Il est dorénavant prévu que l’économie irlandaise se rétracte de 4,6% cette année (tandis qu’elle avait grimpé de 6% en 2007), et le chômage pourrait monter en flèche de 12%, augmentant ainsi par rapport au taux de 4,6% atteint à la fin de l’année 2007. En outre, le déclin économique porte un sérieux coup aux banques irlandaises. Le 15 janvier, l’État à été contraint de nationaliser le groupe Anglo Irish Bank (ANGL. I – le troisième plus grand établissement de prêts du pays) après que le marché immobilier domestique, en plein effondrement, a grièvement exposé la banque à des marchés monétaires internationaux, aujourd’hui non liquides.
Les deux banques les plus importantes du pays, l’Allied British Banks (AIB) et la Bank of Ireland (IRE – la Banque d’Irlande en français) ont également reçu une aide étatique s’élevant respectivement à 2 milliards de dollars et 2,5 milliards de dollars. Pourtant, depuis la nationalisation d’Anglo Irish par l’État, ces deux banques ont par la suite perdu plus de la moitié de leur valeur de marché, par crainte que les politiciens aient à venir à leur secours aussi.
Les banques continentales se portent mieux mais sont également soumises à certaines pressions. Le 21 janvier, l’État français a annoncé une injection de 13,6 milliards de dollars dans le secteur bancaire domestique, élevant ainsi le soutien financier total de l’État à l’industrie française des services financiers à 27,2 milliards de dollars l’an dernier. Jusqu’ici, seule la banque Société Générale (SOGN. PA), la deuxième plus grande banque de France, a accepté une recapitalisation de 2,2 milliards de dollars supplémentaires, bien que les analystes prévoient que les autres institutions principales du pays, BNP Paribas et Crédit Agricole (CAGR. PA) acceptent des renflouages se rapprochant de cette somme.
« L’injection de capitaux par l’État [français] n’est pas destiné à compenser la faiblesse ou l’échec des banques. Son objectif est plutôt d’éviter tout problème qui pourrait se produire dans le futur, » a déclaré Christian Noyer, le gouverneur de la Banque de France lors d’une conférence tenue à Abu Dhabi le 21 janvier.
CASH INJECTIONS
In Germany (the second largest economy in Europe), these problems have already started to affect the banks. The Munich-based institution Hypo Real Estate Bank (HRXG.DE), which has been abused by its investments in subprime loans, revealed on January 20 that the German State’s Financial Markets Stabilization Fund had granted it An additional $15.4 billion in loan guarantees. The move raised the total support received by the bank to $54 billion.
Additionally, Frankfurt-based DZ Bank (ENEA.F), which acts as the central institution for the nation’s cooperative banks, announced on January 20 that it lost $1.3 billion in the last quarter due to its exposure to Icelandic risk banks and the insolvent US investment company Lehman Brothers. The cooperative institutions that own DZ Bank have pledged to pay it $1.3 billion in new capital to keep it afloat.
Just a week after Deutsche Bank announced its huge, unexpected loss, new revelations have fueled fears that Germany’s banking crisis is more severe than previously thought. A study by the regulator of the German banking system predicts that the books of the country’s banks could show as much as 300 billion dollars of bad debt, which could require putting these in writing, in addition to the 100 billions of dollars of debt already disclosed. A spokesperson for the regulator said that the study conducted must remain confidential and cannot comment further on this subject.
THE COOLNESS IS JUST STARTING TO SET IN
How much worse could things get? In Britain, at least, the specter of possible nationalization looms large on the horizon. The state has already taken over two failing mortgage lenders: Northern Rock (NRKX.L) and Bradford & Bingley (BBP.L). Now, Citigroup bank is subject to rumors that the state may take over the 30% of RBS bank that Citigroup does not yet own…another reason for the collapse of the bank’s shares.
In the eyes of Hahn, of the Cass school of management, the British state would like to avoid further nationalizations but will certainly have to be content to swallow the pill. Civil servants are not necessarily going to run the banks better than the state does; they will simply provide them with stronger debt protection. “You cannot ask civil servants to manage complex financial instruments,” explains Hahn. He adds: if that were the case, the state would be entering uncharted territory. »
This argument holds, but further drastic measures could creep in if the British economies and their European counterparts continue to deteriorate. Economists now predict that the global economic decline will last at least until 2010, with banks announcing billions more in risk assets from time to time. The cold snap could last a while longer.
