With the agreement on the new international banking rules behind us there’s a feeling among some investors that the sector and global banking is on the mend and out of danger.
Far from it, in the past week we have seen one small bank go bust in Japan and another bank in Germany rescued again, while Ireland’s flood of losses from its banks continues to grow, as does Austria’s from a bank bailout earlier this year.
The underlying uncertainty was highlighted last Friday in a briefing note issued by the International Monetary Fund.
The Fund said downside risks to global recovery have intensified due to recent turbulence in sovereign debt markets and continued weakness in the financial sector.
The IMF, said global growth had been somewhat stronger than expected during the first half of 2010, "but is projected to slow temporarily during the second half of 2010 and the first half of 2011."
The Fund said European policy actions to calm the euro-zone sovereign debt crisis have eased market concerns.
"Renewed turbulence in sovereign debt markets could precipitate an adverse feedback loop between sovereigns and the financial sector, with spillovers to the real economy through higher bank funding costs, tighter lending conditions, and retrenchment in financial capital flows," it said.
The IMF also cited the American property market as a source of downside risk, with increased foreclosures further pressuring bank balance sheets and possibly causing a reduction in credit available to the economy.
The European bank stress tests started boosted confidence when they gave us a basically clean sheet for the big banks of the region.
The summer rebound in European economic activity and the rise in the value of the euro added to the improved confidence, as did, strangely enough, the slowing in US economic growth. That pushed attention onto Europe and the rebound.
Then the new bank capital rules moved towards eventual settlement and the European Union lifted estimates for economic growth for the second and third quarters across the continent, but warned that growth would slow towards the end of 2010 and into 2011, just as it is elsewhere
No matter was the reaction, but figures out midweek seem to suggest that the rebound is dying much faster than thought.
A sharp fall in European industrial output in July, much to everyone’s surprise, and an equally sharp drop in German investor confidence (which is an unusual but good barometer for sentiment in Germany) surprised analysts.
Now there’s growing concern the slowdown might be happening a bit faster than the expected easing towards the end of 2010.
But all through the northern summer, this outbreak of sunny optimism across European and much of global banking, has been punctured every now and then by reminders of the underlying problem.
Ireland’s bank bailout is costing much more than expected, pushing up the country’s borrowing spreads over German bounds and pointing to greater strains than previously assumed.
The total bill for the first bailout of the banks, the setting up of a bad bank to handle dud loans, the coming round of new capital injections, could take the eventual bill past 70 billion euros, which is a third of the country’s annual GDP.
That’s only an estimate because the bill seems to grow with each sale of dud loans to the bad bank and each report from the likes of Anglo Irish, the Bank of Ireland and Allied Irish.
But it will be much more than previously estimated, meaning the government will have to borrow more to finance it and risk adding to its debt and deficit woes.
In Germany, attention may have been on Deutsche Bank’s $US12 billion capital raising and move to 100% of the Postbank, but not too much attention was paid here to the new 40 billion euro bailout of HRE, Germany’s biggest banking casualty of the GFC.
It has already soaked up 102 billion euros of government aid, now that has risen to more than 140 billion euros (or getting close to $A190 billion, which is a simply staggering figure).
And why?
The German Government’s bail out fund, Soffin says the extra funds are needed to safeguard restructuring efforts.
“The executive committee at Soffin came to this decision to avoid any liquidation bottlenecks during the planned transaction,” the fund said.
Liquidity problems could occur due to “unfavorable” market developments, Soffin said.
In other words the financial sector is still too fraught for a revamp of HRE to happen without extra support because losses from such changes might be much larger than forecast.
HRE is one of Germany’s biggest commercial real estate lenders that lost heavily when a Dublin-based subsidiary collapsed in October 2008.
That helped make HRE Germany’s biggest bank failure since World War Two, which is something you don’t hear mentioned very often as the Government and business leaders prattle on about profligate Greeks and spendthrift Americans.
Hypo RE is also highly exposed to potential losses from the purchases of bonds issued by troubled eurozone countries like Greece, Ireland, Italy, Portugal and Spain. Oh, dear.
In Japan last Friday a small unlisted bank failed with liabilities of more than $US2 billion.
Incubator Bank of Japan declared bankruptcy last Friday after running into problems with regulators.
In May it
