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Europe's banks are heading for catastrophe

Oct 20, 2016

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We interrupt your normal edition of Capital & Conflict for a chance to take a broadside at conventional wisdom. The opportunity presents itself courtesy of the mouthpiece of "received wisdom" in the British financial media. It's a target rich environment these days. But today was too good to pass up.

I promise I'll get back to the pound and America's rigged election tomorrow. But apparently those of us crusading against the moral evil of low interest rates are part of the problem. Not part of the solution.

People like Tim Price are not helping much, by this analysis. What's more, governments should cease criticising central banks for their low interest rate policy, wrote Martin Wolf in yesterday's Financial Times. Wolf said that "To the extent that low rates promote recovery, almost everybody benefits."

It's an astonishing claim - as anyone with a shrivelling savings account or pension will be painfully aware. Wolf says that the alternative, deflation, would be much worse for you.

But in reality, since 2008, the forces of deflation have taken hold.

Despite low interest rates and money printing, growth has been practically non-existent for years. The only meaningful inflation has been in financial markets.

This should not be a surprise. Economies cannot fundamentally be controlled by central bank intervention. At most, they can only be distorted.

Because whatever a central bank does, if there's no economic growth to speak of, money printing and low interest rates are redundant - and only succeed in increasing the debt burden. It creates a false reality... a world that looks prosperous, but is completely hollow.

We're now in a situation where the problems that led to the 2008 crisis - namely excessive debt - is the same solution central banks are offering now to restore inflation. It's the same mistake, but without the excuse that we didn't know better. It hasn't worked.

And it has put the banks under extreme pressure. Given the integral role they play in driving lending - and therefore growth - in the economy, this is now a serious concern.

Low interest rates have rendered their traditional modus operandi increasingly redundant.

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As Tim Price explains in his new presentation:

  • Since the financial crisis, banks have been obligated to invest in government bonds, as they are deemed to be 'low risk'. And herein lies the problem.

    A bank buying a government bond in the Eurozone in 2007 would have received a 4.5% return. In 2016, that investment is likely to LOSE them money. For instance, on 13 July 2016, the German government issued a 10-year bond with a yield of -0.05%, an historic low.

    This is a disaster for the banks. They are losing money owning these bonds.

    And when it comes to depositors, banks have been unwilling to pass these losses on to their customers - who they fear will remove their deposits.

    After all, why would you see your savings diminish if you could just keep them in cash under the bed? Negative interest rates are threatening the very existence of the banking sector.

    As I said, the thinking behind negative rates is to get banks to lend their money. But if the economy isn't growing - which it isn't - then they will obviously be reluctant to do that...

Bank shares tanked across the continent over the summer. Italian bank Monte dei Paschi di Siena recently admitted that its customers had started withdrawing their savings. (The bank saw its share price drop 60% in the first three weeks of 2016.)

In Germany, depositors have had enough of seeing their savings stagnate - and decided their money is safer at home. Sales of safes are up 25% over the last year.

If that makes you feel uncomfortable, it should. When depositors start withdrawing their money from a bank, it becomes even harder for the bank to make money.

It's clear to me that Europe's banks are heading for catastrophe. The difference between now and 2008 is that many may not survive the next crisis - at least not in their current form.

What you need to understand today - as Tim explains in his presentation - is that your money is in the firing line, too, even if you're a British investor or saver with your money in a British bank.

If you have significant savings in the bank... or have money invested in bank shares... and you are (or will be) relying on a private pension... you need to read Tim's presentation now.

Until tomorrow,

Please note: This article was first published in Capital & Conflict on October 19, 2016.

Dan Denning studied literature and history, moving to Agora Financial in Baltimore fresh out of college. Working alongside Bill Bonner and Addison Wiggin, he became managing editor of Strategic Investments. He then moved via Paris and London to Australia, publishing a book - The Bull Hunter - along the way, and opened Agora's successful office Down Under. He returned to London in 2015 and became the publisher of Fleet Street Publications' financial newsletters.

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