- 2021-03-02
The financial crisis returns to Europe?
The European financial market turmoil in mid-February was a watershed event. Due to market concerns that Deutsche Bank, which lost 6.8 billion euros last year, may lose its debt, the bank's stock price plummeted by nearly 10% on February 8, becoming the fuse for the global banking sector, especially the European banking sector, to fall. For a while, concerns about whether Deutsche Bank will become the next Lehman and whether the 2008 financial crisis will repeat itself spread in the market.
What we see may not be the beginning of a bear market in the stock market or an uncertain harbinger of a future recession. What we see-here in Europe at least-is the return of the financial crisis.
The Eurozone Crisis 2.0 version may not look as horrible as version 1.0 in some respects, but it is worse in other respects. Currently, bond yields are not as high as during the first crisis. The euro zone now has an ambulance umbrella. The level of leverage in the banking industry has also decreased.
However, the banking system has not been cleaned up, and there are still a large number of zombie banks; unlike in 2010, we are currently in a deflationary environment. The European Central Bank (ECB) has failed to meet its inflation target for four years, and it is likely that it will still not meet the target in the next few years.
Analysts believe that since the 2008 financial crisis, major global regulatory agencies have strengthened the supervision of the banking industry, and the banking industry's ability to resist risks has been greatly enhanced. At present, there is no possibility of another global financial crisis.
Eileen Davis, a senior analyst in charge of European banking at Morningstar, said that the overall European banking industry is still relatively healthy, and Deutsche Bank has certain particularities. Its international business has a relatively high proportion and is more vulnerable to external factors such as falling oil prices. , But it is too early to talk about bankruptcy.
Compared with Europe, the U.S. banking industry is more stable. Chris Wheeler, an analyst at Atlantic Securities Bank, said that after the 2008 financial crisis, the U.S. has stricter supervision of the banking industry, and the U.S. banking industry’s risk exposure to the oil industry is significantly lower than that of Europe, and much lower than that in 2008. The proportion of housing mortgage loans during the crisis.
The market sends us four specific messages. The first and most important message is the return of "toxic twins": the interaction between banks and sovereign bonds.
While bank stock prices have plummeted, sovereign bond yields in peripheral countries in the euro zone have risen. This situation is similar to the situation from 2010 to 2012. The current sovereign bond yields have not reached the dizzying heights of the first crisis, but the Portuguese 10-year government bond yields are close to 4%.
The combination of high bond yields, expansionary fiscal policies, consistently high public and private sector debt and low growth rates is clearly unsustainable. The situation in Italy may be better than that in Portugal, but it is still unsustainable. The yield on Italian 10-year government bonds rose to more than 1.7%; the yield on German government bonds was slightly higher than 0.2%. The gap (or spread) between the two is a measure of the pressure of the entire system. This indicator is rising again.
The financial markets tell us that they have lost faith in Mario Draghi's (pictured above) commitment in 2012 to protect Eurozone member states “at all costs” from speculative attacks. With this commitment, the European Central Bank President ended the first phase of the eurozone crisis, but at a price. The urgency of solving deep-seated structural problems suddenly disappeared.
The second message is that the European Banking Union has failed. The European Union’s banking union eventually turned into an ugly compromise: unified banking supervision and a unified resolution mechanism, but no deposit insurance system or government support to bail out banks that are about to fail.
It is no coincidence that bank stocks plummeted just as the Bank Recovery and Resolution Directive took effect in full. The directive stipulates a general internal rescue mechanism for banks that are about to fail. Last year, Italy used the directive to bail out four regional banks, causing losses to bondholders. Investors in other banks worry that they may also become targets for internal bailouts. One of the reasons why Deutsche Bank investors began to panic last week was that the bank issued a large number of contingent convertible bonds. If Deutsche Bank is in trouble, these bonds will be converted into Deutsche Bank stock, and if the disposal process is initiated, they will be all written down immediately.
The third message is that the market's expectations for future inflation have undergone a permanent change. The European Central Bank is taking the market’s expectations of future inflation seriously—perhaps taking it too seriously. Its favorite indicator is the level of inflation in the next 5-10 years from today. Last week, the indicator fell to an all-time low of just over 1.4%. This tells us that the market no longer believes that the ECB can achieve an inflation target of just under 2%, even in the long run.
The fourth message is that the market is worried about negative interest rates. This is because most of the 6000 banks in Europe operate traditional savings and loan businesses: they take deposits and then lend. Banks usually adjust the interest rates offered to depositors based on the interest rates imposed by the European Central Bank to maintain profit margins between the two. However, if the European Central Bank imposes negative interest rates on banks, this will not work. If banks impose negative interest rates on savings accounts, small depositors will take their deposits and escape. Of course, banks can reduce their reserves in the central bank and use the money for lending. Or, they can invest in high-risk securities. But this prospect may not necessarily reassure bank shareholders, especially if they do not see good lending or investment opportunities.
Looking back, the main mistake made by European authorities was that they failed to clean up their banking system after Lehman Brothers went bankrupt in 2008. This is original sin. Many other mistakes followed to complicate the problem: fiscal austerity that exacerbated cyclical volatility, the European Central Bank’s multiple policy failures, and the failure to establish a true banking union. Interestingly, every decision is ultimately the result of pressure from German policymakers.