National Bank of Hungary: ESA deficit could fall as low as 1.6 pc of GDP by 2020

Here a late reaction because of the problems with major (European) banks. I liked to add statistics to this comment but this was not possible.
UniCredit and Deutsche Bank are not sick, do not take away your savings. Calling a bank run is punishable and so unnecessary, because the European banking system is heart-safe. Supervision of banks has now been transferred to a European institution, the EBA (European Banking Authority). The EU was founded in response to the Second World War. Everything the EU does is well-intentioned and better than how all those small countries would have arranged it themselves. The EBA regulates banks, so all banks are well regulated. Barclays’s rating is cut by Moody’s lowest investment grade. Markets more sanguine on Barclays. See Credit Suisse, UniCredit and Deutsche Bank as a bigger credit risk.
https://t.co/nW5Cy6zLiQpic.twitter.com/KPMIOBM4qr That is a bit like a conversation about the approaching financial disaster in the eurozone if it is being conducted with a euro-enthusiast. Unfortunately, of course it is not true. For a piece of summary of the problem, we go back to the above video of 6 months ago. Do not be afraid, the fragment starts at the right place and takes a few minutes. What is wrong with specifically those 2 banks that excel in the state of colleague Holger Zschaepitz, whether or not coincidentally exactly the two that are not mentioned in the film about the bankrun? Unicredit is the largest bank in Italy and because the euro crisis has been vigorously fought by brave eurocrats, is there no problem at all? And Deutsche Bank comes from solid Northern Europe, since we never had a problem at all? Unfortunately. Let’s try to briefly summarize it once and for all. In 2016, that EBA was still running a stress test for all European banks, which showed that things are not that bad. That was an absurd exercise because the model that the EBA economists worked with was so mild that every bank would survive under all circumstances. Crap in crap out applies when calculating with computer models. It is comparable to testing an umbrella in sunny weather. Here you will find the article about it, with a link to the EBA’s data on this subject. What are they doing wrong? Assessing the start of the credit crisis. In 2002 Greece had an external debt (i.e. from banks, insurers and investors outside its own national borders) of € 100 billion, just as large as their economy. Greece is financially a special country and the outside world liked it. That changed when they got the euro. That country then had a too high state debt and was not allowed to go to the euro at all. That rule was therefore resolutely violated because there is a lot of enthusiasm about European integration. So much, that we just break rules that are well-conceived, if sensibility jeopardizes the speed of integration and enlargement of the EU. Everything has to give way to the latter, that is why we speak of a Euro Gospel here. And hasty haste rarely makes good, as showned. In addition to rules which prohibit countries with too many countries from becoming members of the club, rules on the introduction of the euro also prohibited bank support. If a government (or bank) has put itself into problems, it must save itself. The text is really unambiguous. By giving Belgium, Greece and Italy the euro and thereby breaking the rules of the so-called stability pact, the European political elite has opened a Pandora’s Box. It was a wink to the banks. Bankrupt governments giving euro’s was not allowed, it happened anyway. Giving banks state aid if they make a jar of it is not allowed either, but that rule may be a bit too much to stretch in the future. The banks assumed that if a country like the Netherlands is condemning Greece’s excessively high national debt, in 10 years’ time we will also be prepared to save banks if things go wrong. If not, but that does not matter. Rules you should not take literally, in the EU you can always talk and rustle a deal with politicians in the issues of the day. They are willing to literally break every election promise. The bankers started pushing Greece with credit so that they could buy German goods. The export and with it the trade balance of Germany explodes because they run, cars, electrical appliances, airplanes, tanks, you name it to export to Greece. That country is full of beautiful things, German factories are working overtime, it seems to be economically high. This is the illusion the euro itself creates prosperity, which is unjustified: it was a temporary feast on credit. Notice that the trade balance of Germany from 2001 to now corresponds exactly to the debts of the Greeks, a graph earlier. The Greeks (like the other Southern European countries) did not have any money for the stuff of Germany (and the other Northern European countries) so they put themselves in debt. Very risky for the bankers involved but who thought that the taxpayers in Northern Europe would jump in to keep the good peace. That turned out to be justified because Dutch PM Rutte broke his promise (again) and kept dumping. The assumption by the high-risk bankers that a country like the Netherlands would help them against all the rules was justified. This situation can be compared to a person with bad credit who drinks champaign in an expensive club. It becomes more fun later on, but after a while it appears that the consumption on credit has taken on quite serious forms. The bill is so high that the bartender, on his side the bouncer, comes along with the pin device after a while. Then the party is over. That moment coincides with the fall of Lehman Brothers. There is a nod in the Greek debt chart if the banks do not want to or can lend more. Exactly then also the German export gets a shock. With all pictures applies: click for large and better readable.
All those bad credits are still in the system. The above picture is about UniCredit, the largest bank in Italy. Here the Greek (or Portuguese) problem also plays, but to a lesser extent. The figures in these graphs refer to the data used by the EBA when performing the stress test. The upper blue line is the interest margin, the most important source of income for a bank. The interest margin is equal to the difference in the interest that savers receive and borrowers pay. The interest on a mortgage is higher than the rate on savings. The difference is turnover for the bank. That costs business costs because the staff must be able to buy beautiful suits and camp in nice offices. The margin minus costs is the net profit. This net profit is still corrected for one-off costs, such as write-offs on bad loans. If a bank later comes to the conclusion that a loan from the past never will be paid, it must be fully written off in the current financial year. That is what happens when the debtor dies, is bankrupt, or has left to a tropical island. Because Southern Europe lived on a pink cloud from around 2000 to about 2009, where there was consumption on credit, there were rather depreciations. UniCredit had the habit of not showing these bodies in the closet to the outside world, but after a while they start to smell. Then an accountant collapses from the school or there is a judicial investigation and then suddenly a huge amount has to be written off. For example, the profit in 2012 was still a decent € 870 million, but in 2013 there was a loss of € 14 billion. In this way the bank will fall over at a given moment. In the graphic the historical values of the stress test are gray and blue, so until 2015. These are certain numbers, assuming not too much fraud, you’ll never know. The red and green lines are the projections of the EBA. Red is the negative scenario, green is somewhat more optimistic. In both scenarios, the amount of loss UniCredit will then be processed and whether there is enough meat on the bones of the bank to absorb that blow. It then concerns the reserves accumulated in the past. The green scenario is called ‘baseline’, which we can interpret as ‘normal’. EBA assumes that UniCredit will have a very stable profit of € 2.5 billion after the disastrous year 2013, from 2015 onwards. That is very unlikely. First, there is a sawtooth effect in the gray, historical line. There is a big chance that somewhere a corpse falls out of the closet where UniCredit loses about € 10 billion. Second, a profit of € 2.5 billion per year for UniCredit is a ridiculously high projection. In 2008, that barrier was dismantled and then never again. If we start from the hyperoptimistic scenario, UniCredit will indeed not be able to process any losses and the buffer of the bank will remain untouched. In that case it is big enough: then, if it does not have to be addressed. If it does not rain, it does not matter whether there are holes in my umbrella or not. The colors work exactly the same with NII (net interest margin): blue is historical, green is the neutral projection of the EBA and red is the negative scenario that the civil servants use. They are therefore much too optimistic.

The EBA therefore assumed that UniCredit would achieve a profit of € 2.5 billion in 2016. In the meantime it is 2018 and we can look back. The financial statements show that the bank then made a loss of € 11 billion. No profit, but a 4x loss. Given the history of the bank, it was time again: every one or two years they would lose such a loss if the actual, pitiable state of the bank can no longer be held under the cap. Try to imagine that the well-dressed UniCredit managers have been well-enriched in the past by overloading a shrinking population with far too much credit. That creates all the stinking corpses in the closet, so passersby – citizens, shareholders, regulators, taxpayers from the Netherlands who look through the glass front of the bank are scared off. They see the managers sitting in the ebony cupboard doors where the bank’s historical archives are, with sweaty foreheads and closing shut eyes. Every one year and a half, the corpses do indeed fall out of the closet, making it clear to everyone how sick this bank is. 2016 was such a year, but the EBA stress test has never been adjusted. Actually, we are being fooled here. If we look at UniCredit’s graphic then 2 trends are clearly present. The interest margin is already falling for 2015. Southern Europe is already so full of debts that the bank’s sellers no longer know who they can sell a loan to. That explains the irrefutably decreasing trend. And because that population is financed to the brink, more and more people are starting to get problems to repay their loans. This gives a life-threatening loss to the bank every one or two years. Deutsche Bank shows the same pattern, although the development of the margin there is slightly less dramatic. Yet there is also a depressing blue line of the interestmarge, while the gray graphic, the profit, is a frightening sawtooth whose future cannot be predicted. But the speculative, credit-driven bubble that the eurozone has been waiting for a while is over: the party is over, the light is on, now we have to clean up the mess. From the Greek graphic, for example, it appears that a start has yet to be made with repayments, with all the pain that entails. Bureaucrats and gullible citizens ask very few questions, but investors leave the banking system. Deutsche bank has lost no less than 65% of its book value since Mario Draghi started with QE.
Again. Deutsche Bank, the figurehead of the German financial sector, is so sick because of the lines in the closet that are the result of historical excess lending that investors saw € 50 billion worth of stock market value in 3 years. Would ING also have that problem? No, but ING is, like ABN-Amro, shaved. Under strict government supervision, a cleaning service will clean up all the bodies, the façade will be cleaned, the sweaty managers mentioned will be allowed to retire and the new board promises to improve their lives. That is the big difference between banks in the Netherlands on the one hand, and banks from Italy and Germany on the other: they can not be redeveloped. That would imply that the banks in the core of the Eurosystem are dead and deathly ill. And we would rather not hear that.

And the Hungarians? They have been punished for giving financial support to Malév, the same support that has ‘saved’ banks all over Europe. And if this not enough the burocrats in Brussels are telling the Hungarian people what to, how to do and when to do! An order is an order and has to be obeyed!

2 Comments

Sander Driessen

April 6, 2018 / 08:13 Reply

Here a late reaction because of the problems with major (European) banks. I liked to add statistics to this comment but this was not possible.
UniCredit and Deutsche Bank are not sick, do not take away your savings. Calling a bank run is punishable and so unnecessary, because the European banking system is heart-safe. Supervision of banks has now been transferred to a European institution, the EBA (European Banking Authority). The EU was founded in response to the Second World War. Everything the EU does is well-intentioned and better than how all those small countries would have arranged it themselves. The EBA regulates banks, so all banks are well regulated. Barclays’s rating is cut by Moody’s lowest investment grade. Markets more sanguine on Barclays. See Credit Suisse, UniCredit and Deutsche Bank as a bigger credit risk.
https://t.co/nW5Cy6zLiQpic.twitter.com/KPMIOBM4qr That is a bit like a conversation about the approaching financial disaster in the eurozone if it is being conducted with a euro-enthusiast. Unfortunately, of course it is not true. For a piece of summary of the problem, we go back to the above video of 6 months ago. Do not be afraid, the fragment starts at the right place and takes a few minutes. What is wrong with specifically those 2 banks that excel in the state of colleague Holger Zschaepitz, whether or not coincidentally exactly the two that are not mentioned in the film about the bankrun? Unicredit is the largest bank in Italy and because the euro crisis has been vigorously fought by brave eurocrats, is there no problem at all? And Deutsche Bank comes from solid Northern Europe, since we never had a problem at all? Unfortunately. Let’s try to briefly summarize it once and for all. In 2016, that EBA was still running a stress test for all European banks, which showed that things are not that bad. That was an absurd exercise because the model that the EBA economists worked with was so mild that every bank would survive under all circumstances. Crap in crap out applies when calculating with computer models. It is comparable to testing an umbrella in sunny weather. Here you will find the article about it, with a link to the EBA’s data on this subject. What are they doing wrong? Assessing the start of the credit crisis. In 2002 Greece had an external debt (i.e. from banks, insurers and investors outside its own national borders) of € 100 billion, just as large as their economy. Greece is financially a special country and the outside world liked it. That changed when they got the euro. That country then had a too high state debt and was not allowed to go to the euro at all. That rule was therefore resolutely violated because there is a lot of enthusiasm about European integration. So much, that we just break rules that are well-conceived, if sensibility jeopardizes the speed of integration and enlargement of the EU. Everything has to give way to the latter, that is why we speak of a Euro Gospel here. And hasty haste rarely makes good, as showned. In addition to rules which prohibit countries with too many countries from becoming members of the club, rules on the introduction of the euro also prohibited bank support. If a government (or bank) has put itself into problems, it must save itself. The text is really unambiguous. By giving Belgium, Greece and Italy the euro and thereby breaking the rules of the so-called stability pact, the European political elite has opened a Pandora’s Box. It was a wink to the banks. Bankrupt governments giving euro’s was not allowed, it happened anyway. Giving banks state aid if they make a jar of it is not allowed either, but that rule may be a bit too much to stretch in the future. The banks assumed that if a country like the Netherlands is condemning Greece’s excessively high national debt, in 10 years’ time we will also be prepared to save banks if things go wrong. If not, but that does not matter. Rules you should not take literally, in the EU you can always talk and rustle a deal with politicians in the issues of the day. They are willing to literally break every election promise. The bankers started pushing Greece with credit so that they could buy German goods. The export and with it the trade balance of Germany explodes because they run, cars, electrical appliances, airplanes, tanks, you name it to export to Greece. That country is full of beautiful things, German factories are working overtime, it seems to be economically high. This is the illusion the euro itself creates prosperity, which is unjustified: it was a temporary feast on credit. Notice that the trade balance of Germany from 2001 to now corresponds exactly to the debts of the Greeks, a graph earlier. The Greeks (like the other Southern European countries) did not have any money for the stuff of Germany (and the other Northern European countries) so they put themselves in debt. Very risky for the bankers involved but who thought that the taxpayers in Northern Europe would jump in to keep the good peace. That turned out to be justified because Dutch PM Rutte broke his promise (again) and kept dumping. The assumption by the high-risk bankers that a country like the Netherlands would help them against all the rules was justified. This situation can be compared to a person with bad credit who drinks champaign in an expensive club. It becomes more fun later on, but after a while it appears that the consumption on credit has taken on quite serious forms. The bill is so high that the bartender, on his side the bouncer, comes along with the pin device after a while. Then the party is over. That moment coincides with the fall of Lehman Brothers. There is a nod in the Greek debt chart if the banks do not want to or can lend more. Exactly then also the German export gets a shock. With all pictures applies: click for large and better readable.
All those bad credits are still in the system. The above picture is about UniCredit, the largest bank in Italy. Here the Greek (or Portuguese) problem also plays, but to a lesser extent. The figures in these graphs refer to the data used by the EBA when performing the stress test. The upper blue line is the interest margin, the most important source of income for a bank. The interest margin is equal to the difference in the interest that savers receive and borrowers pay. The interest on a mortgage is higher than the rate on savings. The difference is turnover for the bank. That costs business costs because the staff must be able to buy beautiful suits and camp in nice offices. The margin minus costs is the net profit. This net profit is still corrected for one-off costs, such as write-offs on bad loans. If a bank later comes to the conclusion that a loan from the past never will be paid, it must be fully written off in the current financial year. That is what happens when the debtor dies, is bankrupt, or has left to a tropical island. Because Southern Europe lived on a pink cloud from around 2000 to about 2009, where there was consumption on credit, there were rather depreciations. UniCredit had the habit of not showing these bodies in the closet to the outside world, but after a while they start to smell. Then an accountant collapses from the school or there is a judicial investigation and then suddenly a huge amount has to be written off. For example, the profit in 2012 was still a decent € 870 million, but in 2013 there was a loss of € 14 billion. In this way the bank will fall over at a given moment. In the graphic the historical values of the stress test are gray and blue, so until 2015. These are certain numbers, assuming not too much fraud, you’ll never know. The red and green lines are the projections of the EBA. Red is the negative scenario, green is somewhat more optimistic. In both scenarios, the amount of loss UniCredit will then be processed and whether there is enough meat on the bones of the bank to absorb that blow. It then concerns the reserves accumulated in the past. The green scenario is called ‘baseline’, which we can interpret as ‘normal’. EBA assumes that UniCredit will have a very stable profit of € 2.5 billion after the disastrous year 2013, from 2015 onwards. That is very unlikely. First, there is a sawtooth effect in the gray, historical line. There is a big chance that somewhere a corpse falls out of the closet where UniCredit loses about € 10 billion. Second, a profit of € 2.5 billion per year for UniCredit is a ridiculously high projection. In 2008, that barrier was dismantled and then never again. If we start from the hyperoptimistic scenario, UniCredit will indeed not be able to process any losses and the buffer of the bank will remain untouched. In that case it is big enough: then, if it does not have to be addressed. If it does not rain, it does not matter whether there are holes in my umbrella or not. The colors work exactly the same with NII (net interest margin): blue is historical, green is the neutral projection of the EBA and red is the negative scenario that the civil servants use. They are therefore much too optimistic.

The EBA therefore assumed that UniCredit would achieve a profit of € 2.5 billion in 2016. In the meantime it is 2018 and we can look back. The financial statements show that the bank then made a loss of € 11 billion. No profit, but a 4x loss. Given the history of the bank, it was time again: every one or two years they would lose such a loss if the actual, pitiable state of the bank can no longer be held under the cap. Try to imagine that the well-dressed UniCredit managers have been well-enriched in the past by overloading a shrinking population with far too much credit. That creates all the stinking corpses in the closet, so passersby – citizens, shareholders, regulators, taxpayers from the Netherlands who look through the glass front of the bank are scared off. They see the managers sitting in the ebony cupboard doors where the bank’s historical archives are, with sweaty foreheads and closing shut eyes. Every one year and a half, the corpses do indeed fall out of the closet, making it clear to everyone how sick this bank is. 2016 was such a year, but the EBA stress test has never been adjusted. Actually, we are being fooled here. If we look at UniCredit’s graphic then 2 trends are clearly present. The interest margin is already falling for 2015. Southern Europe is already so full of debts that the bank’s sellers no longer know who they can sell a loan to. That explains the irrefutably decreasing trend. And because that population is financed to the brink, more and more people are starting to get problems to repay their loans. This gives a life-threatening loss to the bank every one or two years. Deutsche Bank shows the same pattern, although the development of the margin there is slightly less dramatic. Yet there is also a depressing blue line of the interestmarge, while the gray graphic, the profit, is a frightening sawtooth whose future cannot be predicted. But the speculative, credit-driven bubble that the eurozone has been waiting for a while is over: the party is over, the light is on, now we have to clean up the mess. From the Greek graphic, for example, it appears that a start has yet to be made with repayments, with all the pain that entails. Bureaucrats and gullible citizens ask very few questions, but investors leave the banking system. Deutsche bank has lost no less than 65% of its book value since Mario Draghi started with QE.
Again. Deutsche Bank, the figurehead of the German financial sector, is so sick because of the lines in the closet that are the result of historical excess lending that investors saw € 50 billion worth of stock market value in 3 years. Would ING also have that problem? No, but ING is, like ABN-Amro, shaved. Under strict government supervision, a cleaning service will clean up all the bodies, the façade will be cleaned, the sweaty managers mentioned will be allowed to retire and the new board promises to improve their lives. That is the big difference between banks in the Netherlands on the one hand, and banks from Italy and Germany on the other: they can not be redeveloped. That would imply that the banks in the core of the Eurosystem are dead and deathly ill. And we would rather not hear that.

And the Hungarians? They have been punished for giving financial support to Malév, the same support that has ‘saved’ banks all over Europe. And if this not enough the burocrats in Brussels are telling the Hungarian people what to, how to do and when to do! An order is an order and has to be obeyed!
Sander Driessen

April 7, 2018 / 08:23 Reply

The correct link mentioned in the article is https://t.co/nW5Cy6zLiQ

2 Comments

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