Firstly let me welcome any new readers who are reading this blog after seeing me be interviewed on Jeff Randall Live on Sky News yesterday evening. For those who did not see the interview I gave my opinion on the Italian bank Unicredit’s prospects and gave two major problems for it. These are its holdings of Italian government bonds ( and indeed other sovereign bonds) where prices have fallen heavily (over the last year or so the benchmark Italian ten-year bond yield has risen from 4% to 6.93%). And also that lending in foreign currencies to individuals and businesses in other nations, particularly in Hungary, was going wrong. I highlighted the way that the Hungarian Forint had hit a new low against the Euro and that in spite of moves by the Swiss National Bank it was heading lower against the Swiss Franc too. This means that those who borrowed in Swiss Francs and Euros but repay in Hungarian Forints have a problem which means that the lender also has a problem.
I note that today two of these matters have progressed further. Firstly the Hungarian Forint has fallen to a further low against the Euro of 321.68 this morning and secondly the Unicredit share price has fallen by 7% today to 5 Euros after falling by 14% yesterday. It was 19.5 Euros as recently as last February and that fact gives a grim backdrop to the numbers for Unicredit shareholders who are being called for more cash (7.5 billion Euros) for the third time in three years.
For those who wish to know more about the implications of foreign currency borrowing for mortgages and business loans in Eastern Europe I discussed it briefly only yesterday and in more detail on December 15th last year. If you want something hot off the press then take a look at this from Bloomberg today.
Hungarian banks lost 174 billion forint ($692 million) on mortgages which borrowers repaid at below-market rates by the end of December using a government program, financial regulator PSZAF said today.
The final loss will rise further as the number of people who indicated their intention to repay by the end-of-year deadline rose “significantly,” PSZAF said in an e-mailed statement.
What would I have said with more time?
I would have referred to my update on Spain from Tuesday and pointed out that with the number of mortgages there dropping on a year on year basis by around 40% then almost wherever you look banks are being hit with problems. So diversification which was a buzz word used to explain how you could get the magic nirvana of higher profits with lower risk is now an entry for my economic lexicon. If all of your markets fall at the same time there is no reduction in risk at all and in fact due to interbank links it may even exacerbate it.
I would also have pointed out that prospects within the Italian economy are poor too and that must have follow-on effects for her banks. And that this is on top of a situation which I described thus on December 5th.
As we stand Italy is producing an output level equivalent to that of 2004 whilst her debt level has grown substantially.
That is far from a good outlook for a bank operating there and has been added to by the unemployment figures released today. According to the Italian statistics office the unemployment rate has risen to 8.6% and youth unemployment is now 30.1%.
How will this play out?
I explained back in October how banks collapse these days and gave a thirteen point time line for such an event. It attracted a fair bit of interest which rose as the subject ( Dexia bank) began its progress down the list. I had pointed out yesterday that Unicredit was at point three.
3. The Bank tries to raise more private capital in spite of it having no need for it.
Those who recall my update of the 15th of November when I wrote this would not have been surprised by this outcome.
This bank is a rather familiar entry on the roll-call of banks in trouble. For example whenever the Milan stock exchange has a particularly bad down day then it is often the first share to find its trading suspended. Worries about its financial position have circulated for some days and as ever have been officially denied.
I also pointed out then that there are bad portents from recent history.
The collapse of the Irish banking system and many of the Irish banks was accompanied by promises that the full truth was being told when in fact we were getting a heavily sanitised version of it. Week after week new information leaked and it was always worse than what we had been told.
If we go back to 2008 we saw Royal Bank of Scotland have a £12 billion rights issue at the beginning of the summer followed by total collapse at the end of it!
Looking Further afield to Dexia and Belgium
We can gain an insight to what might happen at Unicredit and the implications for Italy from the progress of the situation at Dexia. When I reviewed its progress towards nationalisation in early October Belgium had a ten-year government bond yield of approximately 3.6% and it is 4.47% now. Whilst it is,of course, far from the only influence on Belgian government bonds we do learn from this that there is an upwards push which if recent history is any guide is likely to continue.
Returning to Unicredit I notice that it’s figures for the third quarter of 2011 gave it an asset value of 950 billion Euros which to put into context is around half of Italy’s national debt. The real question for it (and many other) banks is what is the real value of those assets? Those who are fans of Sir Humphrey Appleby and the Yes Minister series will be worried by the statement on those figures
(Unicredit has a) solid balance sheet structure
So solid that it needs a 7.5 billion Euro rights issue…
Credit Agricole
The situation that Europe’s banks find themselves in was highlighted by the French bank Credit Agricole only yesterday. It issued a covered bond which raised 1.5 billion Euros until 2022. So we start with a hurrah and perhaps a sign of easing pressure? Then we got the news that it has pumped a further 2 billion Euros into its subsidiary Emporiki bank of Greece. Not quite so good now is it we are down 500 million Euros. Mind you according to the official statement.
This capital increase has no impact on the solvency ratio of the Crédit Agricole group. This is an internal operation, which consists in converting shareholders’ advances and which started back in 2010
Perhaps this statement was issued by the same genius who bought a Greek bank in 2006.
Oh and somebody had better inform Emporiki of this,as if there is no real change it will be hard for the money to do this.
The approximately €2 billion capital increase will further fortify Emporiki’s competitive position in the domestic market
Muddled thinking on the International Monetary Fund at the Financial Times
Chris Giles of the Financial Times has written this.
Refusing to contemplate joining a pan-European contribution to the general funds of the International Monetary Fund – money that does not show as borrowing because it is almost impossible to lose – was a particular low point for the coalition last year.
Regular readers will be aware of my views on the IMF and the fantasy economics and accountancy which underly it. But let me use Chris Giles own words. For example “almost impossible to lose” does he mean like zeroes or AAA rated mortgage bonds? In an expect the unexpected world such thoughts are unwise at best in my view.
As to “money that does not show as borrowing”, can we all have some please? You know where to find me……
