Concerns about Euroland Bank Runs

There are concerns that the low-key nationalisation August 31 of bankrupt CIF-Credit Immobilier de France, might hasten  bank runs across the EU where leaders continue to dither and equivocate over resolving Euroland’s chronic crisis.


Moody’s downgraded the mortgage lenders’ portfolio and virtually declared it bankrupt, forcing the Socialist government to step in and nationalise. (Credit: Wikipedia)


The French government takeover was followed by an alarming report suggesting that a Spanish bank run is gathering steam. (Spain has long been considered the too-big-to-save EU-state in the ongoing Euroland crisis and the French banking system remains significantly exposed in a deteriorating Spanish market).

According to Mark J. Grant, a former investment banker and author of “Out of the Box and onto Wall Street” writing on Zero Hedge: “The central bank of Spain just released the net capital outflow numbers and they are disastrous. During the month of June alone $70.90 billion left the Spanish banks and in July it was worse at $92.88 billion which is 4.7% of total bank deposits in Spain. For the first seven months of the year the outflow adds up to $368.80 billion or 17.7% of the total bank deposits of Spain and the trajectory of the outflow is increasing dramatically. Reality is reality and Spain is experiencing a full-fledged run on its banks whether anyone in Europe wants to admit it or not”.

French Finance Minister Pierre Moscovici announcing the CIF takeover — (CIF has a small retail branch network of 300 outlets but more than 30 billion euros in mortgage loans) — told Le Figaro that: “To enable CIF group to meet all its commitments, the state has decided to respond favourably to its request to provide a guarantee.”

What this really meant according to Zero Hedge’s Tyler Durden (a pseudonym) was that: “in order to avoid a bank run following the realisation that the housing crisis has finally come home, his boss, Socialist (President François) Hollande, has decided to renege on his core campaign promise, and bail out an ‘evil, evil’ bank.”

Indeed President Hollande’s election campaign earlier in the year had been filled with fiercely anti-banker rhetoric — he made clear he supported separation of retail and wholesale banking and a financial transactions tax — but also with pledges to throw growth into the harsh policy mix imposed at the core of Europe by German “austerians”.

Pierre Moscovici

French Finance Minister Pierre Moscovici (Credit: Wikipedia)


But President ‘Normal’ (as he has been dubbed) has been slow on the uptake preferring endless debate, discussion and consultation to firm financial action. His popularity has slipped significantly as a result. Polling firm Ifop, which conducted a survey for the Dimanche Ouest newspaper August 30 found that pessimism about the government extended to 58% of Socialist party supporters … “the first time that anxiety has been so high at the beginning of a presidential mandate”. Other polls suggested the president’s approval rating had slipped to 54%, a steady decline since he took office in May.

Despite the slow pace of presidential policy-making harsh financial reality, driven by factors outside his control, has now hit, forcing France to takeover CIF-Credit Immobilier de France, described by ratings agency Moody’s Investors Service as ‘currently unviable’ (or bankrupt in plain English).

France’s second largest mortgage specialist has long been in trouble, with the first signs of difficulty going back a year or so when the failed Franco-Belgian banking group Dexia was nationalised.

The gory story — which yet again sees European taxpayers taken to the cleaners to get Western bankers off the hook — is set out in full technical detail here by Zero Hedge one of the first websites to draw attention to the banking disaster awaiting EU member states. It is prescient and well worth a close read.

For while the troubles at CIF are not isolated and certainly nothing to be complacent about, such is the complexity of the interlinked global banking system that storm-driven ripples in one country could, without much warning spread in a global tsunami bringing systemic collapse.

The start of the CIF saga was signalled mid-May when Moody’s cut 3CIF’s standalone bank financial strength rating to E/Caa1 from C/A3, saying the bank was no longer viable without ongoing financial support and adding that 3CIF had only very limited access to private-sector financing. It alluded to a possible nationalisation of the bank, according to the IFR website.

CIF’s troubles began when Moody’s slashed its rating: “Caisse Centrale du Credit Immobilier de France came under pressure from Moody’s for the second time in just three months last Tuesday, after the ratings agency slashed the implied systemic support from the French government by three notches…The downgrade is based on Moody’s assessment of a rising probability of a run-off scenario for the CIF banking group and associated transition risks for its creditors.”

This is the same ratings agency which earlier raised hackles in France by downgrading its Triple AAA rating.

Today writes Zero Hedge the crunch is coming: …”At the end of the day, Europe’s main problem was, is and continues to be the active disappearance of any and all cash and money good assets, as well as collateral, as it is increasingly pledged (or re-pledged once repo mechanisms get involved) to other financial institutions, and primarily to the ECB, in exchange for short-term funding … Alas the can kicking time is now over. And what many took for sacred previously, such as the French mortgage market, has suddenly, just like every other contraption of modern financial markets, been shown to be simply the latest naked emperor in a city full of in-kind dressed supreme rulers. And what it all boils down to is this: will Hollande, for all his pompous rhetoric, immediately do what the market expects him to, which is to unleash the French nationalization machine, first with CIFD, and soon, many other insolvent banks, or, will he stay true to his word, and watch as risk assets crash and burn all around him. Perhaps the question is better posed to French citizens: is their hatred of bank bailouts greater than the fear of facing the fair value of all assets absent central bank and sovereign backstops? Which, incidentally, is the number one question that will once again face everyone in the ‘developed’ world…”

As John Ward reacting to the CIF nationalisation, noted on his The Slog Blog:  “…We are within a few working days of serious bank runs, and the domino effects of those runs going unchecked. This really is the Last Chance Saloon for Europe, the US, and the global economy. Blind German ambition, weak central bank action, and Washington’s puerile political games can smile benignly going into the weekend if they wish. I can guarantee, however, that next week is going to break the urbane calm of Jackson Hole big-time unless somebody beyond Mario Draghi wakes up…”

UPDATE: The French presidential slow-burn is attracting increasingly critical comment domestically, the latest being this ever so gentle rebuke from Charles Wyplosz, a Geneva-based Professor of Economics in Telos: “On savait bien que le plus difficile pour François Hollande n’était pas de se faire élire mais de prendre le pays en charge à un moment extraordinairement difficile sur le plan économique. Son silence sur ces questions durant la campagne pouvait soit être de la tactique politique, soit l’absence de plan stratégique. Quatre mois après son élection, il n’a pas encore articulé sa vision d’une crise qui ne cesse de s’aggraver dans la zone euro. En mettant bout à bout les petites phrases des uns et des autres, on sent le débat et, peut-être la direction dans laquelle Hollande semble se diriger, et ce n’est pas très rassurant.” (We all knew that François Hollande’s most difficult challenge was not getting elected but taking the reins at an extraordinarily difficult time economically. His campaign silence on economic issues was either a political tactic, or the lack of any strategic plan. Four months after his election he still has not spelled out a plan for dealing with the worsening euro area crisis. One gets the feeling that the direction Hollande is taking is not very reassuring.)

Meanwhile the latest daily press summary from Open Europe serves to highlight the weighty issues facing France and Europe, as the political rentrée gets under way:

Daily Press Summary

Barroso calls for new treaty and more integration
European Commission President José Manuel Barroso has made his clearest call yet for fundamental change to the EU treaties, saying on Saturday that, “Europe and the principles of the Treaty need to be renewed. We need more integration, and the corollary of more integration has to be more democracy. This European renewal must represent a leap in quality and enable Europe to rise to the challenges of the world today.
WSJ Observer EUobserver

German Finance Minister Wolfgang Schäuble has said he believes it is unlikely that a new Europe-wide banking supervisory system will be up and running in the New Year telling a German radio station “The ECB has itself said it does not have the potential to supervise the European Union’s 6,000 banks in the foreseeable future” reports the Irish Times.
RTE Irish Times

OECD calls on Draghi to launch “unlimited” bond buying programme;
Bundesbank resistance calls Draghi’s plans into doubt

The European Central Bank should launch an “unlimited” bond buying programme to stem the debt crisis, the Secretary-General of the OECD has warned. Angel Gurria told a conference in Slovenia, “The system is at stake, the euro should not be put at risk … the EFSF and the ESM [bail-out funds] are not enough, fast enough, reactive enough.”

ECB President Mario Draghi was expected at this Thursday’s crucial ECB meeting to unveil a new bondbuying programme to help Spain and Italy go on without a formal bailout. However, reports suggested that Bundesbank chief Jens Weidmann threatened to quit in protest at the plan. “By being so outspoken beforehand, he hopes to limit the extent of the operation,” a senior ECB source told Reuters. “That would constantly put a question mark over how far we could go.” Fellow German ECB policymaker Jörg Asmussen said the ECB should only buy bonds if the IMF was involved in setting an economic reform programme in return.

Handelsblatt columnist Torsten Riecke writes that Chancellor Angela Merkel is increasingly inclined to back Draghi over Wiedmann: “It is an irony of history, that the Bundesbank, which was supported by the German policy establishment as a model for the ECB, is now sidelined by the new Merkel / Draghi axis.
Telegraph Guardian Saturday’s Telegraph IHT Sunday Times FT Sunday Telegraph: Halligan Handelsblatt Handelsblatt 2

FTD reports that Slovenia may be the next country to need bail-out. Janez Jansa, Slovenian PM, is quoted as saying, “A national bankruptcy may happen in October if we cannot sell sovereign bond” adding it is “practically impossible” to obtain financing on the markets.

In an interview with Bild am Sonntag, Spanish PM Mariano Rajoy proposed a three step plan to fiscal union with eurobonds, in which member states first realise convergence criteria by 2013-2014, set up a European budget authority by 2015-2016 to control national budgets, and finally introduce eurobonds by 2017-2018.
Bild FTD

The FT reports that Spain has announced its plans for a “bad bank” in order to clear the way for an EU bank bailout but has been forced to inject more capital into Bankia. Separately, European Voice reports that the Spanish central bank has said that €315.6 billion of deposits have been taken out of the country in the past year
Saturday’s Guardian European Voice FT Weekend El Pais FTD

Former Dutch Central Bank Governor criticises politicians for telling half-truths about euro crisis
De Telegraaf reports former Dutch Central Bank Governor Nout Wellink has criticised Dutch politicians for not being honest enough about the issues raised by the eurozone crisis, saying: “If you have started a monetary union, you will need to complete the story. That includes a second pillar. That is more political integration. And there even isn’t a way back.” In the Sunday Telegraph, Harriet Alexander looked ahead to the Dutch elections, noting that, “The rise of the Dutch Socialist Party could end Holland’s reputation as a Brussels-friendly member of the beleaguered Eurozone club.”

Meanwhile, on Dutch news site De Dagelijkse Standaard, Open Europe’s Pieter Cleppe argues that the Dutch employers’ federation campaign backing both EU and euro membership is wrong to link the two, writing that people should instead be questioning whether “the euro might threaten all the benefits that EU membership has offered”
De Dagelijkse Standaard: Cleppe Open Europe blog Sunday Telegraph Observer Telegraaf

Deutsche Welle notes that Frank Stronach, an 80-year-old auto parts magnate, is due to launch a new political party in September, which will campaign to leave the euro and stand in the 2013 Austrian elections.
DW Reuters

Over the weekend, France’s Finance Ministry said it would guarantee the debt of Caisse Centrale du Crédit Immobilier de France, or CCCIF, after the bank sought emergency assistance. The government will underwrite nearly €5 billion in immediate financing for the bank.
WSJ WSJ 2 BBC FT Les Echos

An FT/ Harris poll finds that only a quarter of Germans think Greece should stay in the eurozone or get more help.

An opinion poll prior to Finland’s municipal elections predicts that Timo Soin’s euro – critical Finns Party could triple their share of the vote obtaining 16.3%.
Iltalehti poll Yle poll

 Story: Ken Pottinger

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