An evaluation of the condition of the European banking system

2011-08-31

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European banks have never been cleansed from their pre-2008 toxic waste and have ever since been loaded with more of it (government bonds). Image source: EU observer

In my articles concerning the systemic crisis of the euro (what has been falsely labeled as a “debt crisis”) I have always stressed that the European banking sector is quasi-bankrupt. A few days ago Ms. Christine Lagarde, the former French minister of finance and now chief of the IMF, stated her concern regarding the viability of European banks. The report from euobserver.com offers the following on the matter:

The head of the International Monetary Fund (IMF), Christine Lagarde on Sunday (28 August) called into question the health of European banks amid a stark warning about a global economic slowdown.</p> Before commenting on Lagarde’s position I would also like to add the other side of the argument put forward by ECB president Mr. Jean-Claude Trichet and by European Commissioner for Economic and Financial Affairs Mr. Oli Rehn. Again from euobserver.com we get the following:

European Central Bank chief Jean-Claude Trichet and Olli Rehn, EU monetary affairs commissioner, on Monday said Europe’s financial system had both sufficient liquidity and capitalisation.</p>

“There is no liquidity or collateral shortage for the European banking system,” Trichet said during a special hearing on the eurozone crisis organised by the European Parliament.

For his part, Rehn pointed to the stress tests for 90 banks published in July as reason for confidence in the sector.

“EU banks are significantly better capitalised now than they were one year ago,” he said.

Starting from Ms. Lagarde’s arguments I will say that what she says now, is correct, yet she would never have said that or something similar a few months ago, when she was minister of the French government. There is no need to elaborate on the reasons why she would not do that, since those are the same for all other European politicians, none of which will ever admit that his/her country’s banks are in a grave position.

As for the statements of Mr. Trichet and Mr. Rehn, they both know that private banks are now acting like zombie banks that absorb all the liquidity that is thrown their way. They both know that European banks have never been cleansed from the pre-2008 toxic paper that remains in their books, since there has never been a central plan of toxic asset removal as was the case in the USA with TARP (Troubled Asset Relief Program). They both know that on top of the pre-2008 toxic waste the banks have accumulated more toxic paper, coming from insolvent states (government bonds).

As for the stress tests that were carried out in July, these were a farce. Professor Yanis Varoufakis, in a recent radio interview characterized these tests as “derisory”, as an “exercise in mendacity”, as “fraudulent accounting”. I am afraid that he is absolutely correct. And as for the comment of Mr. Rehn that “EU banks are significantly better capitalised now than they were one year ago” I must say that comparing the current status of banks to a year before is misleading since there have been massive bailouts and injections of liquidity in the meantime. What about the exposure of the banks to the sovereign debt? How well do their loans perform? After all if the banks were healthy there would be absolutely no need to expand the scope of the EFSF, in the July 21 Euro Summit, to allow it to inject capital into private banks.

No one in Europe is willing to accept that the European banking system is far from healthy. The conspiracy of silence that characterizes European politicians on the matter, is one that is caused by the fact that the euro architecture lacks a central agency responsible for re-capitalizing banks who would take the responsibility of revealing the truth and of carrying out all the necessary toxic asset cleansing procedures. As things currently stand, where each bank is only overlooked by national authorities, there is absolutely no way that any national authority, any state official will ever admit that its country’s banks are insolvent.

The crisis in the EU spirals because it is systemic. Part of this systemic crisis is the banking sector crisis, that is quasi bankrupt and acts like a black hole. For as long as politicians insist on their false interpretation of the crisis and for as long as they continue to deny the truth about European banks, the problems will only accumulate and the solution to them will become even more difficult, if not impossible to achieve.