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Articles by Don Quijones

The Pillage of Pemex Turns Bloody

1 day ago

Gasoline theft is now the second most profitable activity for Mexico’s criminal gangs.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
Mexico’s state-owned oil giant, Petróleos de Mexico, AKA Pemex, has spent the last few decades being pillaged and plundered from the inside-out. The state-owned giant has been financially bled to the verge of collapse by its swollen ranks of senior managers and administrators, corrupt politicians, shady contractors, and the untouchable, unsackable leaders of the oil workers’ union.
Now, Pemex is being bled dry from the outside-in. Those doing the plundering this time include armies of amateur opportunists who live close to the major pipelines that crisscross the country as well as some of Mexico’s most ruthless and organized drug gangs.

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ECB Tapering May Trigger “Disorderly Restructuring” of Italian Debt, Return to National Currency

4 days ago

The only other option: “Orderly restructuring.”
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
Here’s the staggering scale of the Italian government’s dependence on the ECB’s bond purchases, according to a new report by Astellon Capital: Since 2008, 88% of government debt net issuance has been acquired by the ECB and Italian Banks. At current government debt net issuance rates and announced QE levels, the ECB will have been responsible for financing 100% of Italy’s deficits from 2014 to 2019.
But now there’s a snag.
Last month, the size of the balance sheet of the ECB surpassed that of any other central bank: At €4.17 trillion, the ECB’s assets have soared to 38.8% of Eurozone GDP. The ECB has already reduced the rate of purchases to €60 billion a month. And it plans to

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The Backlash to Spain’s New Property Boom Has Begun

6 days ago

When locals can’t afford to live there anymore.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
Spain is in the grip of a property boom. Whereas the last bubble was driven largely by the rampant construction and sale of new homes, with the country at one point accounting for more housing starts than Germany, France, Britain and Italy combined, the focal point of the new boom is the smaller but fast-growing rental apartment market.
Spain has traditionally been a country of home-owners, with an average ownership rate of 78.5%, 10 percentage points above the EU average. But things are changing.
“The concept of owning a home in Spain was almost religious, but that’s changed for an entire generation of young people who have seen people losing their homes, (their house) prices

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Hit by Run on Deposits, Banco Popular Denies it’s Looking for Rushed Takeover to Avert Collapse

10 days ago

Spain’s 6th largest bank: “We have liquidity until the end of the year.”
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
In the world of banking, confidence and trust are a precious currency. The moment a bank loses them, things tend to spiral down quickly. Spain’s sixth biggest and desperately troubled bank, Banco Popular, appears to be well along the process of losing the confidence of its customers, and with it their deposits. Last year the bank lost 6.5% of its deposit base. But now, according to a report by the financial daily El Confidencial, the deposit outflow is swelling from a trickle into a deluge.
The bank responded by making its deposits more attractive. Its deposit rates now range between 0.75% and 4%. With the eurobor at 0%, offering such enticing rates will

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In Bleak Prognosis, Italy’s Financial Regulator Threatens EU with Return to a “National Currency”

12 days ago

Because Italy’s banking crisis and other problems have not been solved.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
Nerves are fraying in the corridors of power of the Eurozone’s third largest economy, Italy. It’s in the grip of a full-blown banking meltdown that has the potential to rip asunder the tenuous threads keeping the European project together.
In his annual speech to the financial market, Giuseppe Vegas, the president of stock-market regulator CONSOB — a consummate insider — delivered a bleak prognosis. The ECB’s quantitative easing program has “reduced the pressure on countries, such as ours, which more than others needed to recover ground on competitiveness, stability and convergence.”
But it hasn’t worked, he said. Despite trillions of euros worth of QE,

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Spain’s Government Presses Property-Bubble Rewind Button

16 days ago

Taxpayer-funded subsidies to benefit banks, real estate agencies, construction companies, PE firms, and landlords.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
After spending the last few years groggily getting back onto its feet following the collapse of one of the most spectacular — and destructive — real estate bubbles of this century, Spain’s economy is once again being primed for another property boom.
In the last quarter prices registered a year-on-year rise of 4.5%. Rents are also surging, though the country is still home to over half a million vacant properties. The cost of renting in Madrid and Barcelona, which between them account for 16% of those vacant properties, has reached historic highs, according to a new study by the online real estate market place

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Is the City of London about to Lose its Crown Jewel? 

20 days ago

Where will nearly €1 trillion-a-DAY in euro-clearing operations go? But other finance operations might not go to the usual suspects.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
The UK economy’s prize “asset,” the City of London’s gargantuan financial services industry, is at the top of the menu of the forthcoming Brexit negotiations. For Britain’s Prime Minister Theresa May, safeguarding the City of London’s operations is a top priority. But for the EU’s negotiators, those operations represent both a valuable asset to covet as well as a huge bargaining chip in the forthcoming negotiations.
One area of activity that European authorities, both political and monetary, seem determined to get their hands on, at pretty much any cost, is the City’s vast clearing operations.
The U.K. is estimated to handle 75% of all euro-denominated derivatives transactions, equivalent to around €930 billion of trades per day. It’s also home to roughly 90% of US dollar domestic interest-rate swaps. Clearing is a huge business for the City of London. The world’s largest clearinghouse for interest rate swaps, LCH, is based there and is majority-owned by London Stock Exchange Group Plc.
It functions as a middle man collecting collateral and standing between derivatives and swaps traders to prevent a default from spiraling out of control.

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London’s Deflating House Price Bubble Gets Messier

22 days ago

Prices in this hotbed of global wealth fall most since 2009.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
London’s property market is estimated to be worth as much as the annual GDP of the world’s ninth biggest economy, Brazil. But prices are falling.
In April they fell 1.5% year-over-year, to £636,777, according to Rightmove, a firm specialized in real estate. The last time prices fell so sharply was in May 2009, when the global financial crisis was gaining steam. The worst hit areas are London’s most expensive boroughs.
Those at the top end of the global wealth and income scale — just about the only people left who can afford to buy residential property in London these days — either have less money to spend or are spending it elsewhere. Some are even splashing it around other parts of the UK, where better value deals can be found.
For the last two years the UK’s prime regional housing markets have outperformed London’s top postcodes, as higher taxes and Brexit uncertainty have chilled the capital’s prime markets. According to Lucian Cook, head of residential research at Savills, values in the prime central London market are 13% below their 2014 peak.

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Corruption Scandals already Trip Up Spain’s New Government

26 days ago

If the Prime Minister is made to testify, all bets are off.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
After taking almost a whole year to form, Spain’s coalition government is already showing signs of strain. Chief among its problems is the endless string of corruption scandals engulfing the government’s majority party, the People’s Party.
In the latest scandal the regional government of Madrid — a bastion of the party’s national apparatus — is accused of channeling illegal funds through the local water company, Canal de Isabel II. Also, the embattled construction behemoth OHL allegedly gave the former president of the regional government, Ignacio González, a €1.4 million bribe in return for the tender of a light-rail project in Madrid.
González is now in jail awaiting charges, as is his brother who is promising to drag down others. Javier López Madrid, OHL’s chief executive, has also been arrested by Spain’s Civil Guard.
The latest scandal raises serious questions about the durability of Spain’s fragile coalition government. True to form, Prime Minister Mariano Rajoy continues to say nothing on the matter. But his silence may soon be broken following news last week that he has been called as a witness in the ongoing Gürtel kickbacks case.

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Just How Safe is Spain’s Banking System?

29 days ago

Investment bank Mediobanca warns of “clear risk of contagion.”
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
“The Cover of La la Land with a Potential Horror Story” is the title of a report about Spanish banks, authored by analysts at Italian investment bank Mediobanca. The shares of many Spanish banks have surged in recent months, some as much as 50%, hence La La Land. “Banco Popular [the teetering bank we’ve written so much about] seems to be the only exception to a truly happy world, but the current situation could take a nosedive with clear risk of contagion for the rest of the sector.”
Spain’s sixth biggest bank, Banco Popular, remains on the verge of either collapsing or being gobbled up by a bigger bank before it collapses. The bank lost over 60% of its market cap last year and it’s already 30% down so far this year. Popular has become a favorite target of short-selling hedge funds. Moody’s has just downgraded its senior debt two notches to B1 (junk), with negative outlook due to the bank’s “weak solvency levels” and worsening capital position.
For Popular to remain a going concern beyond 2017, it must pull off another capital expansion, this time of around €4 billion. That’s a big ask for a bank with a market cap of just €2.9 billion, and that has already burnt through the lion’s share of the €5.4 billion it raised in its three previous rights issues.

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Mexico’s Economy Is Being Plundered Dry

April 20, 2017

Debt is suffocating the economy, but where did the money go? 
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
The government of Mexico has a new problem on its hands: what to do with the burgeoning ranks of state governors, current or former, that are facing prosecution for fraud or corruption. It’s a particularly sensitive problem given that most of the suspects belong to the governing political party, the Institutional Revolutionary Party (PRI), which ruled Mexico uninterruptedly from 1929 to 2000. It returned to power in December 2012 with the election of Enrique Peña Nieto. And it clearly hasn’t changed its ways.
Some of the accused governors were so compromised they went on the run. In the last few weeks, two of them, Tomás Yarrington, former state governor of Tamaulipas, and Javier Duarte, former governor of Veracruz, were tracked down. Yarrington, accused of laundering proceeds from drug trafficking as well as helping Mexico’s Gulf Cartel export “large quantities” of cocaine to the United States, was ensnared by Italian Police in the Tuscan city of Florence. He faces possible extradition to the United States.
Yarrington’s successor as governor of Tamaulipas, Eugenio Hernández, a fellow PRI member who is also accused of close ties with narcotraficantes and money laundering, has not been seen in public since last June.

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Is Barcelona’s Crazy Tourist Boom Too Much of a Good Thing?

April 16, 2017

It brings buckets of money, but what are the consequences?
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
Barcelona, Europe’s most visited non-capital city (at least officially speaking), is now so saturated with tourists that even the tourists are complaining. In a recent study by the City Council, 40% of the tourists surveyed thought that prices in the city were too high, while 59% believed that the streets and tourist hotspots were too crowded.
They’ve got a point. In 2015 the city, with a total permanent population of 1.7 million, drew 8.9 million visitors, 6.5% more than the year before and a five-fold increase from 1990. And that’s just those who stayed in hotels. Airbnb hosts provided accommodation for a further 900,000 visitors. By 2016 that number had climbed to 1.25 million. Many Airbnb offerings are considered illegal, according to the City Council.
The tourism boom has brought with it buckets of money. According to Mastercard’s Global Destination Cities Index, Barcelona rakes in over $12 billion a year from tourism and is the third-ranked European city in terms of tourist expenditure, just behind the two global powerhouses of London and Paris. However, this money has come at a heavy price, as the documentary film Bye Bye Barcelona documents.

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Here’s Italy’s Latest Plan B Where Desperation Meets Insanity

April 13, 2017

Selling securities backed by defaulted loans to NIRP refugees.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
Nerves are beginning to fray in Italy’s banking sector, as pressure rises on the worst hit banks to remove the most noxious elements off their books — most likely at big discounts that will further impair their balance sheets. On Saturday Italy’s finance minister, Pier Carlo Padoan, begged the ECB for more time for the banks to clean up their act.
“We cannot demand that suddenly banks offload their NPLs, because this could be potentially destabilizing, especially if the problem involves several banks in the same banking system,” Padoan told a news conference.
By “several banks,” Padoan means perhaps the 114 banks, of the close to 500 banks in Italy, that have “Texas Ratios” of over 100%. The Texas Ratio, or TR, is calculated by dividing the total value of a bank’s non-performing loans by its tangible book value plus reserves — or as money manager Steve Eisman put it, “all the bad stuff divided by the money you have to pay for all the bad stuff.”
If the TR is over 100%, the bank doesn’t have enough money to “pay for all the bad stuff” and tends to fail. In Italy, 24 banks are estimated to have ratios of over 200%.
On Tuesday it was the Governor of Bank of Italy Ignazio Visco’s turn to plead for more time.

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Three More Reasons to Worry about the Euro’s Future

April 9, 2017

From the “Doom Loop” to the Black Hole.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
“Despite uncertainty over Brexit — formally triggered last week by prime minister Theresa May — central bankers from around the world see the UK as a safer prospect for their reserve investments than the Eurozone, a new poll reveals”: The Financial Times.
At first whiff, this may smell counter intuitive. After all, it’s the UK that’s supposed to be in the weaker negotiating position over Brexit terms. It also risks losing a sizable chunk of its core industry, finance. Yet according to a survey of reserve managers at 80 central banks, who together are responsible for investments worth almost €6 trillion, the stability of the monetary union is their greatest fear for 2017.
They have good reasons to worry. Here are three of them:
1. The Doom Loop is Back in All Its Glory.
In fact, it never went away; it was just squeezed into temporary irrelevance by the ECB’s mass purchase of Eurozone sovereign bonds. The biggest beneficiaries are Italy and Spain where banks’ balance sheets are overflowing with bonds of their individual governments — all considered “risk free” for regulatory reporting.
In 2012, Spanish banks held a staggering 32% of Spain’s national debt (excluding regional and local debt). At the end of 2016, that figure had shrunk to 22.7%, or €168 billion.

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War on Cash Puts ECB, EU on Collision Course with Germany

April 7, 2017

Bundesbank: It’s a war on personal freedom and choice.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
Relations between Germany, and the ECB have curdled in recent times over a key issue: the role of cash. Germans have a soft spot for physical lucre while the ECB and Europe’s executive branch, the European Commission, have openly expressed their desire to suppress, or even punish, its use.
For Germany’s central bank, the Bundesbank, the war on cash is a war on personal freedom and choice, in the name of saving a financial system and its absurd negative interest rates. Last year Bundesbank president Jens Weidmann warned that it would be “disastrous” if people started to believe cash would be abolished — an oblique reference to the risk of negative interest rates and the escalating war on cash triggering a run on cash.
In Germany, trust in Europe’s financial institutions is already at a historic low, with only one in three Germans saying they have confidence in the ECB. That was before ECB president Mario Draghi gave an infamous speech in May last year laying much of the blame for the Eurozone’s weak economy on Germans’ proclivity to save, rather than splash out on foreign imports or invest in the stock market.
Now, it’s the turn of the scientific advisory board of the Federal Ministry of Economics and Technology to have its say.

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Spain’s Most Italian Bank Still “Solvent,” Claims Finance Minister

April 4, 2017

It just doesn’t let up with this bank.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
The future continues to look bleak for Spain’s most Italian bank, Banco Popular, which ironically once bore the slogan “Our Past and Our Present Guarantee Our Future.” Things have gotten so bad that when the country’s Minister of Finance Luis de Guindos was asked by a reporter today about the bank’s state of health, he responded: “the bank is solvent.” Which is kind of like a doctor saying, “the patient is alive.” Not exactly reassuring.
Popular just had its worst day of 2017 after seeing its penny stock tumble over 10%, from €0.90 to €0.82. This is a bank that was once ranked among the world’s most profitable by ratings company IBCA and which not so long ago boasted a share price of over €15. That was before its management decided to bet the farm on risky real estate investments at the height of an insane property bubble and then took too long to clean up afterward.
Even now, nine years after the the bubble’s crash, roughly a quarter of Popular’s total loan portfolio is still concentrated in the real estate and construction sectors. In November last year. it had over €30 billion worth of bad loans and non-performing assets on its books, which it continues to struggle to offload without incurring fatal losses.

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Is the Global Taxman Coming?

April 1, 2017

But who are they really going after?
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
Credit Suisse is once again under international investigation for allegedly helping its clients evade the prying eyes of national tax authorities. This comes after the bank was fined $2.6 billion by the U.S. government in 2014 for helping Americans evade taxes.
Helping high net worth private clients and corporations evade taxes, and then getting caught is not unique to Credit Suisse. Fellow Swiss megabank UBS and UK giant HSBC were fined hundreds of millions of dollars for their troubles.
The banks are not just helping their clients evade taxes. In a report titled Opening the Vaults, UK-based charity Oxfam International revealed this week that in 2015, Europe’s 20 largest banks registered over a quarter of their profits in tax havens – well out of proportion to the level of real economic activity that occurs there. Once again, Luxembourg was a top destination for funds, while in Ireland the same banks recorded profits that were 76% higher than the global average in 2015. Only the Cayman Islands was found to have a higher profitability rate.
None of this should come as a surprise. If any organization knows how to bend the rules and use and abuse the tools and levers of global finance to minimize a company or individual’s tax “footprint,” it’s today’s generation of global banks.

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Here’s Why Italy’s Banking Crisis Has Gone Off the Radar

March 30, 2017

Just how many banks are insolvent? Turns out, a lot! But elections are coming up.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
For a country that is on the brink of a gargantuan public bailout of its toxic-loan riddled banking sector, or failing that, a full-blown financial crisis that could bring down the European financial system, things are eerily quiet in Italy these days. It’s almost as if the more serious the crisis gets, the less we hear about it — otherwise, investors and voters might get spooked. And elections are coming up.
But an article published in the financial section of Italian daily Il Sole lays out just how serious the situation has become. According to new research by Italian investment bank Mediobanca, 114 of the close to 500 banks in Italy have “Texas Ratios” of over 100%. The Texas Ratio, or TR, is calculated by dividing the total value of a bank’s non-performing loans by its tangible book value plus reserves — or as American money manager Steve Eisman put it, “all the bad stuff divided by the money you have to pay for all the bad stuff.”
If the TR is over 100%, the bank doesn’t have enough money “pay for all the bad stuff.” Hence, banks tend to fail when the ratio surpasses 100%. In Italy there are 114 of them. Of them, 24 have ratios of over 200%.

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Shock, Horror: ECB Not as “Independent” as it Claims – Report

March 29, 2017

Transparency International whacks at a central bank.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
The European Central Bank has found itself in the rare position of having to defend itself in the public arena following the release of a scathing report on its perceived lack of political independence. The report, published by anti-corruption watchdog Transparency International, argues that the institution has accrued new power and influence in the wake of the financial crisis but its code of conduct has not kept up with that newfound clout.
It even suggests that the ECB should withdraw from the Eurozone’s Troika of creditors, precisely at a time that calls are rising for the creation of a European Monetary Fund.
“The extraordinary measures taken by the ECB since 2008 have tested the ECB’s mandate (to ensure price stability) to breaking point,” Transparency International EU said. “The ECB’s accountability framework is not appropriate for the far-reaching political decisions taken by the Governing Council.”
The Berlin-based NGO has proposed a range of measures to improve the central bank’s transparency and accountability. They include better management of conflicts of interest, clearer rules on the cooling-off period before former officials accept private-sector jobs; and much higher levels of transparency on the ECB’s meetings with lobbyists.

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Italy at the Grim Edge of a Global Problem

March 25, 2017

This trend is not your friend.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
To be young, gifted, educated and Italian is no guarantee of financial security these days. As a new report by the Bruno Visentini Foundation shows, the average 20-year-old will have 18 years to wait before living independently — meaning, among other things, having a home, a steady income, and the ability to support a family. That’s almost twice as long as it took Italians who turned 20 in 2004.
A Worsening Trend
Eurostat statistics in October 2016 showed that less than a third of under-35s in Italy had left their parental home, a figure 20 percentage points higher than the European average. The trend is expected to worsen as the economy continues to struggle. Researchers said that for Italians who turn 20 in 2030, it will take an average of 28 years to be able to live independently. In other words, many of Italy’s children today won’t have “grown up” until they’re nearing their 50s.

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Eurozone Whistles Past its Biggest Threat

March 24, 2017

Italy’s Multi-Headed Hydra Predicament.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
For the last three years, the political establishment in Italy and beyond have had a field day attacking, ridiculing, and vilifying Beppe Grillo’s 5-star movement. Europe’s media have tarred him with the brush of populism. In 2013 The Economist labelled him a clown on its front cover. Yet his party still leads the polls. And that lead is growing.
A new Ipsos poll in Corriere della Sera newspaper has put Beppe Grillo’s 5-Star Movement on 32.3% – its highest ever reading. It placed 5.5 points ahead of the governing PD, on 26.8%, after the PD dropped more than three percentage points in a month, as former prime minister Matteo Renzi battles to reassert his authority following a walkout by a left-wing faction.
Internal political battles are nothing new in Italy. The country enjoys a hard-earned reputation for political instability and paralysis, having seen 63 governments come and go since 1945. The problem this time around is that internal weakness and strife in Italy’s traditional center-left and center-right parties could end up gifting the next election to a party that refuses to play by the book.

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One Sole Aim: “Steal Away” Global Finance from London

March 22, 2017

Just How Low Can European Governments Go?
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
City of London-based financial institutions are intensifying their search for plan-B locations as concerns continue to rise about Brexit’s potential threat to their unfettered access to EU markets and workers. With an estimated 35% of London’s wholesale market activities forecast (by Brussels-based think-tank Breugel) to migrate across the English Channel in the coming years, the race is on to displace London.
However, as the competition for Brexit spoils intensifies, relations between euro nations are showing signs of strain. Tax-haven par excellence Luxembourg, equipped with a multi-lingual specialized workforce, is likely to be hot property in a post-Brexit world. The country’s competitive tax rates have already caught the eye of AIG, private equity giant Blackstone, and Lloyd’s of London, the world’s largest specialty insurance market, all of whom have expressed an interest in relocating part of their London operations there.
Luxembourg’s success has drawn the wrath of fellow Eurozone members like Ireland, which recently complained to the European Commission about “dangerous competition” from rival centers competing to host financial firms.

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Deepening EU Banking Crisis Meets Euro-TARP and Taxpayers

March 17, 2017

If the ECB scales back stimulus, banks face even greater risk of collapse. But now there’s a new solution.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
Events are moving so fast in Europe these days, it’s almost impossible to keep up. While much of the attention is being hogged by political developments, including the election in the Netherlands, Reuters published a report warning that the European banking sector may face even higher bad loan risks if the ECB begins to scale back its monetary stimulus programs, something it has already begun, albeit extremely tentatively.
The total stock of non-performing loans (NPL) in the EU is estimated at over €1 trillion, or 5.4% of total loans, a ratio three times higher than in other major regions of the world.
On a country-by-country basis, things look even scarier. Currently 10 (out of 28) EU countries have an NPL ratio above 10% (orders of magnitude higher than what is generally considered safe). And among Eurozone countries, where the ECB’s monetary policies have direct impact, there are these NPL stalwarts:
Ireland: 15.8%
Italy: 16.6%
Portugal: 19.2%
Slovenia: 19.7%
Greece: 46.6%
Cyprus: 49%
That bears repeating: in Greece and Cyprus, two of the Eurozone’s most bailed out economies, virtually half of all the bank loans are toxic.

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ECB Trapped in its Own “Doom Loop” as Inflation Surges

March 16, 2017

Trying to keep a financial system and a currency union from collapsing upon each other.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
To the ECB’s barely contained glee, inflation is back, alive, kicking and biting, in the Eurozone. In February, for the first time in four years, the region-wide 12-month inflation rate reached 2%.
Mario Draghi is thrilled to bits. After five years of driving interest rates to ungodly low levels, offering billions of euros of virtually free loans to Europe’s biggest banks, and scooping up tens of billions of euros per month of government and private-sector bonds and stuffing them onto the ECB’s balance sheet, which now holds €3.7 trillion of financial assets, he has finally achieved his dream of stoking official inflation back above 2%.
Now that it’s achieved its inflation mandate, Draghi’s ECB is facing increasing calls to finally begin tempering its monetary stimulus program, with a pre-electoral Germany predictably leading the way.
“It would probably be right if the ECB starts daring to head for the exit this year,” Germany’s Finance Minister Wolfgang Schäuble told the Sueddeutsche Zeitung newspaper (emphasis added). That was in January, when inflation in Germany was still below the 2% mark. Now it’s at 2.2%, its highest rate since August 2012.
In Germany inflation matters a great deal, for two main reasons.

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Are Germans About to Be Made to Pay for Their Love of Cash?

March 12, 2017

The ECB would do so at its own peril.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
Germany loves physical money. According to a Bundesbank study, approximately 80% of payments in Germany are made in cash. Even among millennials, two-thirds say they prefer paying in cash to electronic means, a much higher level than in almost any other advanced economy with the exception of Japan.
This is a big problem for a European establishment that is desperate to consign physical money to the scrap heap. Some countries, including France and Spain, have already set maximum cash limits of €1,000. Greece has dropped its cap for cash transactions from €1,500 to €500.
In January the European Commission telegraphed its intention to implement a mandatory continent-wide limit by 2018, even if it violates the “non-fundamental” rights of over 500 million EU citizens to privacy, anonymity, and personal freedom. The Commission’s plans are likely to meet strong resistance from certain quarters, in particular Germans.
When the Merkel government merely suggested last year that it was considering banning cash payments above €5,000, it triggered a fierce public backlash. The country’s biggest tabloid, Bild, published a scathing open letter titled “Hands Off Our Cash,” while a broad spectrum of political parties condemned the proposed measures as an attack on data protection and privacy.

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Are We About to See a “European Monetary Fund?”

March 9, 2017

There’s an air of furtive desperation about the proceedings.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
As debates rage in Europe over whether or not to take a two-speed or multi-speed approach to post-Brexit integration, Germany rekindled interest in the creation of a European Monetary Fund.
Chancellor Angela Merkel and Finance Minister Wolfgang Schäuble both want to upgrade the grossly unaccountable Luxembourg-based European Stability Mechanism (ESM) into an IMF-style rescue fund that will “be granted the authority to monitor the finances of all eurozone countries,” reports Der Tagesspiegel.
EU Monetary Commissioner (and former French finance minister) Pierre Moscovici is against it, for a simple reason: monitoring budgetary policy in the euro area is, for the moment, the responsibility of the EU Commission.
This is not the first time the idea of a European Monetary Fund has been explored. Ever since the Eurozone’s sovereign debt crisis threatened to rip Europe’s fragile union apart, rumors have periodically surfaced about the possible creation of a fund capable of taking over the IMF’s role as a major source of emergency funding.

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Definition of Madness: Spain Needs Bigger Banks, Apparently

March 6, 2017

Not having learned a thing from merged banks that then collapsed.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
Spain’s banking sector is about to be hit by a new wave of mergers and acquisitions, according to US rating agency Standard & Poor’s. The new phase of industry consolidation will begin with the stealth merger of largely state-owned Bankia with wholly state-owned Banco Mare Nostrum (BMN).
The two banks, each the product of two madcap mergers of Spain’s most insolvent savings banks, will be merged into one entity that is expected to become Spain’s fourth biggest bank by assets. The merger is more or less a done deal, for the simple reason that besides Bankia, BMN has no other suitors and its IPO last year was a complete dud. No private sector player seems willing to even touch its assets with a barge pole, let alone buy them at a “discount”.
“Zero Synergies”
Two renowned Spanish economists, Daniel Lacalle and Javier Santacruz Cano, have already expressed serious reservations about the proposed operation. Most importantly, there are no synergies to be had, they argue, since Bankia already enjoys a strong presence in virtually all the regions where BMN is present.
“This type of operation between banks normally creates no value,” says Lacalle.

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Is Mexico Facing “Liquidity Problems?”

March 5, 2017

When it comes to debt, everything is relative, especially if you don’t have a reserve-currency-denominated printing press.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
At 49% of GDP, Mexico’s public debt may seem pretty low by today’s inflated standards. It’s a mere fraction of the debt loads amassed by bigger, richer economies such as Japan (229% of GDP), Italy (133%) and the United States (104%). But when it comes to debt, everything is relative, especially if you don’t enjoy the benefits that come from having a reserve-currency-denominated printing press.
In Mexico’s case it’s not so much the size of the debt that matters; it’s the rate of its growth. In the year 2000 the country had a perfectly manageable debt load of roughly 20% of GDP. Today, it is two and a half times that size.
Last year alone the Mexican state issued a grand total of $20.31 billion in new debt, the largest amount since 1995, the year immediately after the Tequila Crisis when the country needed an international bailout to rescue its entire banking system from collapse. The money it received also helped repay a number of giant Wall Street investment banks that had gone all in on Mexican assets.
There are plenty of reasons behind Mexico’s current debt issues. Top of the list is the dramatic reversal of fortunes of the country’s shrinking oil giant Petróleos Mexicanos, A.K.A.

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Euro Breakup Rattles Investors Once Again

March 1, 2017

Only this time, the ECB is already doing “whatever it takes.”
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
With hotly contested general elections coming up in France, Germany, and Holland – where yet another upset could be on the cards – 2017 was always going to be a nail-biter for the Eurozone. That was before former Italian PM Matteo Renzi raised the prospects of fresh elections in the home of electoral chaos, Italy.
And investors’ nerves are fraying. The spread between the 10-year yields of French government debt and German government debt has already widened from 0.28% in October to 0.81% today in anticipation of French elections, to be held in April. According to Frankfurt-based Sentix research group, the probability that France could fracture the euro is also rising, reaching 8.4% in its latest survey of investor sentiment as concerns about Marine Le Pen’s threat to the French and European establishment continue to rise. It’s the highest level registered to date.
The poll, which was launched in June 2012, at the height of Europe’s sovereign debt crisis, surveys more than 5,000 retail and institutional investors from 20 countries about their expectations of Europe’s financial markets. The result of the latest survey is clear as day: the euro crisis is once again back front and center in investors’ minds.

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Is that Desperation Hanging Over Europe’s Banking System?

February 26, 2017

Turns out, Italy’s banking crisis is not fixed.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
Many of Europe’s and America’s biggest banks have begun begging, cap in hand, for a new, innovative way of raising vast sums of dirt-cheap debt on Europe’s financial markets.
The Association for Financial Markets in Europe (AFMA), an organization that prides itself on serving as “the voice of Europe’s wholesale financial markets,” just sent a strongly worded letter to the European Central Bank, urging for the prompt creation of EU-wide regulation allowing banks to sell a newfangled class of bail-in-able debt called “senior non-preferred bonds.”
“A swift agreement is essential to enable banks to continue increasing their loss-absorbing cushions and improve their resolution capacity,” says the letter (translated from Spanish).
In its own words, the AFMA represents “leading global and European banks and other significant capital market players.” Its board includes representatives of the biggest banks, from US megabanks like Citi, Goldman, JP Morgan Chase, Morgan Stanley, Bank of America Merrill Lynch and BNY Mellon to European behemoths like Deutsche Bank, HSBC, Lloyds TSB, Barclays, Unicredit, ING, BNP Paribas, Credit Agrcole, Crédit Agircole, and Credit Suisse.

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