Over the past several months, U. S. and New York State banking regulators have brought charges against a number of European banks, mostly for irregularities with regard to money transfers–through their American affiliates–with countries that are “blacklisted” by the U.S. Banco Espírito Santo S.A, Portugal’s largest bank, went through that process in 2012. And now, the on-going economic problems have focused, once again, on the bank and its parent, Espirito Santo International (ESI) .
Today, trading in the shares of Espirito Santo were halted, when it had failed to repay maturing commercial paper (which are short-term notes), and the stock dropped in value by more than 19 percent. This follows perceived weakness in the shares of bank stocks in Greece and Italy and, certainly, there has to be some carry-over to other European Bank stocks, as well. Whenever there is a problem–real or otherwise--with banks’ customers head for the exits.
As noted in prior Blog Posts, most banks Worldwide are still undercapitalized–but, especially the large ones, which tend to take on more risk. Unfortunately, the very large ones–the so-called Too Big to Fails–are perceived as having an implicit guarantee by their respective governments. That has always been the case, especially in Europe. But, given the continued weakness in the overall European economy, the strength of many of the countries to back their respective Too Bigs can be suspect, as well.
When the Worldwide Financial Melt-Down appeared to start recovering in early 2009, most American banks sold shares to increase their Equity Capital. I still agree with the Federal Reserve that they should raise more; however, U. S. banks are still in much stronger condition than their European counterparts. Banks continue to fight raising the additional Capital since it becomes an additional drag on the bank’s profitability. Remember that the banks’ earnings generally tend to impact executives’ compensation.
The Government of Portugal has not repaid all of its Debt to the European Central Bank, and the E.C.B. has also made loans directly to Portuguese banks, including Espirito Santo. At the same time, as the economic recovery within the Eurozone continues to drag-on quite slowly, there are concerns, once again, of a resurgence of the European Debt Crisis. Oh, what a little additional Capital can do!
Once again, the on-going problems within the Eurozone seem to speak volumes about the ten European countries that did not sign-onto the common currency–the EURO. Those countries still have control of their own Monetary Policy, along with their respective national currencies. The E.C.B. can only do much to coordinate the needs of the eighteen countries in the Zone. But, coordination certainly is not as powerful as the actual control that countries like the Netherlands, Sweden and U.K have. Europe!