Europe’s banks turn to bullfight loans

Index Apr12.pngThe blog’s IeC Boom/Gloom sentiment indicator (blue column) continues to be neutral on the outlook. As the chart shows, this is quite unlike its performance in early 2009. Then it rose rapidly from February – accurately forecasting the major recovery that was about to start.

The problem, of course, is that the austerity reading (red line) remains too strong for comfort. Central bank lending has masked the issue, as banks have always been able to borrow more money from them. But lending only helps with cash flow, it doesn’t help with solvency problems.

The major problems today are in Europe. The European Central Bank averted near-catastrophe in December with its €1tn ($1.4tn) LTRO, Long-Term Refinancing Operation. This was meant to provide the banks with time to rebuild their balance sheets.

Instead, just as one would expect, they have chosen to play even more games in the hope of boosting short-term profits. Thus in Spain, probably next in line after Portugal for another bailout, they have been busy doing deals with bullfighting companies. As the Wall Street Journal reports:

• Fans can’t afford to go to bullfights, with the economy in recession
• This means loans to the bullfight companies are at risk of default
• So now, the banks are lending season-ticket money to bullfight fans

In the short-term, this means the banks avoid a costly default. But instead, they will probably face bigger losses next year. With Spain suffering rising unemployment, repaying a bullfight loan is unlikely to be high on the priority list for many fans in 2013.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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