The Bankwatch

Tracking the consumer evolution of financial services

The debt glut and risk to banks

The survivability of banks generally is todays topic.  The Greek situation has one possible outcome of contagion across numerous aspects with potential for another economic crisis, despite the cries from many that the crisis is over.

This week Brad de Long took issue with Niall Fergusons recent piece (A Greek crisis is coming to America)  wherein Niall highlighted the international country debt crisis was not just Greece, Portugal and Spain, but included the US.  He is one of many US commentators who are becoming increasingly shrill against Niall and others even raising his personal life style as a means to discredit him.   The issue is one to be determined by facts not shrillness.

Fact 1:

FDIC problem banks are an increasing problem.  In May 2008, I noted the existence of the FDIC Problem Bank list.  At that time there were 90 banks representing $ 26 Bn in assets at risk.

Today there are 552 banks, representing $ 346 Bn.

Fact 2:

Government debt is a problem.  The Greek situation is one that has no good outcome.  John Mauldin summarises the situation in his weekly newsletter.

The recent credit crisis was over a few trillion in bad, mostly US, mortgage debts, with most of that at US banks. Greek debt is $350 billion, with about $270 billion of that spread among just three European countries and their banks. Make no mistake, a Greek default is another potential credit crisis in the making. As noted above, it is not just the write-down of Greek debt; it is the mark-to-market of other sovereign debt.

That would bankrupt the bulk of the European banking system, which is why it is unlikely to be allowed to happen.

He goes on to note that there might be ways to reduce valuations of debt at a slower pace to allow absorption into the banks’ balance sheets, but that partly assumes the Greek situation remains alone.  What of the US debt, which despite de Longs protestation to the contrary is at 100% of GDP by 2012, and eerily similar to the Club Med countries position.  The contrary argument says it matters less because the debt is denominated in US Dollars.  However if money has to be printed to repay the interest, I see no relevance to the currency denomination.  Directly or indirectly it always comes back to exchange rates, interest rates, and repayment, and those are factors that impact the general population directly through inflation/ deflation, unemployment, and affordability.

Debt and repayment of that debt remains one of the single largest global risks and those that try to paint a picture that the US is immune are wrong.

Earlier this week Moody’s reported a downgrade to Bank of America and CitiBank with the peculiar note that the potential availability of government bailout of those institutions is reduced.  The implication of that statement is that government bailout is factored into the rating of US banks.  This is insanity.  the risk of a bank to fail should not be mitigated by inferred support from Government.  Financial risk is financial risk and can only be reduced by explicit guarantees.  Clearly the rating agencies have learned nothing since 2008.

Banks will continue to be distracted from customer based activities by threats to their financial survival.

UPDATE:

Europe cannot afford to rescue Greece | ft.com

Participation in Emu brings huge advantages. The benefits of joining a stable economic area are greatest for countries that were unable to deliver such conditions before. Thanks to the euro, Greece has enjoyed long-term interest rates at a record low. But instead of delivering on its commitment at the time of entry to reduce public debt levels, the country has wasted potential savings in a spending frenzy. The crisis with which it is now confronted is not the result of an “external shock” such as an earthquake, but the result of bad policies pursued over many years. Bailing out Greece would reward such behaviour and create moral hazard of a dimension hardly seen before

Written by Colin Henderson

February 14, 2010 at 16:20

Posted in US

One Response

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  1. PUBLIC DEBT and how we all get into it is the key issue and we have to go back to basics if anything is to be done about getting out of it – this link offers a flashmovie with a solution – there are others too, but all agree that q return to Constituional money is the only game in town …..
    http://www.scottishmonetaryreform.org.uk/2010%20film%20springflash/index.html

    Ron Morrison

    February 20, 2010 at 12:23


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