Ever-Greening, Europe’s Banking Sector Closet Full of Skeletons are falling Out !
This is Not Simply Isolated to the Spanish Banking Sector
Written by Mitch, December 18th
Banking Sector / Institutions refer to this little game as ‘Ever-greening’, I prefer to call it ‘Spraying manure onto your balance sheet !!!’.
In the good old days (Years gone by..) when a good portion of the banks capital was supplied by the partnerships of a group of men or families, even the premise of doing such practices would have seen you marched off to the lunatic asylum.
But in these joyous times of Fractional Reserve Banking where the board has no exposure whatsoever to the downside and maximum intention of keeping the golden goose alive to keep supplying them well fed with bonuses, this practice is all the rage (along with Re-Hypothecation which I have written about before). The Japanese Banks perfected this art form in the 1990′s and actually pretty much got away with it ( but then again the rest of the World was growing very strongly and Japanese manufacturers were enjoying enormous trade surpluses ). If you wish to read about Japan’s ‘Ever-Greening’, then please read here.
So what is Ever-Greening ?
I will give you two examples in very simple terms…
Case number 1…. Say your a construction company in Spain with an outstanding loan of 10 Mio Euros. Considering the economic backdrop your business is suffering terribly. You go and visit with your Bank to talk about your outstanding loan that you can no longer pay, with say ‘La Caixa’ or ‘Banco Santander’.
“I am very sorry but business is dreadful and we are trying to stay afloat here, we have opportunities arising but considering cash flow and profits have been decimated recently I can no longer make payments on this loan”.
Bank manager says “OK don’t worry , we will lend you another 3 Mio Euros to tide you over. You will use this new 3 Mio Euro loan to continue to pay down the initial loan and also use this new capital bridge to make monthly loan payments on this new loan arrangement“.
Why would the Bank do this ? They manage to increase the asset side of their balance sheet by another 3 Mio Euros, the NPL (non performing loan) shrinks because of the one NPL (they were about to have) you now have 2 assets that are actually now performing (repayments being made) , on the balance sheet your percentage of NPL’s ag assets falls , your revenue goes up and hence your overall credit worthiness rises !! (Yipee more bonuses)
This is called kicking the can down the road while praying it all works out in the end, but no worries if it collapses as the state will bail you out.
This practice by the banks covers Corporations, Businesses but more importantly - Consumers themselves !!!
Case number 2….. During 2008/09 part of the crisis I could not understand why the Spanish housing market was not dropping like a stone (I have been living in Spain since 2007) , then I discovered what was going on ……
Domestic customers who were not paying their monthly mortgage payments where asked to come into their local branch to speak to the Bank manager. Simple example as follows :
Bank: So sir why is it your not paying ?
Customer: I am awfully sorry but our family outgoings have far outpaced our income especially since my husband/wife lost his/her job. Bank: Can you please list your outgoings, ie. any other loans you may have.
Customer: Well HP on the car, Credit card loan, High Interest short term loan, HP on some white goods etc. Add them all up and it comes to say 40k. (Their outstanding mortgage is 160k)
Bank: OK Sir, we will pay off all these separate loans and increase your mortgage to 200k (amalgamate all your debt into your mortgage) and give you this new friendly low interest rate loan against the arbitrary value of your house at say 250k ( The Spanish banks were pretty liberal with their valuations of property at that time – negative equity was not allowed). OK Sir, your new monthly mortgage repayments will be 700 Euros.
Customer: Oh I am sorry I think we will have difficulty paying this sum without going into further debt again.
Bank: OK sir what can you pay ?
Customer: We can pay Euros 400.
Bank: OK your new mortgage repayments will be Euro 400 a month however this will be fixed for 3 years, in which time your loan will be increased to Euro 220k (Extra 20k on unpaid mortgage payments and accrued interest) . On that date we will revert back to normal mortgage repayments based of your new mortgage debt, this to tide you over this rough patch Sir !
This case study mirrors roughly what exactly happened in early years of this ongoing crisis and you can only imagine how many holes & stresses have developed in the last 2 years with that little strategy.
This was done with the full support of the Bank of Spain and the knowledge of the ECB, as they naturally presumed this was a just a severe recession that would end abrubtly .
That was in 2008/09, we now have situation with ever growing unemployment, bank cash reserves that have been decimated and an imminent Sovereign debt crisis with a continuing fall in house valuations which are the collateral to these consumer mortgages. Gulp !
This crisis has morphed into extreme insolvency of the financial system and is not contained just in Spain but across the whole of Europe including the German banking system, however the actual reports of this ‘Ever-Greening‘ in Spain I have particular first hand knowledge off.
In Spain all these numbers you hear about in the press, Politicians and Central Banks is that 60 to 100 Bio Euros is enough of a capital injection to solve their gigantic losses and keep them alive, this is an enormous un-truth !
The real picture from analysts closer to the ‘scene of the crime’ state that numbers closer to 600 to 700 Bio Euros is more relevant. Non-Performing Loans are the skeletons in the cupboard that can no longer be papered over – The Ponzi scheme can no longer be kept afloat.
So let’s have a look at the picture today curtesy of a Zerohedge article………Spanish loan delinquencies as a percentage of the total have risen for the 8th straight month to a new record high of 13.00% (even as sovereign bond spreads continue to plunge to multi-year lows signaling all is well).
Banco Santander alone jumped to 7% (from 3.1%) following its “reclassification” of loans that it had refinanced (never expecting to be repaid) and with home prices still falling, “there is an urgency to come clean” as regulators see the need for banks to cover a further shortfalls in provisions.
So the Ever-Greening is coming home to roost and bad loans are escalating at an enormous rate.
But you may ask “how on earth is the Spanish Government Debt markets responding so postively to extreme unemployment, escalating deficits, bad loan delinquencies, insolvent banking system etc.. ?”
Well the answer can be found in the Spanish Governments raid on quietly tapping the country’s richest piggy bank, the Social Security Reserve Fund, as a buyer of last resort for Spanish government bonds. Which are now weighted 97% into Spanish Bonds – Holy Moly Batman, that’s a disaster waiting to happen.
As Zerohedge again reported here.
Pension Funds, the future funds of Spain’s retirees are near 100% fully exposed to Spanish Government Bonds, who mathematically are guaranteed to renege upon in the future - Oh No !
I will leave you with this cartoon that really says it all…….The European Banking System Regulators….
If this looks sustainable to you ? Then can I have a drag of what you are smoking !