Hit from All Sides, European Bank Stocks Swoon to 1988 Low

Leaks about money laundering, a resurgent Pandemic, China risks, exposure to Turkey’s financial crisis, all in a negative-interest-rate environment that is toxic for banks. By Nick Corbishley, for WOLF STREET: The Stoxx 600 Banks index, which covers major European banks, slumped 5.7% on Monday, to close at 81.1, just a smidgen above the multi-decade low, of 79, set in March. The last time before March that the index was below today’s level was in February 1988, during the sell-off that followed Black Monday in October 1987, when it also slumped as low as 79. The index has collapsed by 85% since its peak in May 2007, after having quadrupled over the preceding 12 years. Here are the wondrous European bank stocks going back to 2007: Not even the promise of more industry consolidation, facilitated by shotgun mergers of big, struggling banks with smaller struggling banks, has stemmed the slide of Europe’s banking shares. Three weeks ago, Spain’s third largest lender, CaixaBank, announced plans to buy majority state-owned Bankia, with money largely provided by the State, to form what will be Spain’s largest domestic bank. Spain’s MSCI rose only slightly in response and is now lower than it was. Today, it wasn’t just banking stocks that had a rough day. European stocks overall were down by 3.9%, as concerns grow over a second wave of the coronavirus. But banks were particularly hard hit. One reason for the rout was the release of a report by the International Consortium of Investigative Journalists on lenders that had facilitated $2 trillion in suspicious transactions. HSBC, Deutsche Bank, Standard Chartered, JPMorgan Chase, and Bank of New York Mellon, were implicated. Over almost two decades, the five banks had “enrich[ed] themselves and their shareholders while facilitating the work of terrorists, kleptocrats, and drug kingpins,” the report said. Here’s a sampling of how the bank stocks reacted: ING: -9.27%. Deutsche Bank: -8.76% BNP Paribas -6.37% Santander: -6.22%: Unicredit: -6.17% HSBC: -5.26% Deutsche Bank appears to have facilitated more than half of the leaked $2 trillion of transactions, which were flagged to the U.S. government but rarely read by investigators, let alone acted upon, according to Deutsche Welle. Experts said that some banks treat Suspicious Activity Reports (SARs) “as a kind of get-out-of-jail-free card”, filing “numerous reports on the same clients, detailing their suspected crimes over the course of years while continuing to welcome their business.” HSBC is alleged to have allowed WCM777, a particularly pernicious Ponzi scheme, to move more than $15 million despite the fact the business was barred from operating in three states. The scam pilfered at least $80 million from investors, mainly Latino and Asian immigrants, while the company’s owner “used the looted funds to buy two golf courses, a 7,000-square-foot mansion, a 39.8-carat diamond, and mining rights in Sierra Leone.” The latest allegations could further complicate Deutsche Bank and HSBC’s business in the U.S. Deutsche Bank has already been mired in a host of scandals since the financial crisis: Its front-line role in the subprime mortgage crisis, its manipulation of interest rates, the services it provided Jeffrey Epstein, and its involvement in numerous money laundering scandals. HSBC’s position is fragile, given it has already signed three deferred prosecution agreements (DPAs), an official form of probation, with the U.S. Department of Justice in the past eight years. But patience is running thin, especially since the bank’s decision, in June, to embrace the Chinese Communist Party’s crackdown on Hong Kong, which prompted U.S. Secretary of State Mike Pompeo to accuse the bank of aiding China’s “political repression” in Hong Kong. HSBC’s relations with the CCP are also strained. No matter how much the bank kowtows to Beijing, it could still be sidelined as punishment for ratting out Huawei to U.S. authorities last year for breaching U.S. sanctions on Iran, which eventually led to the arrest of Huawei’s finance director, Sabrina Meng Wanzhou, in Canada. This weekend, fresh reports surfaced that China could put the bank on the list of “unreliable entities”, a punishment meted out to foreign companies seen by the Chinese government as compromising national security. Given HSBC’s massive dependence on the Chinese market, which together with Hong Kong accounts for the lion’s share of its profits, if that were to happen, as unthinkable as it may seem, the impact on the lender would be huge. HSBC’s shares are now down 52% so far this year, at their lowest level since 1995. Other banks have similarly stellar performances this year, pushing the Stoxx 600 bank index down 43% so far this year: Spain’s Santander (-59%) and BBVA (-58%) France’s Société Générale’s (-63%). Italy’s Intesa Sanpaolo (-32%), which recently took over its domestic rival, UBI Banca; Switzerland’s UBS (-17%) and Credit Suisse (-30%). They, too, are thinking about merging, to create a European megabank that is capable of competing with giant U.S. lenders; Deutsche Bank (-3.5%), ironically the best performing European large bank this year, after its shares had collapsed last year, and Commerzbank (-29%). The two banks’ shares are down 94% and 99% from their respective peaks, in 2007 and 2000. The risks continue to accumulate for Europe’s banking sector, which never properly recovered from the last two crises — the Global Financial Crisis and the Euro Debt Crisis — and has been chronically debilitated by the ECB’s evermore aggressive monetary policy, pushing its policy rates and many bond yields into the negative, with largely undesirable consequences for banks, such as obliterating their interest margin and destroying their capacity to generate a healthy profit. Europe’s doom loop — when shaky banks hold too much of their country’s shaky government debt, raising the fear of contagion across the financial system if one of them stumbles — has actually deepened by €210 billion since the start of the pandemic, according to a new report by S&P. Another risk that appears to be growing is the outsized exposure of some European banks — particularly those in Spain — to struggling emerging economies, including Turkey. But the biggest risks are at home. Although Europe’s furlough schemes and forbearance programs have helped forestall the pain, it cannot be put off forever. To give banks a little breathing room, the ECB has relaxed banks’ leverage requirements until next July. The ECB’s plan to keep Europe’s banking system afloat is to push through a massive wave of consolidation that will weed out many of the weaker, smaller banks and reinforce many of the larger banks, many of which are also weak. “Before the Covid crisis, the need to adjust costs, eliminate excess capacity, and restructure the banking sector was very important,” and the pandemic intensified those needs, Luis de Guindos, the ECB’s vice president, recently said. Banks need to consolidate “quickly and urgently,” he said. The hope is that with less competition, they’re able to survive in what is for banks a hostile interest rate environment that the ECB has created. By Nick Corbishley, for WOLF STREET. For Turkey, borrowing in dollars & euros was cheap until it wasn’t. Read… On Concerns about Turkey’s Financial Health, Lira Dives to New Low, Cost of Insuring Turkish Sovereign Debt Nearly Doubles Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how: Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.

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E3 Says US Claim about Iran Sanctions Has No Legal Effect

The foreign ministers of France, Germany, and the UK, known as the E3, have reaffirmed their full commitment to UN Security Council Resolution 2231 in a joint statement in response to US claims of returning the UN sanctions on Iran. “Today marks 30 days since the US sought to initiate the ‘snapback mechanism’, which allows a participant to the JCPOA to seek the re-imposition of the multilateral sanctions against Iran lifted in 2015 in accordance with resolution 2231, adopted by the UN Security Council,” they said in the statement. “France, Germany and the United Kingdom (“the E3”) note that the US ceased to be a participant to the JCPoA following their withdrawal from the deal on 8 May, 2018. Consequently, the purported notification under paragraph 11 of UNSCR 2231 (2015), received from the United States of America and circulated to the UN Security Council Members, is incapable of having legal effect,” it added. “It flows from this that any decisions and actions which would be taken based on this procedure or on its possible outcome would also be incapable of having any legal effect,” the statement noted. “We remain guided by the objective of upholding the authority and integrity of the United Nations Security Council. The E3 remains committed to fully implementing UNSCR 2231 (2015) by which the JCPOA was endorsed in 2015. We have worked tirelessly to preserve the nuclear agreement and remain committed to do so,” the foreign ministers added. In a separate statement, EU Foreign Policy Chief Josep Borrell said the “US unilaterally ceased participation in JCPOA on 8 May, 2018, and has subsequently not participated in any JCPOA-related activities.” “It cannot therefore be considered to be a JCPOA participant State and cannot initiate the process of reinstating UN sanctions under the UN Security Council Resolution 2231,” he added in a tweet, which included a link to his statement. The UK embassy in Tehran also tweeted on Sunday that the E3 remains committed to fully implementing UNSCR 2231 (2015) by which the JCPOA was endorsed in 2015. Subscribe

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What’s to Be Done Now with All These Zombie Companies?

Saving the Zombies in Europe. By Nick Corbishley, for WOLF STREET: Europe’s zombie firms are multiplying like never before. In Germany, one of the few European economies that has weathered the virus crisis reasonably well, an estimated 550,000 firms — roughly one-sixth of the total — could already be classified as “zombies”, according to research by the credit agency Creditreform. It’s a similar story in Switzerland. Zombie firms are over-leveraged, high-risk companies with a business model that is not remotely self-sustaining, since they need to constantly raise fresh money from new creditors to pay off existing creditors. According to the Bank for International Settlements’ definition, they are unable to cover debt servicing costs with their EBIT (earnings before interest and taxes) over an extended period. The number of zombie companies has been rising across Europe and the Anglosphere — due to of two main factors: Central banks’ easy money forever policies, which brought interest rates down to such low levels that even firms with a reasonable chance of default have been able to continue issuing debt at serviceable rates. Many large zombie firms have also been bailed out, in some cases more than once. Spanish green energy giant Abengoa has been bailed out three times in five years. The tendency of poorly capitalized banks to continually roll over or restructure bad loans. This is particularly prevalent in parts of the Eurozone where banks are especially weak, such as Italy. A Bank of America report from July posits that the UK accounts for a staggering one third of all zombie companies in Europe. They represent 20% of all companies in the U.K, up four percentage points since March, according to a new paper by the conservative think tank Onward. In the two hardest-hit sectors — accommodation and food services, and arts, entertainment and recreation — the proportion of zombie firms has soared by 9 and 11 percentage points respectively, to 23% and 26%. The number of zombie firms has shot up as companies have taken on huge volumes of fresh debt merely to weather the virus crisis while, in many cases, generating a lot less in revenues. Across the globe, non-investment grade companies issued $322 billion in the first eight months of this year — as much as in the whole of 2019, according to BIS data. At the same time, companies that were already zombies, instead of entering bankruptcy and having their debts restructured, have been bailed out by government and/or the central bank. For their part, smaller companies have also taken on more bank loans, largely or completely backed by government. Many firms, particularly in the sectors most affected by the crisis, have lower revenues and weaker cash flow. As a result, the borrowed cash gets used up quickly but the debt remains. If they weren’t zombies before the Pandemic, they’ll be zombies going forward. What is to be done with all these zombies? That’s the question many are now asking. The report by Onward proposes a cunning plan (in the Baldrick vein) — called New Start — that would convert any coronavirus debt that can’t be paid back into an income contingent loan collected as a share of trading profits. The debt would come due only when a company begins turning a profit. “The New Start scheme gives the option to intelligently delay repayments only for those firms who need it,” says the study’s author Angus Groom. “This can be rolled out as a scheme managed by HM Treasury and implemented and controlled by banks — all the while maximizing taxpayer value for loans that the Government has already underwritten.” The term “scheme” in British English in this context means “program,” but the USian meaning of “scheme” seems to be at least equally appropriate. And taxpayers will likely never see those funds again. This is one of a number of proposals doing the rounds in Europe aimed at finding a way of keeping most, if not all, of Europe’s zombies upright, for as long as possible. They include a straight “state debt for equity” swap, which would essentially involve governments converting the emergency loans taken out by struggling companies into equity. This idea is particularly popular among senior bankers, such as Unicredit CEO Jean Paul Mustier, presumably because the unpayable coronavirus debt companies owe the banks would also be turned into equity. “It is a win-win all around,” says City of London grandee Lord Leigh of Hurley: “Taking equity stakes in borrower-SMEs would provide those businesses with interest-free liquidity, leaving their growth potential unimpeded, whilst correspondingly giving banks the opportunity to recoup more of the money they have committed in the medium to long term.” Former UK Chancellor George Osborne has proposed another solution: just forgive all small business coronavirus debt. As with most of the proposals, the plan is couched in terms of exclusively saving small companies. If past is prologue, it’s the larger ones — the ones that owe the banks millions or billions — they’re most interested in saving. “None of these options are ‘uncontroversial’ and each involves varying degrees of moral hazard, taxpayer loss and engineering complexity,” says Groom. “However our solemn conclusion is that some form of action is unavoidable.” Up to now, many — though not all — of the short-term rescue interventions by governments or central banks can be justified in some way or another, particularly if they support the unemployed and unlock credit that had frozen up even for healthy companies. But it’s quite another thing when the short-term rescue efforts become a long-term reality that helps to engender more and more new zombies as well as make preexisting zombies even bigger. There are plenty of reasons why filling the economy with ever larger numbers of zombie firms is not a good idea. For a start, zombie firms are less productive and crowd out investment in more productive firms. Researchers at the BIS found that each one percentage point increase in the prevalence of zombie firms means 0.25 percentage points slower employment growth and a 17% decline in the capital investment rate. Allowing zombie firms to proliferate in order to protect banks from the consequences of their bad lending practices and investors from the consequences of their bad investment choices doesn’t just reward — and by extension, incentivize — bad actions and decisions; it stores up bigger problems for the future. By Nick Corbishley, for WOLF STREET. Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how: Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.

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Iran Summons German Envoy to Protest ‘Meddlesome’ Tweets

The Ministry of Foreign Affairs of the Islamic Republic of Iran has summoned Germany’s Ambassador to Tehran in protest at the embassy’s undiplomatic move to interfere in Iran’s domestic judicial affairs by sending a series of tweets. The German ambassador to Tehran was summoned by the Director General of Europe Affairs at the Iranian Ministry of Foreign Affairs on Monday, September 14, over the German Embassy’s recent tweets. In the meeting, the Director General of Europe Affairs of the Iranian Foreign Ministry strongly condemned the German embassy’s move as a violation of the diplomatic norms and an interference in the internal affairs of Iran. The Iranian diplomat underlined that meddling in Iran’s laws, regulations and independent judicial procedures is by no means acceptable or tolerable, saying the German Embassy is expected to know the limits of its diplomatic mission and not to go beyond them. The German ambassador said he would convey the issue to his government. The envoy was summoned after the German Embassy criticized the execution of Navid Afkari, an Iranian wrestler convicted of murder, in a series of tweets. Subscribe Facebook Twitter ReddIt Pinterest WhatsApp Viber VK Email Telegram Print LINE The IFP Editorial Staff is composed of dozens of skilled journalists, news-writers, and analysts whose works are edited and published by experienced editors specialized in Iran News. The editor of each IFP Service is responsible for the report published by the Iran Front Page (IFP) news website, and can be contacted through the ways mentioned in the "IFP Editorial Staff" section.

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