Dark clouds in the horizon

The eurozone banks are borrowing heavily from the European Central Bank. Current borrowing amounts to €1,31 trillion. They take the money at negative interest rates, which means that they are paid to borrow. The negative rates are now around minus 1 per cent. By doing so, the ECB is telling us that the funding needs are enormous and that the crisis resulting from the pandemic is very deep.

The picture shows me three more things.

One, that we have too many private banks in the eurozone. Some countries, with small economies, have an incredible number of banking players. Tiny banks are particularly vulnerable to shocks. They represent an additional financial risk at a time of many hazards.

Two, most of the borrowing has been applied by the banks in the purchase of government bonds. That means the ECB is using the commercial houses – and paying them a fee – to finance exceptional and current government expenditures. Public debt is growing fast and in a non-productive way. Its growth goes hand in hand with the tremendous levels of debt of the enterprises and of the poorer segments of the population. Overall debt, in some countries of the zone, is reaching unsustainable levels.

Then, my third point. Conservatives and extreme right parties and movements in richer eurozone States are getting ready to challenge the policy options of the ECB, particularly their easy money funding programmes. These challenges will combine political activism with legal proceedings. As an example, the ultra-nationalist and extremist German party Alternative for Germany has announced today they will move a legal action against the ECB’s emergency programme. It would be a mistake to underestimate this decision. That goes along the recent ruling of the country’s Constitutional Court on a comparable matter. And it must be seen in conjunction with the position that The Netherlands, Finland, and a few others have taken, asking for conditionalities to be added to the Von der Leyen rescue plan.

As I see it, all this contains the seeds for further divisions in Europe. This time, the division might mean severe rupture. It is the future of the Union that is at stake.

Renzi´s fall and our worries

Italy has known 63 governments since 1945. That´s a lot of instability during a long period of 70 years. And most likely, the current government, led by Matteo Renzi, will fall after this coming Sunday´s referendum. It´s certainly no good news. Particularly at a time when the Italian banking system and the economy require the support of a strong and stable Cabinet.

In Brussels and in the financial centres of Europe most people believe that there will be no negative impact if Renzi falls and becomes just a caretaker Prime Minister. They have basically in mind the European politics and the markets.

But I think they are a bit short-sighted.

First, there will a very serious impact on the internal politics of Italy. That will give an additional chance to the 5-Star Movement and others, including the racist Lega Nord, to gain additional votes and mess up the domestic politics. Second, the banking system is in a far worst situation than we are prepared to accept. Cabinet needs to have full power to be able to adopt the measures that are required to address the banking crisis. Thirdly, the EU would certainly benefit from a stronger leader in Rome. Renzi has not been able to play an active role in European affairs. If he loses, but stays on, as interim leader, his intervention will be even lighter. If he goes, the new leader will be too busy trying to ground himself in the national politics to have time for Brussels.

For these reasons, one should be worried. 

Portugal could have been brought down by a single man

Ricardo Salgado, the top man at the Portuguese bank Banco Espírito Santo (BES) had been called by his countrymen the “owner of everything”. He was indeed a very influential fellow. Now, it has been concluded that his bank was in shambles and that the gentleman, who had friends in almost every corner of the political, economic and academic elite chessboards, was about to bring the Portuguese economy down, not just his bank and business empire. His business interests were wide and covered several sectors. The misjudgments, the malpractices and the cover-ups have therefore a very wide impact. The true measure of this collapse is yet to be fully grasped. For the time being, only the bank side of the story has been safeguarded. But an initial lesson that can be learned from this saga is that when a banker is also a major business actor, in a relatively small economy, things can go very wrong.