Banking April 1, 2014
Many of Europe’s banks are ‘loading up’ on sovereign debt, according to recent data released by the European Central Bank. Public sector debt accounts for 5.8 per cent of European bank assets, fuelling concerns among economists about stability.
Sovereign debt accounted for approximately 4.3 per cent of European bank assets in January of 2012. The 1.5 per cent increase over just two years has prompted leading economists to voice concerns that the increase in sovereign debt holdings could lead to a dangerous interdependency between European banks and governments.
Data from the European Central Bank indicates that most of the increase is related to banks’ holdings of public debt. Eva Olsson, Mitsubishi UFJ Securities director of credit strategy, notes that the idea that certain banks are “too big to fail” has yet to disappear from the Eurozone.
Mediterranean economies have experienced the biggest increase in sovereign debt holdings. In Italy, 10.2 per cent of all bank assets were government debt, according to statistics from February. In Spain and Portugal, government debt makes up 9.5 and 7.5 per cent of all bank holdings, respectively.
Perhaps most worrying is the situation in Slovenia, where government debt makes up 13.9 per cent of banking assets. Economists believe that the dependence could result in a ‘downward spiral’ in the event that a major lender failed or a country’s credit rating was adjusted downwards.
Under the Basel II framework, which regulates the European banking industry, all national regulators are allowed to consider sovereign debt risk-free. Banks are not required to hold any capital against government debt in order to comply with their regulatory obligations, unlike the requirements for consumer or business debt.
Worryingly, the increase in sovereign debt holdings has not only affected Europe’s weakest economies. German banks now hold 4.6 per cent of their assets in the form of government debt, up from 3.5 per cent. In France, 3.6 per cent of bank assets are in the form of sovereign debt.
Ms Olsson believes that Europe’s banks should start acting “as real banks” now and end the cycle of sovereign debt trade. The Eurozone’s banks should “lend money to companies and so on” instead of simply acting as investment institutions.Read more
Eurozone governments are approaching a possible deal on how to close the failing banks that have emerged since the financial crisis. No conclusion has currently been reached and talks aimed at reaching a concrete deal regarding the banks are likely to continue throughout the week.
Negotiations regarding the Eurozone’s failing banks are scheduled to continue until Wednesday in order to address the European Parliament’s wishes. The negotiations could be the last step in the establishment of a European banking union which could result in a single supervisor for the Eurozone’s banks.
This would also produce a single fund to restructure failing Eurozone banks, as well as one consistent set of regulations regarding the restructuring or closure of failing financial institutions. An agreement needs to be reached by mid-April, else the slow negotiations could delay the new Eurozone banking law by seven months or more.
The European banking union is planned as a way to restore confidence between the Eurozone’s banks. Increased confidence could result in a restoration of lending that would help improve growth among the 18 countries that use the euro. Lending has currently been held back as many European banks attempt to raise more capital.
Banks based in the Eurozone hold approximately 1.7 trillion euros worth of public sector debt. Due to the assumed default of Greece and the high levels of government debt in countries such as Spain and Italy, the high levels of exposure have concerned many in the financial sector.
In order for the banking union to go ahead, it needs the approval of the European Parliament. The countries that make up the Eurozone have hesitated to hand over authority regarding banking to the EU government in Brussels, and wish to create an intensive system of assessments before governments can decide to close banks.
The negotiations will continue this week as governments and European parliament leaders reach a decision regarding bank closures.Read more
Sluggish economic growth has affected several Eurozone economies over the past three years. In this brief economic comparison, we look at two of Europe’s largest markets – France and Germany – and compare their recent performance using two nearby but very different cities.
The BBC recently profiled the French city of Chalons – an interesting city in which circus trainees take part in government-subsidised trapeze training as part of an amazing French effort to keep the circus alike.
As bizarre as it may seem, the subsidised programme has its benefits – the circus is an important French tradition and, in the form of tourism benefits, it pays for itself over time while employing young French workers.
France’s reputation for administration is well known and many commentators have expressed their concerns about the state-heavy country’s economic future. Across the border in the German twin town of Neuss, attitudes are a little different.
TI Automotive managing director Oliver Schmeer – a German – believes that France faces numerous challenges in reaching its economic potential; a task Germany has largely accomplished over the past decade.
France’s “ultra-complex” labour code and high taxes – not to mention the country’s famously difficult unions – limit its potential and make it harder for industry to get ahead. Schmeer believes that the French Socialist government “doesn’t understand industry” and can’t comprehend that businesses rely on customer to place orders.
The French leadership has made several attempts in recent months to improve its economic situation. President Hollande recently promised to reduce social charges for French companies if they employed more workers.
Schmeer believes that it’s an empty stunt that showcases the government’s lack of understanding for industry. He said: “We can’t offer jobs to people to build things that no-one wants.”
Many in France believe that change is required, and that the country’s significant unemployment benefits and unions should be the first to change. However, with a record unemployment rate and few job opportunities, France’s economic woes are unlikely to be fixed with sudden cuts to unemployment benefits.
Financial industry leaders believe that, despite improvements, serious risks are still a concern for Europe’s biggest banks. Former UK Financial Services Authority head Lord Adair Turner believes it was an error to believe that loans would be “magically unleashed” as Britain’s economy improves.
Speaking at the World Economic Forum in Davos, Lord Turner noted that many of the rules governing European banks may need to be strengthened in order to stop another major crisis from occurring, and that lending to businesses in the UK was still at a “very low” level.
Other World Economic Forum panellists, such as Deutsche Bank co-chief executive Anshu Jain, agreed with his take on European finance. Mr Jain noted that despite a series of improvements, many of Europe’s banks were not “where they should be” and that the United States was “one step ahead again.”
“Inter-bank lending is not back to normal or where it should be” noted the co-chief executive of Deutsche Bank. He was backed up by Lord Turner, who believes that a possible model for the European banking sector could be observed in the changes made to financial services companies in the United States.
Not all of the panellists at the event agreed with Lord Turner’s outlook on Europe’s banking sector. German finance minister Wolfgang Schaeuble noted that Europe is “not the US” and that “fiscal discipline and banking reforms” were the only solution to its financial problems.
Late in 2013, European Union leaders backed a new set of regulations for managing failed Eurozone banks. Under the new rules, a £46 billion fund will be established by the European banking industry over the next decade. The EU hopes that an industry fund will prevent the need for additional taxpayer-funded bailouts of failed banks.Read more
Economy August 23, 2013
Business activity in the Eurozone grew rapidly over the past month, reaching a 26-month high. New data from economic research group Markit indicates that Europe is recovering at a rapid pace after years of sluggish economic performance.
The composite purchasing managers’ index, known as PMI, rose from 50.5 points to 51.7 points across the Eurozone. PMI operates on a 0-100 scale in which 50 means a period of total stability, and anything above 50 represents stable economic growth.
Certain sectors of the Eurozone economy grew more rapidly than others, according to the Markit data. Manufacturing, for example, reached a PMI of 51.3 points –a 26-month high and an increase of one percentage point since the last study in July.
Services, the largest sector in the economic community, increased significantly from 49.8 to 51 over the past month. The service sector shrunk significantly in the wake of the financial crisis and is only beginning to find its feet as the economy grows.
Despite the positive growth throughout the Eurozone, certain markets fared better than others. Germany’s incredible economic growth allowed it to neutralise major contractions in markets such as France, which fell from 49.1 to 47.9 in August.
The disparity between different Eurozone countries indicates a mixed recovery that is taking place in Europe. Analysts have stated that Germany is leading the economy towards repair, while other markets are continually struggling to perform.
Economists have also warned that increasing numbers of employed people could be an issue for the Eurozone as a whole. Many businesses are reducing their amount of staff in an effort to reduce costs and return to profitability in tough conditions.
Despite the somewhat mixed nature of the recovery, stocks rose after the economic progress was announced. Markets in London and Frankfurt rose by one percent on the news, indicating a new sense of confidence in Europe.Read more
Germany’s excellent second quarter economic growth may not be repeated later this year, according to the country’s central bank. In its monthly report, the Bundesbank noted that Germany’s robust 0.7 percent growth during the second quarter was not likely to last, and that economic growth in Germany is likely to stabilise.
The central bank noted that the excellent second quarter growth was largely due to the European nation’s economy ‘catching up’ after earlier slow performance. Long-term annual economic growth in Germany is likely to fall between 1 percent and 1.3 percent, based on the country’s capacity to grow its economy sustainably.
Germany has fared relatively well in recent quarters after several European markets failed to reach their targets. The country’s large industrial production sector has not sold to many of its former customers in the Eurozone, instead trading with overseas markets that have a greater demand for German-made solution.
Because of this, many German companies are opening new production centres in a variety of foreign territories, instead of within Germany. While the manufacturing centres have an obvious advantage for German industry, the Bundesbank worries that the offshore manufacturing may slow foreign investment in Germany.
The central bank believes that large-scale investment in Germany is unlikely until the Eurozone recovers from its current economic issues. The majority of German trading has occurred outside the Eurozone in recent months, with its two fastest-growing export the United States and United Kingdom, respectively.
Exports to EU countries decreased by two percent in the last year, leading many of Germany’s top economists to express concerns about the nation’s growth potential during the Eurozone economic crisis. Almost 60 percent of Germany’s exports are sent to other European Union countries, making a fast European economic recovery a high priority for German industry.Read more
Economy August 14, 2013
After eighteen months of constant economic contraction, the Eurozone is finally on the way up. The Eurozone’s GDP rose by 0.3 percent during the second quarter due to strong growth in Germany and other key markets.
Europe has been stuck in a lasting recession for almost two years, with several of the Eurozone’s largest markets struggling to regain ground lost during the major economic downturn that began in late 2011.
However, recent growth in key markets such as Germany and France has pushed the entire bloc back into a growth phase, with a modest 0.3 percent growth figure a new hope for millions of European workers.
The fastest-growing Eurozone member was Portugal, which achieved an impressive 1.1 percent growth rate, setting the pace for the trading bloc. Nearby Spain was not able to achieve such positive results, weathering a 0.1 percent fall in total output.
Several other struggling European markets also faced a decline in output. Italy was one of the bloc’s worst performers, with a 0.2 percent decline in output reducing an already worryingly low national morale. The Netherlands also saw its output drop by 0.2 percent during the second quarter.
The modest growth figures suggest that the Eurozone is following the right path to economic health, but patchy growth and poor economic performance in certain key member states indicate that sustained growth could be a long way away.
The 0.3 percent Eurozone growth is the first positive quarter in several years, with the first quarter of 2013 marked by a 0.3 percent contraction in output. The current recession has been an issue for Eurozone states since the fourth quarter of 2011.
However, the economic bloc’s worst recession in recent history occurred at the peak of the credit crisis in late 2008 and early 2009. The Eurozone recorded a 2.8 percent contraction in output during the first quarter of 2009 – the largest in recent history.Read more
From NSA spying to youth unemployment, German Chancellor Angela Merkel is one of several EU leaders taking aim at social and economic issues affecting Europe’s top economies. The German leader will host a summit on youth economic issues today in Berlin, as part of an effort to eliminate mass youth unemployment in Europe.
Economists have voiced concerns about growing unemployment rates in several of the continent’s southern countries. Portugal, which is currently recording a record 17.7 percent unemployment rate, is regarded as one of the countries hit hardest by the ongoing Eurozone economic crisis.
What’s far more worrying that Portugal’s overall unemployment rate, however, is the total number of young people left out of the nation’s labour market. 42 percent of Portuguese youth are out of work, with many blaming the government’s austerity measures on a lack of opportunities for young people in Portugal.
The issues affecting Portugal appear to be spreading throughout the Eurozone, with recent figures pinning the economic community’s unemployment rate at a record 12 percent. Analysts fear that the continent’s growing unemployment figures may lead to a ‘lost generation’ of professionals in struggling Southern European economies.
The German Chancellor has voiced her concerns on unemployment before, but has stuck to a consistent policy of supporting austerity measures aimed at lowering the level of public spending in countries such as Portugal and Spain. The states Merkel has commented on largely rely on debt for public spending, often from Germany.
Merkel’s critics have claimed that her recent efforts to tackle youth unemployment are a publicity stunt aimed at strengthening her re-election bid. Germany’s elections will take place in September, with issues such as youth unemployment and lending to indebted EU states likely to be major political hot points for German voters.Read more
With the bulk of the eurozone’s economy made up of service businesses, a serious slowdown in orders has cost the economic community dearly. Eurozone countries saw a continued downturn in business activity during May of this year, although it was less severe than the economic slowdown during the previous month.
Markit, one of Europe’s leading business activity polling companies, found that new business continued to decrease throughout Europe in May as the service sector saw continued order reductions. Countries such as Spain, Italy, and France saw sluggish economic activity, particularly from the service and manufacturing sectors.
Eurozone manufacturing activity is tracked using the Purchasing Managers Index, a measure of manufacturing orders frequently referred to as PMI. The index tracks the economic activity of manufacturers throughout Europe using a scale that runs from zero to one hundred.
A score of fifty – exactly halfway through the scale – indicates that a manufacturing sector failed to grow or contract during a measuring period. Scores of below fifty – such as the 47.7 composite score tracked during May – indicate that manufacturing spending shrunk in many major European markets.
While the manufacturing and service sectors continue to shrink in Italy, Spain, and France, new indicators show that the decline has decreased in severity. Germany, a country that had previously seen a sharp decline in service industry spending, saw its PMI reach 50.2, indicating a small level of growth in the service sector.
Many major European economies also face employment issues, with payroll in the service and manufacturing sectors decreasing. May marked the seventeenth month of job losses in countries such as France and Italy, with regional leader Germany a surprise feature, reporting its first payroll decrease in four months.
Markit believes that the data signals a continued downturn in economic activity in many Eurozone countries. The company reported that, despite the ease in the rate of decline for many countries, short-term economic growth remains unlikely.Read more
This is the question which looms on everyone’s minds at the moment from political leaders to global investors. Since it is evident that the political atmosphere in Greece is at an impasse and there is mounting ‘anti-austerity’ pressure in the upcoming election, it is looking more and more as if Greece will default and pull out of the EU. In addition, it has been reported that news is coming out of Brussels that there are talks about a possible end of the euro.Read more