Winds of confusion and despair swirl around Europe's largest banks. Bank stocks plunged sickeningly late last summer as the euro crisis worsened. Its been a skittish, rumor-driven market ever since.
Adding to the confusion Central banks (US Federal Reserve, European Central Bank, Bank of England, etc.), sovereign wealth funds, the International Monetary Fund (IMF) have all become involved. The European Financial Stability Fund (EFSF) is Europe's latest savior. Such an entanglement of financial entities. How can anyone know the truth?
Dexia (DXBGF.PK), previously Belgium's largest financial institution, has become the first (but probably not the last) casualty of the crisis. It is being nationalized.
Which institutions actually own European sovereign debt? Who knows? It's a shell game (Where are those Greek bonds hiding today?) The "banking elite" juggle loans, guarantees, derivatives, and rumors - a desperate attempt to preserve the status quo.
Perhaps the only way investors can keep a finger on the pulse of this simmering monster is through the publicly traded stocks of the large banks. Here are the world's five largest by asset size as of last August.
- BNP Paribas (BNPQY.PK) - total assets: $2.676 trillion. The latest on BNP is contesting allegations that it needs recapitalization. Standard & Poor downgraded BNP's credit-rating along with several other large banks a few days ago.
- Deutsche Bank AG (DB) - total assets: $2.552 trillion. Deutsche Bank's investment banking unit is estimated to lose 250 million euros due to its holdings of Greek government bonds.
- Barclays Bank PLC (BCS) - total assets: $2.326 trillion. Barclays roots stretch back 300 years to the heyday of the British empire.
- Credit Agricole SA (CRARY.PK) - total assets: $2.133 trillion. Originally set up to give loans to French farmers Credit Agricole is now the 4th largest bank in the world. It had its credit rating downgraded by Moody's in September.
- Industrial and Commercial Banks of China Limited (1398.HK) - total assets: $2.044 trillion. ICBC claims to be the largest bank in the world (by market capitalization) and says it has no exposure to Euro bonds. Even though 5th It has more than twice the combined equity of the 4 largest banks.
Note that the first 4 of the above are European. Moody's, Standard & Poor, and Fitch have been regularly downgrading credit ratings on both European banks and the sovereigns themselves. The latest? France (the second largest economy in the Eurozone) is now under scrutiny for a downgrade
How Much Trouble Are These Banks In?
Well ... it depends on who you listen to. Christain Noyer, governor of the bank of France, says Greece is no threat to French banks. BNP's website says it's "one of the strongest banks in the world." The current rally in the markets is driven by hopes the EFSF will live up to its name. Perhaps the banks will be successfully recapitalize and the Greek problem stabilized - or so we hope.
I wonder how many are tempted to gamble on Greek debt. With yields approaching 180% maybe you can get in and out before default. A nice "all is well" rumor before dumping may help. Its not business anymore - its a casino.
Even if Greece is toast here's the thing: As everyone knows, its not just Greece. Once Greece is given terms the rest of the PIIGS will want them also? Stratfor says all roads lead to a banking crisis - some are just shorter than others. European financial entities will continue to kick the can down the road as long as they can - they have no choice.
Will Large European Bank Failures Precipitate Global Calamity?
Highly leveraged European banks (see Dark Clouds over European Banks) have very low equity/asset ratios. If assets (such as European sovereign bonds) are forced mark-to-market or faltering trust a run on short term deposit will cause equity to vanish overnight.
In the best of scenarios, a European meltdown would would still send shock-waves across the world. US banks have European assets. Europe is China's largest export market. The $600 trillion derivative market may destabilize and counter-parties may fail as in 2008. James Kostohryz's article Global Financial Disaster warns what might happen. Let's hope he is wrong.
If the large banks go - or come close to going - you can be sure of one thing: Central banks will print, print, print. Here is the hyperinflation some fear.
The overriding reality today, as during the Great Depression, is "there is no money." Now, Asian growth too is looking precarious. As during the Great Depression, malaise is spreading worldwide.
In 1932 private banks were in total collapse. Newly enacted government assistance and banking reform came with the election of Franklin D. Roosevelt. Today, with private banks and governments both in the same sinking ship. It's not sure where salvation will come from.
Investment Ramifications
First, keep yourself liquid. Dollar debasement may be coming - but that day isn't here yet.
Even in a deleveraging world, don't get too bearish. Stay hedged. All it takes is a hint at QE to send markets rocketing up ... and you can be sure there will plenty of QE rumors.
As an inflation hedge it is important to own real things such as your house (keep the mortgage affordable) and perhaps a position in precious metals or natural resource stocks. Short term scares can send these stocks sharply down so be prepared for a rocky ride. Minimize fixed income - high inflation will decimate it.
Avoid leveraged investments. You may be right long term yet bad timing can wipe you out.
Disclaimer: This article is intended to be informative and should not be construed as personalized advice as it does not take into account your specific situation or objectives.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
