Unicredit in trouble?
- Thread starter antelope
- Start date
Here's the gist......
Most of Europe's major banks are insolvent. But only in the last week have they lost most of their access to additional funding. Their key source of funding has been U.S. money-market funds. But these funds are bailing out of Europe as quickly as they can. The result is a run on Europe's banks.
This crisis is now past the point where the authorities can hope to control the situation. We are now days (not weeks or months) away from the first major bank failures.
Italy's UniCredit, one of Europe's largest banks, would be the first catastrophic bank failure there.
Here's the problem with UniCredit.
It holds more than 1.2 trillion euro in assets. But it only has 74 billion euros in equity.
That includes nearly 24 billion euros in things like goodwill and tax losses â intangible equity that can't be traded or sold⦠things that are only really equity in the minds of accountants.
When you do the math, you discover that UniCredit is leveraged 24 to 1.
That's risky enough. But when you understand what it owns â piles of European sovereign debt that's all going to have to be marked down substantially â you can see the fundamental problem.
At 24 to 1, an average loss severity of only 4.1% wipes out the bank.
I'd estimate a fair evaluation of UniCredit's books will show an average loss severity of at least 10%, which implies actual losses of more than 100 billion euros.
These are Fannie Mae- and Freddie Mac-sized losses. And Italy, which is already the world's third-largest sovereign borrower, doesn't have the money to bail out the bank.
Now, here's the really bad news...
Out of all the major European banks, UniCredit has the highest amount of bonds coming due next year (2012) â 51 billion euros.
Currently, its bonds are trading on the market at prices equivalent to four notches below investment-grade and eight notches below its official Moody's A2 rating.
This is a very serious problem.
The bank cannot operate without an investment grade credit rating. Nor can it possibly refinance the 51 billion euros.
Compounding matters, the bank took a 14.3 billion euro loss in the most recent quarter that Bloomberg called "surprising."
UniCredit has clearly reached the point where private investors will no longer provide financing.
Its bonds are now trading at prices that indicate an eight-notch reduction in credit rating â prices at which the bank cannot hope to operate profitably. To raise desperately needed capital, it has organized a huge equity offering. The problem is, if investors won't buy the bank's bonds, why would they buy its equity, especially when so much of it is probably completely inflated in value?
The problems at UniCredit have already spilled over into the entire European interbank funding market.
An unnamed bank executive in Europe told Reuters this week that "the market for unsecured funding with maturities that go beyond two years is literally dead." Given that Europe's banks can't presently fund themselves without government support⦠you should view the exit of the U.S. money-market funds as a run on Europe's banks. This crisis is very much underway.
Even with these facts in the market, most people â U.S. investors in particular â don't seem to understand this coming crisis will be much, much worse than the Lehman Brothers failure.
We're not talking about the failure of a single bank â though it seems more and more likely that a single bank (UniCredit) will be first â we're talking about the failure of an entire system, the largest system of credit and banking on Earth.
You need to understand that these problems and Europe's inability to deal with these losses will have a huge impact on the world's economy and the U.S. financial system.
Europe's banking system holds 55 billion euros in assets. That's the same size as the total debt (public, private, corporate) in the entire U.S. economy. Europe's banking system is four times larger than the U.S. banking system. And it is stuffed to the brim with sovereign debts that will never be repaid. This isn't a crisis... It's a catastrophe.
The main way these problems will spread to the U.S. is through money-market funds.
As of September, 37% of the $1.5 trillion in U.S. money-market funds was invested in European bank bonds and CDs. Even though that's down from 51.5% in May, it still leaves more than $500 billion of U.S. assets in Europe's banks. The Federal Reserve cannot allow U.S. money-market funds to lose $500 billion. It cannot allow Europe's entire economy to collapse.
Whatever the other risks â inflation, a panic out of euros and dollars â anything will be tolerated except a complete collapse.
.........................................
bottom line......toast.
puke em out.
cheers,
s
Most of Europe's major banks are insolvent. But only in the last week have they lost most of their access to additional funding. Their key source of funding has been U.S. money-market funds. But these funds are bailing out of Europe as quickly as they can. The result is a run on Europe's banks.
This crisis is now past the point where the authorities can hope to control the situation. We are now days (not weeks or months) away from the first major bank failures.
Italy's UniCredit, one of Europe's largest banks, would be the first catastrophic bank failure there.
Here's the problem with UniCredit.
It holds more than 1.2 trillion euro in assets. But it only has 74 billion euros in equity.
That includes nearly 24 billion euros in things like goodwill and tax losses â intangible equity that can't be traded or sold⦠things that are only really equity in the minds of accountants.
When you do the math, you discover that UniCredit is leveraged 24 to 1.
That's risky enough. But when you understand what it owns â piles of European sovereign debt that's all going to have to be marked down substantially â you can see the fundamental problem.
At 24 to 1, an average loss severity of only 4.1% wipes out the bank.
I'd estimate a fair evaluation of UniCredit's books will show an average loss severity of at least 10%, which implies actual losses of more than 100 billion euros.
These are Fannie Mae- and Freddie Mac-sized losses. And Italy, which is already the world's third-largest sovereign borrower, doesn't have the money to bail out the bank.
Now, here's the really bad news...
Out of all the major European banks, UniCredit has the highest amount of bonds coming due next year (2012) â 51 billion euros.
Currently, its bonds are trading on the market at prices equivalent to four notches below investment-grade and eight notches below its official Moody's A2 rating.
This is a very serious problem.
The bank cannot operate without an investment grade credit rating. Nor can it possibly refinance the 51 billion euros.
Compounding matters, the bank took a 14.3 billion euro loss in the most recent quarter that Bloomberg called "surprising."
UniCredit has clearly reached the point where private investors will no longer provide financing.
Its bonds are now trading at prices that indicate an eight-notch reduction in credit rating â prices at which the bank cannot hope to operate profitably. To raise desperately needed capital, it has organized a huge equity offering. The problem is, if investors won't buy the bank's bonds, why would they buy its equity, especially when so much of it is probably completely inflated in value?
The problems at UniCredit have already spilled over into the entire European interbank funding market.
An unnamed bank executive in Europe told Reuters this week that "the market for unsecured funding with maturities that go beyond two years is literally dead." Given that Europe's banks can't presently fund themselves without government support⦠you should view the exit of the U.S. money-market funds as a run on Europe's banks. This crisis is very much underway.
Even with these facts in the market, most people â U.S. investors in particular â don't seem to understand this coming crisis will be much, much worse than the Lehman Brothers failure.
We're not talking about the failure of a single bank â though it seems more and more likely that a single bank (UniCredit) will be first â we're talking about the failure of an entire system, the largest system of credit and banking on Earth.
You need to understand that these problems and Europe's inability to deal with these losses will have a huge impact on the world's economy and the U.S. financial system.
Europe's banking system holds 55 billion euros in assets. That's the same size as the total debt (public, private, corporate) in the entire U.S. economy. Europe's banking system is four times larger than the U.S. banking system. And it is stuffed to the brim with sovereign debts that will never be repaid. This isn't a crisis... It's a catastrophe.
The main way these problems will spread to the U.S. is through money-market funds.
As of September, 37% of the $1.5 trillion in U.S. money-market funds was invested in European bank bonds and CDs. Even though that's down from 51.5% in May, it still leaves more than $500 billion of U.S. assets in Europe's banks. The Federal Reserve cannot allow U.S. money-market funds to lose $500 billion. It cannot allow Europe's entire economy to collapse.
Whatever the other risks â inflation, a panic out of euros and dollars â anything will be tolerated except a complete collapse.
.........................................
bottom line......toast.
puke em out.
cheers,
s
Nice synopsis of EU situation. So what has changed in three years? US corporates had a run when MM funds moved to treasuries during the crisis here. Fed then stepped in. Nothing changes. FED will just print more money and exchange it for anything including EU debt under the disguise of a swap. FED is the global printing press.
This is misleading, as the majority of the exposure of these US funds is to the Dutch, Swiss etc names, which also are considered European. US money funds have cut their exposure to EMU banks drastically. For example, their exposure to French banks is only arnd 2% of their holdings. I don't have the figure for the Italian exposures, but it's normally much smaller than the French. Moreover, a large portion of the current exposure is secured (repos) rather than unsecured (CP), which is what it used to be. Source for all this data is the latest report from Fitch.
I noticed this awhile ago and yet each and every day we hear that US banks have negligible exposure to this mess. Many of these money market funds simply cannot return ANY yield if they want to charge a nominal management fee and even with their exposure via REPO's to these foreign banks, their returns are a fraction of a percent.
Throw this one right at the feet of Bernanke and ZIRP. At some point next year I suspect there will be a hell of alot more public criticism of just what ZIRP has done to not only ordinary citizens/savers, but how it has created even greater financial instability as the traditional holders of short term treasuries were forced to "chase yield" in toxic debt...
Come to think of it, sounds alot like what we saw a few short years ago when traditionally conservative funds, pensions, etc...were trying to goose returns with alot of supposedly sanitized mortgage backs and other utter crap that nearly blew apart the system.
Treasuries and agencies, mostly, although it would vary, depending on the MMF type/mandate (I don't have the ICI data handy, but, if I remember correctly, roughly 1/2 of the MMF assets are in so-called non-govt funds). And yes, the US MMF community used to be full of European bank commercial paper (unsecured), 'cause it offered a nice pickup. They have reduced this exposure quite drastically, though.
I would generally have quite a lot of sympathy for this view. However, the US MMF industry is horribly flawed and needs to be reformed. If it's not reformed (and a few things have been done, but nowhere near enough), it needs to die, IMHO, because it represents a massive tail risk for the taxpayer. So the more of these MMFs go out of business, because their business model isn't viable w/rates arnd 0, the better it is for the general health of the system. My Z$2c.
Quote from shopster:
Here's the gist......
Whatever the other risks â inflation, a panic out of euros and dollars â anything will be tolerated except a complete collapse.
.........................................
bottom line......toast.
puke em out.
cheers,
s
Very informed and interesting post
Thank you.
a
