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Euro area banking problems – again

Saturday, October 1, 2016 23:06
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The German state claims to have strong finances. It is true it has no running deficit for the time being. It is true the German economy runs a huge balance of payments surplus, which causes all sorts of stresses and strains in the wider European markets. It is true Germany has huge surpluses held in the form of claims on the European Central Bank. So far so good for Germany, though not so good for the rest of Europe. Germany’s surplus is the mirror image problem of the southern countries deficits which Germany herself is so unhappy about.

All is not strength elsewhere in Germany’s financial arrangements. The state has relatively high levels of government debt like much of the rest of Europe. Germany’s commercial banks cause worries from time to time. Whilst German politicians are busy lecturing the Greeks, Spaniards and Italians to run a more prudent policy, at home Germany has to work away at improving the balance sheet strength and profitability of her commercial banks.

This week unnamed hedge fund raiders and others have had another go at the Deutschebank share price. They appear to have driven it down on unsubstantiated rumours of withdrawals of money from that bank, and on interpretations of the bank’s capital and cash positions that are unflattering. They ignore the relatively strong balance sheet ratios the bank points out, and discount the ECB’s continuing confidence in the bank. The US authorities large fine on the bank will make an impact on its capital if it all has to be paid. Negative interest rates and low rates for lending longer make it more difficult for the bank to make good profits from traditional activities.

Commerzbank has also had to announce changes to try to improve its profits and future balance sheet ratios. It has decided to cut 9600 jobs or around one fifth of its workforce. It is reducing securities trading activities, merging company banking and cancelling dividend payments to conserve cash. All these are usual corporate responses to tough times.

All of this is one consequence of the continuing negative interest rate policy, allied to the creation of a ramped market in bonds meaning rates are low across all time horizons. The authorities are making savers lives a misery, and impeding the generation of profits by banks out of lending to rebuild their financial strength. Banks may well continue to be very unpopular, but the truth is you cannot have a sound and sustainable economic recovery without properly functioning banks and sensible levels of new debt to support investment and larger item purchases.You can only have stronger banks if they make a bit more profit which they retain, and distribute better dividends to allow them to sell more shares to raise more capital. The policies the ECB is using to stimulate the Euro area economy are in practice delaying bank repair, which in turn impedes a proper recovery. Low rates also probably make savers more cautious about spending, which hits demand.


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