Thursday, April 4, 2013
Handicapping Europe's Next Fiasco
Now that Europe is living under the “Cyprus Doctrine”, which provides that no eurozone bank is too big to be rescued, we must ask: what is the profile of the next eurozone bank to explode? Here are my suggested criteria:
1. Hopelessly insolvent
2. Utterly worthless accounting
3. Discredited regulator
4. Highly indebted government
5. Politically controversial
6. Associated with the wrong political party
7. An embarrassment to Mario Draghi (i.e, not his best friend)
If you input these criteria into my supercomputer, only one name pops out: Banca Monte dei Paschi di Siena, the world’s oldest and most insolvent bank. I don’t say this gleefully, because MPS is a venerable institution, like the papacy, the British monarchy and the imperial Japanese throne. Our ephemeral civilization should not discard such things lightly. I have visited MPS, and I have seen their books which go back to 1472. They invented banking and double-entry bookkeeping. I bow before their ancient heritage. Who can imagine a business that lasts for over 500 years?
But now, they’re toast, at least as a business. Anything wrong you could do, they did. Not only that, but they are affiliated with the wrong political party. They are the Enron of Tuscany, and I say that in sadness. But they are, as we used to say at Moody’s, a dead bank. And I say that cognizant of their having been recently bailed out in the billions: they’re still dead. They’re dead because no one knows the depth of their insolvency, and no rational corporate treasurer would keep more than ten cents on deposit there. They are a ward of the bankrupt Italian state and the unreliable ECB. The ECB killed the Cypriot banks--will it kill MPS too? You have to put your money on YES, that is, unless Wolfgang Schaeuble says something different which he won’t. Are you willing to bet that, when push comes to shove, that Schaeuble will fork over the X billion euros needed to keep MPS solvent in Draghi’s eyes--Draghi, the guy in the crosshairs over MPS’s insolvency? No you’re not; no one is. Over the next month, the ECB will become MPS’s only uninsured depositor. (Can you believe how screwed up the eurozone financial system is? It’s a wonderland of bad policy.)
I will note that Italy has no government, as in, there is no government. One of the leading parties, Five Star, opposes giving MPS another dime. The Great And The Good, represented by Honest Man Mario Monti, lost the last election--they lost. In other words, Germany’s “responsible” candidate lost. The Italian people are not lining up for a Greek depression; they are voting for the anti-austerity parties, the anti-German parties. So do not count on parliament voting for a few more billions for MPS to satisfy Sr. Draghi. We are not in Kansas anymore, we are in a new world of angry voters, hard constraints and hard deadlines, something entirely new for southern Europe.