Europe’s Big Problem: No Shortage of Bad Debt

Europe’s Big Problem: No Shortage of Bad Debt


Europe's Big Problem: No Shortage of Bad Debt

This must be in the area of conjecture, but there are some indicators:

Greece will is going to be saved – there still remains a lot of tribal dancing – but they will remain within the Euro as far as one can tell.

Investing in the Next Generation of Emerging and Frontier Markets with Maurits Pot

Yarra Square Investing Greenhaven Road CapitalValueWalk's Raul Panganiban with Maurits Pot, Founder and CEO of Dawn Global. Before this he was Partner at Kingsway Capital, a frontier market specialist with over 2 billion AUM. In the interview, we discuss his approach to investing and why investors should look into frontier and emerging markets. Q2 2021 hedge fund letters, conferences and Read More


  • Great Britain withdrew from the rescue plan. Probably because – and this is speculation as no one (at least at this point) will come out with the “true story” – they had issued Greek sovereign bonds under British law. The natural reaction for Germany and France would be to demand, that the UK government should cover that loss. How they redirected it further to the British banks would be Cammeron’s problem.
  • The heated and definitely not always rational debate over Tobin-tax.
  •  A general severe watch list from Moody’s – which also hit Germany. According to Financial Times Deutschland: Not only are some of the larger German banks in for a downgrade; but also all German subsidiaries of major foreign banks.
  •  We can see that Danske Bank has further massive reservations on their Irish adventure.
  • Nordea escapes Moody’s watch list with only a raised eyebrow.

We can thus begin to form a picture – both overall and in detail:
There seems to be a major shakeup in the European Union – where Greece is only a side issue – concerning banks.
One thing is an attempt to get some sort of control over the stock exchanges that seem to have an existence of their own. That is not surprising.
With an interest rate around 0% and inflation barely tricking over by different tax increases the practice of discounting future payment to the present day of papers of long maturity: Well present value of an investment is the ratio of the annual yields divided with interest rate. As any school child knows: You can’t divide through zero. This makes calculation of present value more than difficult.
In that environment any change in prospects are liable to be exaggerated greatly.
There is little doubt that the British banking sector has been a sore point with Germany and France. Pots calling the kettle black. What remains seem to be that neither Germany nor France will stand by idly to watch the banks take the rest of the economy over the cliff.
There seems to an “Operation Disentanglement” in progress – not so much a rescue operation. Each country will seemingly have to answer for their banks actions. A very difficult process as banks – by nature – is crisscrossing transactions and obligations.

The next problem is what the outcome will be? There is no shortage of bad debt – be it commercial credit, real estate or even sovereign bonds: The notion that a nation cannot default is shown to be wishful thinking, as every investor in Greek sovereign bonds should have seen the utter unreality in the Greek promises.
This will leave all banks with severely reduced equity to the extent that losses are taken – and losses will be taken, otherwise the smoke rising from the streets of Athens will be more telling than the reassuring annual reports. This leaves the banking sector severely undercapitalized. As if we didn’t know; but with disentanglement figures come up.
How are the banks to raise more capital? And from whom? As long as the whole financial sector is an utter mess it is difficult to take coordinated political action – so that is probably why the Germans ask: “What’s the damage?”

No posts to display