Earlier this month, the results of the third EU-wide bank stress test were published. In the past week, the public learned that the Italian Andrea Enria is to become the new head of the ECB Banking Supervision from 2019. The latter is not exactly confident.
Italy: Desolate debt situation
Last Wednesday, the Governing Council of the ECB nominated the current Chief of the European Banking Authority (EBA) to replace its former boss Danièle Nouy. The election also included Sharon Donnery, Vice President of the Irish Central Bank. Now, this person has yet to be approved by the European Parliament and the EU leaders. This leaves the future chief overseer from the country, which acts anything but “model boy” in terms of bank stability and fiscal policy.
Just a reminder:
In the coming year, the new Italian government wants to raise new debt from the originally agreed 0.8 percent to 2.4 percent of the gross national product in order to finance the benefits promised in the election to the population. Because of Europe’s particularly high debt mountain of more than 130 percent of economic output, the new debt policy of the Italians is strongly criticized by the rest of Europe.
The Italian banks are also considered ailing, which can be seen from the relatively high proportion of bad loans. This amounts to 10.8 percent. Even more miserable are the banks in Greece (45.3 percent), Cyprus (38.9 percent) and Portugal (13.6 percent).
By comparison, the balance sheets of the banks in Great Britain (1.5 percent), Germany (1.7 percent) and the Netherlands (2.2 percent) look a lot healthier. Since Italy’s economy represents the third strongest economy within the Eurozone, everyone should realize that a financial collapse of Italy for the various European bailout funds should be a few numbers too big.
If the worst-case scenario does indeed materialize, many Europeans will most likely remember a currency alternative forgot in recent years: gold.
WGC reports global ETF gold inflows
Initial shifts in gold seem to have already begun. This is indicated by data released by the World Gold Council last week on global inflows of gold ETFs.
In the wake of stock market turmoil in October, the WGC reported 16.6 tonnes of inflows for the month, with North America (up 12.4 tonnes) and Europe (plus 10.5 tonnes) recording the strongest gold appetite, Particularly meaningful, however, is a look at the development since the turn of the year.
In fact, the sentiment here is very mixed, with North America accounting for 58.1 tonnes of gold outflows in the first 10 months, while 48.2 tonnes were registered in Europe during the same period.
The main reasons for this are two problem areas: Italy’s debt and Britain’s Brexit.
The outlook for the current week
Inflation is on the rise – in some countries more, in others rather less. Last week, for example, Turkey reported an inflation rate of over 25% for October (see table), the highest level in 15 years.
Worldwide inflation rates
A flood of further inflation figures is expected in the coming days. For example, for Germany an increase from 2.3 to 2.5 percent, for the United Kingdom an increase from 2.4 to 2.6 percent, for the US, an increase from 2.3 to 2.4 percent, for the eurozone an increase from 2.1 to 2.2 percent and for France an unchanged value of 2.2 percent.
This level of devaluation is a big problem, especially for German investors. They only achieve returns of 0.46 percent even on Bunds with a ten-year maturity. Systematic asset destruction is thus preprogrammed, especially as short-term maturities of up to six years currently even hit negative returns.
Anyone looking for asset protection and inflation protection will therefore always encounter one asset class: gold.