The European banking crisis continues to spiral out of control while hapless politicians fail to put together a credible resolution plan.
Part of the problem may be that it is difficult to construct a solution when failing banks are bigger than the countries that are trying to rescue them.
The latest European bank on the verge of collapse is giant Dexia, a Belgian-French bank. According to the Wall Street Journal, Dexia has total assets, including derivatives of $689.5 billion and a leverage ratio of 74.5. By comparison, in mid 2008, prior to its collapse, Lehman Brothers reported a leverage ratio of 31.
The Belgian government, along with France, have agreed to rescue Dexia, but who will rescue Belgium and France?
The Belgian government is massively indebted with a debt/GPD ratio of almost 100%. The total assets of Dexia exceed Belgium’s gross domestic product of $469 billion by $221 billion. By comparison, the U.S. banking industry has total assets of $13.6 trillion dollars, slightly below the total GDP of the United States.
Nor is sharing the burden with France likely to alleviate confidence concerns about the rescue of giant Dexia. France is almost as heavily indebted as Belgium with a debt/GDP ratio of 90%. In addition, France already has to deal with the looming collapse of France’s two largest banks, BNP Paribas SA and Societe Generale SA. According to Bloomberg, the four largest French banks have total assets that exceed France’s GDP by an astonishing 300%.
At the end of March, French financial firms had $672 billion in public and private debt in Greece, Portugal, Ireland, Italy and Spain, according to Basel, Switzerland-based Bank for International Settlements. That’s the biggest exposure to the euro-area’s troubled countries and almost a third more than German lenders. The four largest French banks have 5.9 trillion euros in total assets, including loans and bond holdings, or about three times France’s gross domestic product.
“If liquidity conditions worsen, their size and the weight of their trading books would make it more problematic for the government to replicate a rescue like in 2008,” said Christophe Nijdam, an analyst at AlphaValue in Paris.
Credit markets signal a squeeze at French banks, with increased risk of default. Credit-default swaps on BNP Paribas have soared to 299.6 basis points from 110 in July, according to CMA. Contracts on Credit Agricole SA (ACA) have climbed to 297 from 130, and those for Societe Generale have surged to 410 from 128.
A further cause for alarm were remarks made by banking executives of both Paribas and Societe General who adamantly insisted that the situation was “under control” and “manageable”. Is there any possible reason to believe this public relations gibberish?
Christian Noyer, Bank of France Governor, echoed the nonchalance of bank executives by stating “I’m not at all worried…For French banks, they are very solid. Frankly, I’m much less worried about French banks than American banks…Our banks are in very good health.”
Anyone who has been around the block a few times is no doubt familiar with the old saying “you should never believe anything until it is officially denied.”
Does anyone remember what Ben Bernanke said just prior to the U.S. housing collapse and financial meltdown? The Fed Chairman proclaimed on May 17, 2007 that “All that said, given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system. The vast majority of mortgages, including even subprime mortgages, continue to perform well.”
The European banking system is on the verge of full scale collapse and Europe’s sovereign states do not have the resources to fund a plan even if they had one. As this banking and debt crisis reaches the critical failure point, expect major involvement by the U.S. Federal Reserve and a massive monetization of obligations that cannot be repaid. What the value of any currency will ultimately be worth at the end of this global financial crisis is subject to debate. Is this what the gold market is signaling to us?