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Monday, 16 May 2016 09:11

First, It Was "Fu$k the Fundamentals", Now "It's Fu$k Contracts, Too" - Negative Rates Are Doing So Well in the EU Featured

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Exactly one year and one month ago, I penned "Fu$k the Fundamentals!": Negative Rates In EU Will Absolutely Wreck the Very System the ECB Sought to Save" a piece that warned of the consequences of the EU negative rate policy and how it would effect Spain and Denmark among other EU nations, in particular. To wit:

I have been warning Veritaseum users about the unbridled risks the ECB is taking with its banking system by slamming its yield curve - driving short and medium term rates negative. Despite the ECB's proclamations, its banking system is still quite fragile, and it is putting pressure on the barely recovered fractures, causing additional stress fissures.

Before we go on, if you haven't read "It's All Out War, Pt 3: Is the Danish Krone Peg to Euro More Fragile Than Glass Beads? The Danish National Bank Infers So! and "How the Danish Central Bank is Destroying the Danish Citizens' Wealth Form Both Sides While Stressing It's Bank!", please do. My warnings in 2010 on the PAN-EUROPEAN SOVEREIGN DEBT CRISIS will do a lot to fill in the background as well.

Yesterday, the Wall Street Journal ran a story on the Spanish bank, Bankinter S.A., which was actually paying customers interest on their mortgages, in a rather backwards twist that is the result of the perverse incentives (basically, the opposite of typical tenets that underlying fundamental analysis) that come about when you turn the world of borrowing, literally, upside down. Here's an excerpt (and remember I warned about Spain 5 years ago in "The Spanish Inquisition is About to Begin..."):

At least one Spanish bank, Bankinter SA, the country’s seventh-largest lender by market value, has been paying some customers interest on mortgages by deducting that amount from the principal the borrower owes.

The problem is just one of many challenges caused by interest rates falling below zero, known as a negative interest rate. All over Europe, banks are being compelled to rebuild computer programs, update legal documents and redo spreadsheets to account for negative rates.

Well, fastforward a year and a month, and we have the WSJ reporting that Reggie seemed to have a pretty damn good point: A Battle Brews Over Negative Rates on Mortgages

Consumer groups in Spain and Portugal say lenders should pay up when mortgage rates drop below zero. Lenders are fighting back, with billions of dollars at stake. As interest rates in Europe fall near or below zero, lawmakers and consumer advocates in Spain and Portugal are attacking an ancient tenet of finance by insisting that lenders can owe money to borrowers. Banks in the two countries, struggling to recover from recessions that shook their financial systems, are fighting back, with billions of dollars in mortgage interest payments potentially at stake. Portugal’s central-bank governor, in a reversal, has rushed to defend the banks against a proposed law that would require them to pay borrowers when interest rates turn negative. Banks in both countries are rewriting new mortgage contracts to warn homeowners that they could never profit from subzero rates.

... Europe already has a precedent: Banks in Denmark are paying thousands of borrowers interest on their home loans, nearly four years after the central bank introduced negative interest rates. Danish banks have increased some fees to compensate but never mounted serious legal objections.

In Spain and Portugal, bank executives said they would pay borrowers when pigs fly. “In no case could a client receive interest payments” because that would go against the nature of a loan, Banco Bilbao Vizcaya Argentaria SA Chief Executive Officer Carlos Torres Vila said at a news conference in April after the bank released its earnings. Portuguese bank executives are similarly categorical in private. In the few cases in which interest rates went negative, Portuguese banks lifted the rate to zero.

Oh, bank execs want to go by the fundamentals now, but only as they apply to their customers. When it's time for the bank to get paid to borrow money, it's "Fu$k the Fundamentals", to wit: ECB pays banks to take its money

The project would mean that banks qualify for billions of euros of initially free loans from the ECB and would get paid up to 0.4 percent of what they borrow on condition that they lend more to companies or consumers.

... "The amount that banks can borrow is linked to the amount of loans they have," Draghi said. "So a bank that is very active in granting loans to the real economy can borrow more than a bank that concentrates on other activities."

... Spanish bank executives told Reuters they welcomed the move, whereas German banks were caustic in their criticism of the ECB's steps to loosen money supply, saying it would hurt savers.

This reminds me of the character on the old Popeye cartoons that used to divvy up the food by saying, "One for you, two for me, three for you, four for me..."

Consumer groups said banks are contractually obligated to stick to the terms of a variable-rate loan, which by definition rises and falls with changes in interest rates. If rates fall far enough below zero, these groups said, the banks should make interest payments to borrowers, just as they would charge clients more if interest rates rose.

But the consumer groups don't seem to realize that only Veritaseum smart contracts are ironclad. EU bank contracts have an implicit malleability clause wherein the contradts are only valid if things go in favor of the banks. The terms of payment are null and void if during normal business, banks don't get their way.

The Left Bloc, an ally of Portugal’s Socialist government, introduced legislation in January that would oblige lenders in such cases to pay up. As Parliament debates the bill, Lisbon-based consumer rights group Deco has instructed customers to check their loan contracts and complain if they don’t benefit from negative rates.

“It was the banks that chose to fix loan rates to Euribor, not customers,” Paulino Ascenção, a Left Bloc lawmaker, said. “It’s a matter of principle and trust to follow the rules of the contracts.”

Portugal’s central-bank governor, Carlos Costa, stepped into the fray last month, reversing an earlier position and siding with the banks.

Last year, he had issued a recommendation that lenders apply negative Euribor in calculating loan interest, which would be following the rules of the contracts. Back then, Mr. Costa told lawmakers last month, he couldn’t have imagined that Euribor would keep falling.

Now that it has, he argued, the banking system is at risk.

Do you remember the name of the article I penned last year, this time? "Fu$k the Fundamentals!": Negative Rates In EU Will Absolutely Wreck the Very System the ECB Sought to Save". I told you so!

 Portuguese banks would take a collective €700 million ($796 million) hit to their interest margins annually if the country’s six-month Euribor rate, which now stands at minus 0.144%, were to fall to minus 1%, the central bank estimates. Even if banks could limit interest rates to zero, they would lose €500 million from the difference between what they pay to depositors and what they make from lending, the central bank said.

Veritaseum has new EU bank research to release, likely today. Remember how easy this was to see coming. Remember how well, our last bank research piece performed? We killed it, crystal ball-style! Reference Veritaseum Blockchain-based Bank Research Hits Another Homerun - Banco Popular Shown to be Bear Stearns Redux!

During the months of March and April of 2016 we released a series of proprietary research reports indicating signficant weakneses that we found in the European banking system and released it for sale through the blockchain (reference The First Bank Likely to Fall in the Great European Banking Crisis). This was performed by the same macro forensic and fundamental analysis team that first warned about the pan-European sovereign debt crisis in 2009 and 2010 (reference Pan-European sovereign debt crisis) as well as Bear Stearns and Lehman Brothers (Is this the Breaking of the Bear? January 2008). 

Today, Reuters released news vindicating our position in spades, leading any institution that took a position via our blockchain-based Veritaseum trading platform or today's legacy system with 14% cash gains or 50% to 100+% leveraged gains in the short time period in question, to wit: Tumbling Banco Popolare leads Italian bank shares lower

Banco Popular Research teaser1

 The quality of loans has been deteriorating with percentage of non-performing and bad loans showing signs of increase due to adverse macro-economic environment. Of the total loan portfolio, the bank’s performing loans decreased to 82.1% in 2015 from 83.7% in 2013. Furthermore, BP stopped reporting restructured loans for at least two years. That looks quite suspicious given that loan credit quality has been tumbling. The numbers offered add up, but they shouldn't unless the restructured loans have been somehow reclassified as performing loans (quite possibly). If so, that's quite misleading and should be duly noted.

A significant percentage of the loan portfolio comprises mortgage loans and loans on current accounts. Distressed residential real estate sector and subdued business environment are likely to take toll on % of performing loans in these categories.  As can be seen below, Italy as a nation, has high NPLs and it is not materially improving, YoY.

 Banco Popular Research teaser2

Contact me via the info directly above this line if you're interested in purchasing the newest bank research.

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