Household Wealth in Europe

The ECB has finally published the all-country report which gives us an indication of where household wealth is located and where in the future bailouts private wealth will be confiscated. The data is from 2009-2010 so especially in the PIIGS countries it could be overinflated after 3 years of austerity still is a powerful indicator of major unbalances in the Eurozone.

Italian median household wealth was indeed over three times larger than Germany’s. But that wasn’t the problem. The problem was Cyprus.

Cypriot households (CY), as measured by both their median and average wealth, were the second richest in the Eurozone. Median household wealth of €266,900 was over five times Germany’s median of €51,400. 

Average household wealth reached a phenomenal €670,900, 3.4 times Germany’s €195,200, and just shy of Luxembourg’s €710,100. Rarefied levels of wealth achievable only by small countries with huge and murky banking centres, or lots of oil. Few countries in the world are in that elite club.

And Germans based on median household wealth, were the poorest in the Eurozone.

It wasn’t that Cypriot households earned a lot of money—they earned the same as German households! They just knew how to hang on to it. At least until their bubble blew up.

By now, wealthier German households, those who own property and stocks, are significantly better off than they were in 2010, and they have since pulled up the average. Median household wealth, however—almost none of them own property or stocks—has certainly been left behind, again.

In the meanwhile in Cyprus real estate values, after a mind-boggling bubble, have been plunging for over two years; and billions in bank deposits have evaporated. 

Spanish household wealth has also been caught in a downward spiral of devastating unemployment and an exploding housing bubble—Spanish households lead the survey with a homeownership rate of 83%. In 2010, homeowners valued their homes at bubble prices. By now, much of the home equity Spaniards were clinging to has dissipated—with dramatic impact on household wealth.

Central bank sources told the FAZ that the Bundesbank and the ECB, to avoid stirring up a storm at an inconvenient time, kept this explosive wealth data secret until after the Cyprus bailout had been decided. But the data also explains the political motivation for the haircuts of account holders in Cypriot banks.

Eurozone Capital Flight

Citi' analyst Matt King has been monitoring the situation of bank assets in Europe and his results are most disturbing: "In Greece, Ireland, and Portugal, foreign deposits have fallen by an average of 52%, and foreign government bond holdings by an average of 33%, from their peaks.
The same move in Spain and Italy, taking into account the fall that has taken place already, would imply a further €215bn and €214bn in capital flight respectively, skewed towards deposits in the case of Spain and towards government bonds in the case of Italy.
Economic deterioration, ratings downgrades and especially a Greek exit would almost certainly significantly accelerate the timescale and increase the amounts of these outflows.


Below a summary of all the less than pleasant capital flows out of Europe's periphery.

 How far is the flock likely to run? In Greece, Ireland, and Portugal, foreign deposits have fallen by an average of 52%, and foreign government bond holdings by an average of 33%, from their peaks (Figure 18). The same move in Spain and Italy, taking into account the fall that has taken place already, would imply a further €215bn and €214bn in capital flight respectively, skewed towards deposits in the case of Spain and towards government bonds in the case of Italy (Figure 19).

Although large, if these flows occur slowly enough, they might not represent a major problem. After all, Portugal’s banks have managed to replace fleeing foreign deposits with domestic ones, and ECB repo should allow a further ramp-up in banks’ holdings of government bonds.

But we think the risks are skewed towards larger outflows occurring considerably more rapidly. Admittedly there are a great many unknowns, including the potential policy response. But none of these estimates allow for the possibility of domestic deposit flight. In the case of a Greek exit from the euro, that outcome seems highly likely. Nor is there any sign that the flight from Ireland and Portugal is diminishing (if anything, we expect the opposite).11 Moreover, banks’ appetite to buy further government bonds may prove limited if they start to suffer deposit flight – and all the more so if they suspect that deposit flight stems in part from their holdings of government bonds

Once the run (either bond or bank) starts, there is no stopping it:

Above all, though, we think capital flight, like so much in markets, is a self-reinforcing process. Provided other depositors and bondholders are grazing quietly, there is no reason to run. But as risks come ever more into the spotlight – whether through the TARGET2 imbalances, benchmark shifts or the threat of EMU exit in Greece – the unattractiveness of the risk-reward becomes ever more obvious.

What is the only possible outcome that will prevent this virtually catastrophic outcome?

To our minds, capital flight will stop only once there is decisive policy intervention. The longer investors have to wait for this, the more decisive it will need to be. Even a Euro area-wide deposit guarantee scheme might struggle to be credible if investors fear the incentives for redenomination are strong enough... Quite simply, investors in ‘safe assets’ need to be reasonably sure they will get their money back. Foreign investors in peripherals can no longer be sure of that.

Eurozone Unsustainable Debt could bring Germany to leave the Euro

Eurozone crisis can has been temporarily frozen by the ECB but is on track to come back home with a revenge. There are many signs that the ECB intervention could have actually made things worst in exchange for some months of relative calm on the markets. Let us not forget that as far back as September 2011, PIMCO’s Co-CIO, Mohamed El-Erian (one of the most connected of the financial elite) noted that French Banks were running REAL leverage levels of almost 100-to-1.

El-Erian said French banks are a particular cause for concern, noting that "credit markets now put their risk of default at levels indicative of a BB rating, which is fundamentally inconsistent with sound banking operations." He adds that bank equity now trades at a 50% discount to tangible book value on average, while the ratio of market capital to total assets has fallen to 1%-1.5%, compared with 6%-8% for "healthier banks."

http://www.marketwatch.com/story/pimco-french-banks-could-tip-europe-to-recession-2011-09-22

The ECB managed to swap out its Greece debt into new debt. But it won’t be able to do this with the remainder of PIIGS’ debts. Instead, the ECB plans on shifting any of the losses from these debts onto the individual EU national banks:

ECB Balance Sheet Jumps Above €3 Trillion

The mix of bond purchases and loans has exposed the ECB and the 17 national central banks that make up the euro to losses in the event of defaults or bank failures. Last month, the ECB was forced to swap its €50 billion Greek bond portfolio for new bonds to shield the banks from potential losses in the event of any forced write-­downs.

If banks that have borrowed from the ECB can't pay the money back and the collateral they have posted falls in value or becomes worthless, the ECB would be on the hook for losses. Most of these losses would be spread across national central banks according to their size, meaning Germany's Bundesbank would face the largest exposure.

http://online.wsj.com/article/SB10001424052970203458604577265373668388122.html?mod=googlenews_wsj

Germany is certainly aware of this since it has already put up a firewall that would allow it to walk out of the Euro at any point. Obviously it doesn’t want to, but when the ECB will try to shift the losses from its PIIGS exposure onto Germany’s shoulders, Germany will have no choice.  The reality is that the ECB is far too small to cover the astonishing amount of debt a look at the chart below gives an idea of what kind of figures we are talking about.



A solution would be for the ECB to start printing money but it is blocked form doing so from Germany who made clear will walk away from the Euro rather than trigger an hyperinflation.

A new bailout looming: Cyprus downgraded and italy under pressure

And the hits keep coming! After the launch last week of the Great Euro Marshall Plan which was supposed to cure all economic diseases once for all, the bond tragedy has resumed relentless.
Yields on Italian 10-year bonds spiked to 5.8pc on Wednesday while Spanish yields punched through 6pc once again. Analysts remain perplexed by the decision of Italy's treasury to cancel bond auctions in mid August due to lack of liquidity and "reduced financing needs". Italy was expected to raise €68bn (£60bn) in August and September.
In the meanwhile there is a new entry in the bailout club.
Cyprus has been downgraded today two notches from A2 to BAA1 due to "fractious politics", exposure to Greece and the disaster of the energy crunch caused by the explosion and destruction of his main power plant on the 11th of July which destroyed 60% of Cyprus electricity output.

The darkening picture in Cyprus raises concerns that a fourth eurozone country might soon need some sort of rescue, exhausting bail-out tolerance in Germany, Holland, Finland and Slovakia, where a wing of the coalition has denounced the EU accord.

"The markets have started to see all the flaws in the summit deal," said David Owen, of Jefferies Fixed Income. "They know there has been no increase in the size of the European Financial Stability Facility (EFSF) and that it will not be in any position to intervene in the Spanish and Italian markets for quite some time because the changes have to be ratified by all parliaments."

"Unless the European Central Bank (ECB) steps in to buy bonds, this is going to be tested by markets over the summer. EU leaders have sent absolutely the wrong signal by thinking they have done the job and can now go on holiday," he added.
But the most interesting and scary piece of news today is the following:
Italian bank stocks fell sharply in Milan with Intesa down 5pc and Unicredit off 4pc.
Deutsche Bank said it had cut its exposure to Italian debt from €8bn to €1bn since the end of last year, mostly by purchasing credit default swaps (CDS). This suggest Europe's banks have been the main buyers of Italian CDS for hedging purposes, rather speculators as claimed by Italian leaders. It appears that core Europe started now for quite a while to dump the peripheral PIIGS.
The economic outlook continues to darken in Italy. The manufacturing index fell for a fourth month in July, dipping below the contraction line of 100. Italy's business lobby Confindustria said growth would be "almost nil" this quarter. The group's leader Emma Marcegaglia said Italy's political system was unravelling, leaving industry to its fate.

Net foreign liabilities in Italy have reached 26pc of GDP, the Italian government leitmotiv has been always that Italy is safe since most of the debt is owned by Italian families, this has not been the case since now for some time regardless of the Prime Minister's media propaganda.
Italy is cushioned for some months and the traditional summer shutdown will let the country slumber through till September unless of course a major event wreak havoc on the international markets.
September though will be torture for PIIGS.