The ECB’s recent report on the stability of the financial sector in the Eurozone has shown that growth in the Eurozone will continue to move at the same anemic levels, given that the challenges that Eurozone member countries will face due to Brexit and reduced global demand due to the possible escalation of trade wars in the world will keep consumers and businesses in a consumer and investment reserve.(ECB Report, https://www.ecb.europa.eu/pub/financial-stability/fsr/html/ecb.fsr201905~266e 856634.en.html#toc3
by Thanos S. Chonthrogiannis-https://www.liberalglobe.com
Debt and European companies
The degree of exposure to which European companies are exposed to debt sizes is gradually increasing due to the low overall demand in the Eurozone that this low overall demand will continue in the near future, while servicing the loans of European companies will become increasingly difficult in this weak, demand-side macroeconomic climate.
The volume of corporate bonds characterized by low investment grade is gradually increasing (it has doubled compared to a year ago). Companies that have a high debt service ratio and in combination with the continuation of reduced aggregate demand and reduced profitability, in the event of an internal or external shock on the demand side (e.g. a deterioration of commercial warfare that will lead to a global recession) will find themselves very badly exposed and with great chances of bankruptcy.
In the event of a worsening of the economic climate due to the challenges posed by the Euro-area bond markets will continue to be exposed to whatever this means for the bond yields and credit spreads (CDS).
Photo by Author: European Commission, licensed public domain,
Source: https://ec.europe.eu/
Banks and the inability to develop in the Eurozone
At the same time, the debt of Eurozone member-countries continues to move at high levels (particularly member countries such as Italy, Greece, etc.), making it necessary to implement specific fiscal measures in the economies of these member countries to continue to keep these member countries in their budgetary commitments regarding the budget deficit of their general government.
The necessary implementation of the specific fiscal measures will increase indirect and direct taxation, exacerbating in these economies any existing levels of consumption due to reduced disposable income for citizens and thus existing growth rates in these economies.
In the event of a future reduction in the annual growth rate, the cost of financing the weak Eurozone member-countries will start to grow, bringing the questions about the sustainability of these public debt back to fore.
The growth failure of the Eurozone economy as a whole is compounded by the fact that the Eurozone banking sector is showing a constant weakness both in terms of its profitability and in the non-possibility of granting attractive loans due to the inability of European companies to undertake new investments in the Eurozone due to low demand and increased investment risk in the real economy.
The weakness of European banks is also reflected in the low valuation of their shares.
In any case, their reduced profitability has to do with fines imposed by judicial decisions of the past, but their weak profitability is due also to the fact that they have not “healed” until today the wounds caused to them the Financial crisis of 2008.
The high rate of non- performing loans in bank balance sheets is the main factor that does not allow banks to offer loans to finance the economy of Eurozone member-countries.
Any strategies implemented so far by the ECB, e.g. Quantitative Easing (QE), for the financing of artificial growth in the Eurozone, coupled with the policy of low-virtually zero level of borrowing rate, did not attribute the expected.
This is because, on the one, banks used this low-cost money to close “openings” in their balance sheets due to an increased rate of non-performing loans, consistently not lending the real economy for financing of development, thus healing their wounds, and on the other hand, the policy of low cost money was used for the financing of old loans or for investments in the financial markets and little to finance of the real economy.
In order to “liquidate” the balance sheets of banks from non-performing loans, the following solutions should be qualified which should be applied as a continuation of the previous one. More specifically:
1. In each member-country of the Eurozone, systemic banks should pre-decide the creation of a single “bad bank” in which it will include all non-performing loans of the banks of the member-country concerned.
The financing of this ‘bad bank’ should be made solely by the banks and not by the Government of the state of the member-country.
Subsequently, and if these non-performing loans are valued for the current year, they should be sold so that profits from sales can be used to reduce the cost of these to the respective bank balance sheets.
2. Thereafter, each bank fully free from the burden of non-performing loans should proceed to reduce operating costs and personnel and where necessary due to e.g. application of artificial intelligence techniques in banking.
3. The Commission and generally the Government of each Eurozone member-country will then have to encourage, wherever possible and always based on the real needs of banks, their banks to proceed to cross-border bank mergers and only.
Mergers between banks should not be allowed in the respective domestic sectors of the member countries because will be created domestic oligopolies or monopolies. In this case, the management of these banks due to their local-domestic giants will not want to be involved in cross-border banking mergers.
In this way, the banking sector is magnified throughout the Eurozone and, slowly and steadily, a banking market forming a banking market where banks can offer their products at the same time throughout the Eurozone.
After the end of this phase, the landscape will have been “cleaned” in the entire banking market and in a subsequent period of about ten years the second phase of bank mergers will take place only between banks operating in European level by fully defining the definitive picture of the banking market in the Eurozone (five to six large pan-European banks will remain at this stage).
Thanos S. Chonthrogiannis
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