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European banking union

Reality or pipe dream?
May 3, 2018

Five years after the Great Financial Crisis that started in 2007, cracks and weaknesses in the eurozone financial system almost brought down the single currency. Investors and the overseeing authorities eventually realised that there was a vicious circle between commercial banks, sovereign debt and levels of government borrowing. ECB president Mario Draghi famously said, "the ECB is ready to do whatever it takes to preserve the euro" on 26 July 2012.

Another five years along the so-called road to recovery, and the question is: are we there yet?  Many have claimed that 2017 was the year the EU economy had turned the corner – although not Britain, of course, because of its Brexit decision. Steps have been taken to ensure proper economic and monetary union in the eurozone countries, including the Single Supervisory Mechanism and Single Resolution Fund. But a European Deposit Insurance Scheme remains elusive.

French president Emmanuel Macron is a devotee of more profound EU integration, sending out a rallying call at the European Parliament in Strasbourg recently. All well and good, but the fundamental problem remains: Germany is reluctant to sign up to anything of the sort if it means underwriting the finances of the rest of the bloc. So today we look at the charts of four systemically important EU banks.

Britain’s Barclays plc saw a five-wave rally start in earnest in 1992 at the 60p level, culminating in a massive spike high at over 700p in 2007, only to collapse to its starting point in early 2009. Recovery since then started well, but by late that same year began forming a series of successively lower highs. A right-angled chart pattern is forming and the risk is for another serious downside test as this is typically a continuation formation – ie, a continuation of the downtrend of the last decade.

 

Our next chart is Madrid-listed Banco Santander SA. Chaired by Ana Botin, she took over the reins in 2014 when her 79-year-old father (who built the bank into the largest by capitalisation in the eurozone) died suddenly. In a way it’s a hybrid, as its operations and profits are fairly evenly split between Spain, Brazil and the UK. A very different chart with the share price moving very broadly sideways between four and 12 euros for the last 20 years. Watch, if and when we get close to four, for signs of basing activity.

 

Our third chart is Italy’s UniCredit SpA, currently the nation’s biggest and an exception to the 400 or so small banking groups and independents that plague the landscape. Although they’ve been going through the motions, a convoluted legal system and the ethos of protecting the debtor means that bad loans are estimated to be a staggering €350bn (one third of the eurozone total). Sluggish economic growth, low inflation and a sizeable black economy mean that non-performing loans might need another decade to get down to EU levels, says Morgan Stanley. However, because size matters, perhaps the share price can hold between €10 and €35 for quite a bit longer. Below €10 the next stop is zero.

 

Finally, Germany’s finest: Deutsche Bank AG, where the chart resembles that of Barclays; the trouble is, at €11 it’s trading at about one-tenth of its peak. The share price is also below that of the mid-1990s when Germany’s cult of the equity started. Bargain basement beckons.