One of the features of the early stages of the credit crunch was the various bank bailouts around the world. We then got another wave as the Euro area crisis hit home. However we were then told we would be advancing into a new era except they have never really gone away. For example in my country the UK there was promises that a profit would be made and that there would be bank reform to stop this happening again. Instead we find that the reform is always being watered down and is also always just around the corner. As to a profit well Royal Bank of Scotland cost around £5 per share to the UK taxpayer compared to the current share price of £2.27 which is quite an achievement when you consider that the FTSE 100 equity index is within striking distance of 7000.
We have seen another example of how the “precious” is always protected this morning already from Ukraine. From the National Bank of Ukraine.
At its meeting held on 18 December 2016, the Cabinet of Ministers of Ukraine approved a decision on state participation in the recapitalization of PrivatBank PJSC. In accordance with this decision, 100% of the bank’s shares will be held by the state represented by the Ministry of Finance of Ukraine. This move will ensure the security of funds and savings deposits placed with this Bank, help avert systemic risks to the banking system and will pave the way for preserving financial stability in the country.
This decision will enable the protection of over 20 million Ukrainian citizens that use services provided by this Bank and hold their funds there. I primarily refer to 3.2 million pensioners and 1.6 million socially vulnerable households. They all will have unrestricted access to their accounts.
Okay we learn something of the scale of PrivatBanks operations from that but later in the statement it is rammed home.
Given the systemic importance of the country’s largest bank, it was decided to transfer PrivatBank PJSC under control of the state.
So it was TBTF or Too Big To Fail something which was supposed to have been eliminated.as Reuters points out.
Under Western-backed banking reforms, Ukraine is meant to shut lenders that cannot meet capitalization targets, but PrivatBank is considered too big to fail.
Some more details on the back story are given here.
The state was forced to assume responsibility for the future fate of PrivatBank PJSC and its customers to prevent it from sinking into a deeper crisis. Unfortunately, the problems faced by the Bank, which have been accumulated over many years, have recently deteriorated . These problems were mainly caused by imprudent lending policy pursued by the Bank, which led to capital losses.
All rather familiar isn’t it?
Tell me lies tell me sweet little lies
That line from Fleetwood Mac comes to mind as I note that these sort of rescues are associated with if we are polite continual misrepresentation and dissembling. Only last Wednesday PrivatBank released this.
According to the bank’s press-service, in Ukraine today there is no legal concept and legal way “nationalization” of a stable running of the bank, which demonstrates the blatant “feykovye” (fakeness) relevant information distributed among the bank’s customers via SMS, instant messenger, phone calls business call centers and private media.
Of course an official denial would have put followers of my writings on immediate red alert and it took less than a week! Sadly history tells us that we can expect more of the same going forwards. Specifically we will be told the truth but in “bite-sized chunks” every now and then as that has been the pattern of not only the credit crunch era but bank bailouts from time immemorial. The situation of this bank previously being under the control of oligarchs makes me fear that this may be worse than usual. This from Reuters poses all sorts of questions.
97 percent of its corporate loans had gone to companies linked to the bank’s shareholders.
What could go wrong?
Before we move on let me present some humour from the PrivatBank statement.
PrivatBank according to the results in 2016 ranked among the world’s best banks in The Banker’s Bank of the Year Awards in 2016 and recognized in Ukraine Bank of the Year.
Sometimes you really could not make it up.
Ukraine has been in the midst of an economic crisis mostly caused by the struggle with Russia which amongst other things has annexed the Crimea. Having had lunch yesterday with my mum in a pub named after the battle of Alma the only good think I can say about it is that the UK is not involved in this particular Crimean conflict. But the economy of Ukraine has been hit hard as the World Bank reminded us in September.
The economy grew by 0.8 percent in the first half of 2016, compared to a contraction of 16 percent in the first half of 2015…….
Inflation peaked at 43.3 percent at the end of 2015 due to the considerable depreciation of the Hryvnia in 2014-2015.
As a result, real wages were down by 13 percent y/y in December 2015.
Even worse these numbers were on the back of previous economic difficulties as I pointed out on August 19th last year.
The GDP per Capita in Ukraine is equivalent to 16 percent of the world’s average. GDP per capita in Ukraine averaged 1866.79 USD from 1987 until 2014, reaching an all time high of 2826.10 USD in 1989
As you can see unlike many countries which broke away from Soviet Russia Ukraine struggled economically. There was another problem which was always going to cause trouble.
the US Dollar is a type of ersatz currency in Ukraine
Accordingly the strong US Dollar which has in fact pretty much coincided with the crisis in Ukraine must have caused all sorts of economic and banking problems.
But we move on with the background that the US $5.5 billion for this bailout is a lot of money for the Ukraine as for example it is more than a third of the IMF program.
The European Investment Bank has chosen an interesting day to be plugging this theme!
#Ukraine rail tunnel is the first of €3bln wave of #EU finance and reflects boost in EU ties ……..How many projects have we financed in #Ukraine? Which sectors have already benefited from an EIB loan? Find out here http://bit.ly/2hQeYGU
Italy and Monte Paschi
We arrive here from two sources of news. Firstly if you look at the main Investor Relations page for PrivatBank you are told it has subsidiaries in Latvia,Portugal, Cyprus and Italy. Of course it has I hear you thinking! Actually the Italian subsidiary appears to be going through a liquidation process. This must be somewhat of a distraction for the Bank of Italy as it mulls this and limbers up in case it is needed. From Bloomberg.
Banca Monte dei Paschi di Siena SpA will begin taking orders for shares Monday as it aims to complete raising 5 billion euros ($5.2 billion) by the end of the year to avoid a rescue by the Italian government.
I have two main thoughts for you. The timing is significant as it will allow the Italian authorities to bail it in or out over the holidays. Although of course the holiday feeling went very wrong for the Bank of Portugal when it tried some financial engineering with Novo Banco. Also we have the issue of what has happened if this goes through as in better pre Italian referendum days only about 1 billion Euros was offered.
There is something of an irony here as I think it would be sensible for my country to fully nationalise RBS. This is not because I am a fan of such things but simply that it would be a more honest reflection on where we stand. However some 9 years after all this began it is a sorry tale that we see banks still being nationalised and others seemingly on the verge of it. Meanwhile the reform rhetoric bumbles on and employs quite a few bureaucrats and establishment barnacles on its way.
Meanwhile I note that as part of its reform program the IMF is on well trod ground for it as it criticises the pension scheme in Ukraine. This made me wonder if anyone has researched the IMF pension entitlements?
Here is a link to my August 19th 2015 analysis of Ukraine