Posted May 4, 2018 by Martin Armstrong
The Cologne Institute of German Business sees in the planned European deposit insurance is simply incapable of proving protection against a bank crash in Europe. The EU deposit guarantee is simply not practical under any concept of austerity. The Eurozone still has inherent significant risks in the balance sheets of European financial institutions. This is primarily because where the USA took the bad loans from the banks and stuffed them into Freddie and Fanny, in Europe, the bad loans are still on the books of the banks. Systemically, this has been the leading problem why Europe has been unable to recover and Quantitative Easing merely robber savers of their income and it failed completely to stimulate the economy. Banks were still reluctant to lend and people would not borrow if they did not have confidence in the future.
The proportion of bad loans is so different between the individual banks that a joint deposit guarantee leads to a permanent transfer mechanism. This is a complete disaster and pulls the EU apart. As the worse banks are in Southern Europe, Northern Europe will see this as a bailout for the South. Therein lies the very crisis and why the structure of the Eurozone from the outset has been such a complete disaster. All national debts of member states should have been consolidated and that should have become the European National Debt. Thereafter, member states should have been on their own. But that common sense design was ignored for political purposes. Any consolidation of debt was seen as a bailout for weaker member states. This inherent disparity simply remains intact with no solution in sight.
The recapitalization costs for eliminating non-performing loans (NPLs) just in Cyprus will still consume 2.4% of GDP in that member state. In Greece, any recapitalization will cost 2% of GDP and in Italy 0.8%. The disparity among members smacks of transfer payments which have been a sore subject behind the design of the Euro. A closer look at Italy reveals that more than 10% of the balance sheets of Italian banks constitute bad loans. The cost to bailout Italy is put at €189 billion while Spain comes in around €100 billion and even France will be €85 billion. In Germany, the bad loans amount to about €48 billion
While nobody wants to talk about it, the obvious issue is why has Deutsche Bank not been merged with Commerzbank? The bad loan problem a derivatives problem would simply not be solved even by such a merger.
Is it any wonder why politicians have looked to bail-ins rather than bailouts?