The Eurozone Is Leaking Cash As The Confidence In The System Is Evaporating

The confidence in the European banking system is decreasing on an almost daily basis. Six years after the global financial crisis, most of the European banks are still struggling to meet the minimum requirements of the regulatory bodies that are supervising the ‘health’ of the financial system. After the GFC, the European system had to deal with a Greek, Italian, Portuguese and Spanish crisis, and several banks needed to be bailed out through either a straight ‘nationalization’ or a ‘government-incentivized’ merger with a stronger counter party (which was used in both Spain and Portugal).

One would think that in all these years the banks would have been able to clean up the mess on their balance sheets. The American counterparties have just recently started to pay (more substantial) dividends again after their shareholders had to survive on water and bread for afew more years. Unfortunately that’s not what the European banks did, and most of them continued to pay very attractive dividends to their shareholders, even when their portfolios had to absorb losses related to the PIGS-exposure.

Needless to say the European financial system isn’t anywhere as ‘strong’ as the American system, and as the banks are starting another round of releasing financial results that are missing expectations, the fears are increasing again. Throw in the fact the interest rates on savings accounts are barely positive and you’ll understand why we think an explosive cocktail is developing in Euro-land.

After seeing the total value of the deposits on the banks in the Euro-system peak at 3 Trillion Euro in 2012, everything started to slide downhill until a bottom at the end of 2014, followed by a sharp reversal towards a sharply increasing amount of deposits on the banks’ balance sheets. You might think this is the result of an increased level of confidence in the banks, but oh no. A large part of this effect was caused by more countries joining the Eurozone (Latvia and Lithuania), and even though these two Baltic countries were quite small (the total GDP is just $80B on a combined basis), the perception of the increasing amount of deposits should be considered in light of what really happened.