October 9, 2018

While we have been proudly boasting of U.S. growth rates exceeding 4%, European growth rates have been receding. Europe’s second-quarter 2018 cumulative 12-month rate is 2.2%. (The following chart measures quarter-over-quarter increases, so the preceding four quarters added together equal 2.2%.)

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The Eurozone’s Economic Sentiment Index has been sinking all year long from a high of 115.2 last December to 111.3 in September. This index closely tracks Europe’s GDP growth trend (downward).

In addition, Europe’s Manufacturing PMI is down to 53.2 in September, the lowest reading in two years. New export orders are the lowest in 63 months and business confidence is the lowest in 35 months.

European markets have reflected this malaise. In August, while U.S. stocks were soaring, Europe’s stocks as measured by the EMU MSCI index fell 2.7% (in euros), tying Latin America for the worst-performing regional index that month. Italy’s MSCI index fell 9% in August and Greece’s MSCI dropped 9.5%.

While the Eurozone unemployment rate has been coming down all year, it is still stubbornly over 8%, while the U.S. rate is less than half that, at 3.7%. Germany is doing slightly better than the U.S., with 3.4% jobless, but the European rate is bloated by 19.1% jobless rates in Greece and 15.2% in Spain.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

It has now been a decade since the debacle of 2008. While the United States has kept growing – albeit too slowly under Obama – Europe suffered a second recession in 2011 and then a series of financial crises in Greece and the other PIGS (Portugal, Italy, Greece, and Spain). Now, a new crisis is looming with the Italian banks. It seems like Europe has never fully recovered from the 2008 financial crisis. Why not?

Why Europe Can’t Seem to Recover from 2008

This week marks the 10th anniversary of the most traumatic week of the 2008-9 financial crisis, October 6-10, 2008, when European banks were hit far harder, and for far longer, than American banks were hit. That message comes through loud and clear in a massive (686-page) new book by Columbia University History Professor Adam Tooze in “Crashed: How a Decade of Financial Crises Changed the World.”

Here’s what happened. On Monday, October 6, 2008, equity markets lost $2 trillion in value and world leaders decided to call an impromptu gathering of the G7 and G20 finance ministers at the U.S. Treasury on October 10-11. But before they could meet, the share price of RBS – touted as the “largest bank in the world” the previous spring – collapsed on Tuesday and trading had to be halted. British Chancellor of the Exchequer, Alistair Darling, launched a bank bailout package the next day after some all-night wrangling.

On Thursday, October 9, the Dow fell 733 points, the second-worst daily collapse in history. Ironically, that was the one-year anniversary of the Dow’s peak in 2007, and its previous bear-market low in 2002.

On the same day, Iceland imploded, after that very small nation of 334,000 people, with bank deposits of 14.437 trillion krónur in the second quarter, 2008 (equal to more than 11 times its national GDP) realized that there were very few assets backing the massive balance sheets in their three leading national banks.

The following day, Friday, October 10, stock markets crashed in Asia and Europe. Russian markets remained closed, but London, Paris, and Frankfurt dropped 10% within an hour of opening and again after Wall Street opened. On Wall Street, the Dow fell 697 points in the first five minutes to its lowest level since March 17, 2003. It was the worst single day since October 19, 1987. Traders rallied at the close, but the Dow was still down over 18% for the week and -40% from its record high on October 9, 2007.

The weekend meeting of the G7 and G20 leaders didn’t help much. On Monday, October 13, markets were closed in Japan and the bond market was closed in the U.S. In Europe, Britain nationalized Lloyds and RBS. European leaders, meeting in Paris, announced recapitalization plans for many European banks.

On Monday, October 13, the stunned CEOs of America’s nine largest banks were called into Washington DC and told to accept a pro-rated amount of Troubled Asset Relief Program (TARP) money or else lose their FDIC guarantees. It was a “take it or leave it” offer. At the Freedom Fest in Las Vegas, I’ve heard from two of those CEOs who were present that day (Wells Fargo’s Richard Kovacevich and BB&T’s John Allison) who didn’t need or want the money but were forced to take it or else be put out of business.

Here’s the “offer the bankers couldn’t refuse,” put to them in blunt Godfather terms:

“When Wells objected to bailing out New York banks, Paulson coolly pointed out that Wells Fargo was sitting opposite its regulator. If they did not take the capital on offer that afternoon, they would be notified the following morning that they were undercapitalized. They would find themselves locked out of capital markets. When they came back to Paulson for help, the terms would be less attractive than those available that afternoon. The CEOs were then dismissed to call their boards. Within a matter of hours, they had all agreed.”

– From “Crashed,” by Adam Tooze, page 197

Call it a Mafia squeeze play or not, the U.S. government had a lighter touch on U.S. banks than the EU had in their nationalizations of eurozone banks. In recent columns here, Bryan Perry has written about the problems facing Italian banks, and Ivan Martchev has written about the dismal fate of Deutsche Bank. European banks got deeper into bad debts than American banks did, and they are still carrying bad debts:

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

In the early 2000s, European banks bought an outrageous percentage of the U.S. mortgage market: HSBC boasted of servicing 450,000 U.S. mortgages, to the tune of $70 billion. Deutsche Bank had a cozy relationship with mortgage-giant Countrywide and issued a glowing press release about owning the bottom rung of the U.S. mortgage capital market, which provided “significant competitive advantages.”

“In 2007, the three largest banks in the world by assets were all European – RBS, Deutsche Bank and BNP.* Combined, their balance sheets came to 17 percent of global GDP. The balance sheet of each of them came close to matching the GDP of its home country – Britain, Germany and France – the three largest economies in the EU. In tiny Ireland the situation was far more extreme. The liabilities of its banks added up to 700 percent of GDP.” (*RBS is Royal Bank of Scotland, and BNP is Bank Nationale de Paris)

– from “Crashed,” by Adam Tooze, page 110

All this accumulation of bad debts came crashing down 10 years ago this week. Europe kept suffering due to their overload of bad debts, and then the Federal Reserve had to come to the rescue of Europe’s banks.

“QE is generally thought of as the quintessential ‘American’ policy, the symbol of the Fed’s adventurousness. It would earn Bernanke regular scolding by conservative policy makers in Europe. But after what we have already said, it will come as no surprise that 52 percent of the mortgage-backed securities sold to the Fed under QE were sold by foreign banks, with Europeans far in the lead. Deutsche Bank and Credit Suisse were the two largest sellers.”

– from “Crashed,” by Adam Tooze, page 210

The Fed issued $10 trillion in liquidity swap lines of credit from December 2007 to August 2010. Over 95% went to central banks in Europe: $8 trillion to the ECB and nearly $1 trillion to the Bank of England.

No wonder Europe swiftly sank into a second recession in 2011, and the U.S. didn’t (to be continued) …

About The Author

Gary Alexander

Gary Alexander has been Senior Writer at Navellier since 2009.  He edits Navellier’s weekly Marketmail and writes a weekly Growth Mail column, in which he uses market history to support the case for growth stocks.  For the previous 20 years before joining Navellier, he was Senior Executive Editor at InvestorPlace Media (formerly Phillips Publishing), where he worked with several leading investment analysts, including Louis Navellier (since 1997), helping launch Louis Navellier’s Blue Chip Growth and Global Growth newsletters.

Prior to that, Gary edited Wealth Magazine and Gold Newsletter and wrote various investment research reports for Jefferson Financial in New Orleans in the 1980s.  He began his financial newsletter career with KCI Communications in 1980, where he served as consulting editor for Personal Finance newsletter while serving as general manager of KCI’s Alexandria House book division.  Before that, he covered the economics beat for news magazines. *All content of “Growth Mail” represents the opinion of Gary Alexander*


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