Dexia zombie bank: The tip of the iceberg and the derisory stress tests

2011-10-04

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Dexia is about to fall apart due to exposure to the debts of Greece and Italy. European banks are verging on insolvency. The stress tests of July were a farce as Dexia passed them successfully.

Franco-Belgian private bank Dexia announced that it might be forced to “restructure” its operations so as to cope with the run on shares caused by its exposure to the spiraling Greek debt. In a report from EurActiv we get the following:

Dexia said that chief executive Pierre Mariani had been charged with preparing measures to resolve structural problems that were harming its operations, possibly the set up of ‘bad bank’ to hold a portfolio of assets, which has hampered the financial institution.
Dexia’s statement came shortly after the conclusion of a meeting of euro zone finance ministers in Luxembourg, including those of Belgium and France, both shareholders in the group.</p> Also euobserver notes the following in a report on the same issue:

Options for what would amount to a break-up of the company include getting rid of Dexia Credit Local, a unit which lends money to local authorities in Europe and the US, Dexia Banque Internationale a Luxembourg, its private fund-management branch, and Denizbank, its retail banking business in Turkey. </p> I am among those who have been warning long now that the European banking system is verging on insolvency and that it is filled with zombie-banks that parasitically exist thanks to the support of the ECB and the bailouts to states with taxpayer money that end up in the European banking system. I have been saying that it is largely self-defeating to focus on individual countries as if those are the only problem while completely ignoring the financial crisis that is brewing in Europe as part of the broader systemic crisis.

The European banking system is quasi-bankrupt and Dexia is only the tip of the iceberg. Even Europe’s biggest banks will fall in disarray if the systemic crisis of the euro is not addressed with system-wide solutions in all its three dimensions: (a) debt crisis, (b) quasi-bankrupt banking crisis, (c) under-investment crisis.

Instead of repeating what I have said before I shall reproduce part of an article I published in August regarding the condition of the European Banking system and the statements made by IMF chief Ms Lagarde and by ECB chief Trichet and European Commissioner on Economic and Financial Affairs Mr. Rehn. Just to put you into context Ms. Lagarde admitted that Europe’s banks are in grave danger (something that she would never had said if she was still France’s Finance Minister), while the European officials, those who have denied reality on a series of occasions, indirectly said that Ms Lagarde was speaking non-sense.

Here are some selected parts of the article titled “An evaluation of the condition of the European banking system”:

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).</p>

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.

Just to add a comment on something that was not included in that article and relates to Dexia. That particular bank passed with “success” those much-vaunted, phony stress tests back in July, that Mr. Rehn and other top ranked officials often use as a reference point to hide the truth. The “omerta” (code of silence) between European elites on the systemic nature of the current crisis is only making things worse. It is a common secret that they are simply not speaking the truth about the condition of European banks and about the systemic nature of the crisis. This is a great gift for anyone willing to speculate against the euro and the markets are well aware of it.

Dexia is just a tiny example of what the European banking system looks like. Just to note that France and Belgium have stated that they will bail out any bank in need. This will reinforce my prediction that France is heading towards losing its triple-A rating in order to shore up its banks – and if that happens say goodbye to the EFSF and to the programmes in Ireland and Portugal (see Greece near default, EU in trouble – Six facets of the euro crisis).

The absence of a system-wide strategy to deal with the crisis is leading with mathematical accuracy to the collapse of the euro. Politicians must finally find the courage to reveal the truth and they must finally take the decision to make decisive steps forward to arrest the crisis. Praying and delaying is not a policy suitable for European leaders.

European banks need to be cleansed. It is unacceptable that they remain in a zombie state, that they act as black holes to the system and that they put all their losses on the shoulders of the “ever-generous” European taxpayer who is called to bail them out time and again.