Yes, Virginia, There Is Robust “Growth” In Europe: Bank Bad Debt Is Up By 8% To $1.4 Trillion

According to a new article in the Financial Times a majority of Europe’s banks have suffered a jump in bad loans. Specifically, impaired loan volume increased by 8.1% in 2013, and now exceeds $1.4 trillion. Moreover, one third of the largest 100 European banks surveyed by Fitch experienced a 20% or greater rise in dud loans.

But that sobering reality has not deterred investors from plowing into new bank debt. Funding costs for European banks fell by 38% last year and issuance by peripheral banks was up 72%.

At the same time, it is not as if European banks are slathered in bad debt reserves against the inevitable day of reckoning. In fact, loss provisions stand at just $780 billion or 55% of exposure.

Stated differently, there is no honest free market in the debt and funding issues of Europe’s bloated and essentially insolvent banking system. The great banks of Europe are wards of the state, pure and simple. Traders and gamblers buy their paper at ridiculously sub-economic yields because what is being priced is the well-warranted belief that Brussels and the ECB will backstop their debt if push comes to shove.

Yet this only compounds the chain of deformation and malinvesment. Due to the implicit state underwriting of its capital and funding costs—-much like the case of Freddie and Fannie before the summer of 2008—-the European banking system is able to lend to households and businesses at subsidized rates far below what would be demanded by fully at risk lenders.

No surprisingly, total credit outstanding in most European countries exceeds 350% of GDP, and is upwards of 400-500% in struggling peripheral economies like Italy and Spain. The simple fact is, however, that economies where households, businesses and government sectors are freighted down with this kind of “peak debt” cannot grow at anything close to traditional rates.

So we now get the central bank generated absurdity that pretty much pertains worldwide. Europe is struggling to post even 1% real growth, yet the fast money gamblers have piled into European bank and sovereign debt issues over the last 20 months with almost violent intensity—buying with almost reckless abandon into the promises of Brussels and the ECB that everything is fixed when, in fact, Europe’s giant can of bad debt is just being kicked down the road.

Gamblers should actually be loosing their shirts in European bank and government debt, not making vast windfall fortunes. The fact that leveraged bets on highly leveraged European banks and fiscally busted governments have produced triple digit gains since mid-2012 is a measure of the extreme moral hazard that is being build into the global financial system.

Stated differently, when the bubble burst in 2008, the central banks had no clue was to why it happened.  Now they have abetted the growth of far larger and even more tenuous bubbles all over the world–like this one in European bank paper. Yet they remain clueless as to the consequence of their policies of driving money market rates to zero—-thereby fueling the very carry trades which result in vast mis-pricing of securities and valuation bubbles which inevitably burst..

The pending insensible move by the ECB to push deposit rates into negative territory is all the proof that is needed. It can be well and truly said that the world’s financial system is being run by mad men (and women).

For the complete FT article click here: