Those who live in glass houses shouldn’t throw stones. 

Mess with the banks and Europe gets nervous.  After getting all lathered up over the Cyprus deal, markets tanked when the head of the Eurogroup of euro zone finance ministers,  Jeroen Dijsselbloem,  came out with this:

What we’ve done last night is what I call pushing back the risks..If there is a risk in a bank, our first question should be ‘Okay, what are you in the bank going to do about that? What can you do to recapitalise yourself?  If the bank can’t do it, then we’ll talk to the shareholders and the bondholders, we’ll ask them to contribute in recapitalising the bank, and if necessary the uninsured deposit holders.

Only later to be contradicted by this:

25 March 2013
Statement by the Eurogroup President on Cyprus

Cyprus is a specific case with exceptional challenges which required the bail-in measures we have agreed upon yesterday.  Macro-economic adjustment programmes are tailor-made to the situation of the country concerned and no models or templates are used.

Go no further than the following two charts to understand why markets freaked out over Dijsselbloem’s comments.    Europe is way overbanked and vulnerable to financial sector shocks.

Even in the so-called “safe haven” Switzerland the banking system is outsized relative to the country’s GDP.  Compare the relative size of UBS, for example,  to largest bank in the U.S.,  JP Morgan.  Nuff said.

Mar25_Bank Assets

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Mar25_UBS_JPMO

 

(click here if charts are not observable)

 

Category: Bailouts, Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

7 Responses to “Nervousness in over-banked Europe slams markets”

  1. f95kai says:

    Barry, this comparison bis a bit simplistic. Of course Luxembourg’s and Switzerland’s financial sectors are outsized, because much of the surrounding countries mutual fund (Lux) and tax evasion..ahem, i mean private banking money (Swi) goes there. Also, banks fund much of the corporate sector, corporate bonds are growing very rapidly as a financing source, but are still way behind bank loans. Of course it’s still true that Europe as a whole is overbanked because of protectionism (like the Landesbanken here in Germany) and other other factors.

  2. [...] 26, 2013 by admin  Via The Big Picture and Ritholz comes Nervousness in over banked Europe Go no further than the following two charts to [...]

  3. Fred C Dobbs says:

    The charts relate only to the Europe, and omit N. America and Asia, but are representative of a world-wide problem, nevertheless. Without the limiting effect of an external standard (such as, e.g. gold), every sovereign who can print money has printed far too much paper money. Although merely paper, it is worth more than the cost associated with printing it, so long as people believe it is worth something more. The extra or surplus money has to find a ‘home’ somewhere in the legal fiction world, and it does, primarily as entries as debts on bank books of account. These statistics are based on these entries, not the paper and coin money hoarded outside the banking system. The paper money accepted as deposits are invested by the banks into all sorts of things, in the hope and expectation the money invested will be paid back. Unfortunately, when the borrowers ability to repay falls, either because of a decline in income or a fall in wealth, common sense tells us the lender is simply not going to be repaid. People cannot do what they cannot. There is no rational reason to expect that any country is going to repay any amount of debt that comes close or exceeds its income, and the same is true for its banks. Some say that the debts can and will be paid in the future when inflation will raise income sufficiently to retire debts, but this is a legal fiction. If I bought house for $10,000 in the ’60s on borrowed money, and repaid the lender thirty years later, he wouldn’t be able to buy the same number of bread loaves he could have bought in the ’60s. If it is foolish to believe a country will repay its debts when they exceed its income, it is equally foolish to believe the banks will pay their debts to their depositors. In the world of business, a company that operates at a loss is worth nothing more than its assets may be sold for cash. The same is true for a sovereign, even though it has the power to print paper money no one wants. So, turning to Cyprus, we see a country whose banks can’t possibly pay their debts. No matter what the utopian technocrats think and say, the sovereign is not going to be able to print and give to the banks enough money for the banks to pay their debts to depositors. The Cypriots are going to enjoy a much lower standard of living in the years ahead. They will be punished for the arrogance of the international banks (the over-banked adjective would not apply if the banks only conducted domestic business), and the seductive effect the international banks have over the politicians throughout Cyprus, and the other areas of the world that are ‘over-banked.’ Kicking the can down the road has solved nothing. It is time for the sovereigns to force the banks to get together world-wide and cancel their mutual debts, divide themselves into good and bad banks, and with the good banks restart the world’s economy. This is what the US did in the ’30s. Otherwise, the over-indebted economies will continue to stagnate.

  4. kaleberg says:

    A lot of it is about the inefficiency of our financial sector. The government keeps printing money to keep the economy moving, but most of it winds up dead in the water, wallowing in the financial sector where it will never purchase real goods or services. (Think of it as “the real sequester”.) The obvious thing to do is start taxing financial holdings the way we used to back when we last had real economic growth, pre-1980s.

  5. [...] The Big Picture and Ritholz comes Nervousness in over banked Europe Go no further than the following two charts to [...]