In all my career in finance, never once was a behemoth financial out of the headline index of any country. Banks and insurance companies have always been like the muscular body-builders posing to girls on Venice Beach yet Deutsche and Credit Suisse have become the trodden on puny weaklings who are getting sand kicked in their face. Yes, these two former giants of the finance world have been relegated because their market caps have fallen under #75 for two months consistently.
It really paints a telling picture of how desperate things are becoming. Don’t give me this disrupter “fintech” malarkey. Markets, for as much as they are manipulated by government hands, are still barometers of trust and confidence. To that end the majority of pundits don’t trust these banks. The European stress tests were a forgone conclusion. I’d written what a basket case Italian banks already were. The bigger problem is the message. When the sector that greases the wheels of the economy is severely limping it is time to ask how bad the real economy is. I wrote a while back that some Chinese machinery companies have accounts receivable equivalent to 5 years of revenue. They AREN’T getting paid by customers.
Let’s look at how “non performing loans” in Europe have grown since 2008 and whether you’d agree outer central banks have it under control
Greece +15x, NPLs now 38% of all loans
Italy +3x, now 18% of all loans
Portugal +8x, now 19% of all loans
Spain +2x, now 7% of all loans
France +1.4x, now 4.2% of loans
Germany +1.8x, now 3.2% of all loans
Total EU non performing debt has essentially trebled to over €1 trillion.
Sure banks can fiddle around with assumptions to suppress the true state of NPLs because triggering the bailiffs creates a whole new can of worms. If the resulting asset fire sales cause a bank to mark-to-market other outstanding loans the torpedo to the balance sheet would sink them. Let’s not forget a chart I posted looking at the sharp rise in inferior rated companies on the US S&P500 over the last decade. On the far left we have AAA credit going all the way to the credit rated one notch above at the far right.
Now Australia has cut rates again I wonder at the personal debt edifice being run up and the state of banks with an overreliance on wholesale funding markets. At the moment it seems benign but if we get financial contagion in Italy markets will deprive debt. Central banks have done an admirable (not credible) smoke and mirrors job but we are coming to a dead zone where market forces, as weakened as they are, can still surprise. In a world drowning in debt, the authorities are ill prepared for the car crash that’s coming. The amount of complacency shown by markets to date is disturbing and that only means once the apple cart is tipped it will be multiple times worse, making GFC look a walk in the park.
As my mate Stu joked this morning, “Our kids are going to see some big changes to the Economics 101 textbooks by the time they get to study.” Never a truer word than that said in jest.