20 November 2015

Global Economic Slowdown to Impact Banks

More data has surfaced recently that suggests the slowdown in the global economy could accelerate next year. According to an article in ZeroHedge, the Baltic Dry Index has collapsed, and has hit its lowest cost level for this time of year in history. (Source: ZeroHedge 2015 November 6th)

The article reports that the index is now within a small drop of an all time historic low. The Baltic Dry Index measures rates for transporting raw materials such as Steel, Energy and Food. The cost of shipping these goods usually provides a good indicator of the health of the overall global economy.

What is concerning about the numbers is that from mid-summer to late fall demand usually picks up because of inventory buildup for the holiday season. However, this is not happening this year.

This is yet another sign that world trade is slowing down. China is likely at the forefront of the dismal numbers. But the data is also showing that deflation and low growth are going to be the trend going into next year.

Worlds Largest Shipping Company Confirms Slowdown

Shipping companies are also confirming that the slowdown is real. A.P. Moller-Maersk, is the worlds biggest shipping company. Recently, Maersk’s container line reported a 61% drop in profits for the third quarter. 

The company is considered a bellwether for global trade and moves about 15% of all consumer goods that are transported by sea. Because of slower growth, the Maersk Line said it will cut as many as 4,000 jobs. (Source: Bloomberg 2015 November 8th and 9th)

In the Bloomberg article, the CEO of the company was quoted as saying “We believe that global growth is slowing down, trade is currently significantly weaker than it normally would be under the growth forecasts we see.” 

IMF: Global Growth Slowest Since Great Recession

In an article in the Telegraph, the IMF said that global growth would be the slowest since the great recession. A report by the Fund warned that the world faced a “triad” of challenges that meant policy mistakes could wipe 3pc off of global growth. (Source: telegraph.co.uk 2015 Oct 15th.

The big concern from the IMF is that emerging market companies have over-borrowed by $3 trillion in the last decade. Between 2004 and 2014 private sector debt has quadrupled. 

The combination of a weakening global economy with the debt that has accumulated on the balance sheets of corporations could set off a wave a defaults that could become a big problem for the credit markets. 

In the Telegraph article these concerns prompted a financial counsellor at the IMF to say "Policy missteps and adverse shocks could result in prolonged global market turmoil that would ultimately stall the economic recovery”.

Clearly the risks that the global economy face as next year approaches are significant. 

Bank Recovery and Resolution Directive (BRRD). 

Weakening global growth and credit market disruptions are not going to be very friendly to the banking sector either. This is why we wanted to segue way into some of the recent developments with banks and the cashless movement.

According to an article in GoldBroker.com, The European Commission recently announced  it was going to sue before the European Court of Justice six European countries that have still not integrated into their national rights the Bank Recovery and Resolution Directive (BRRD). (Source:GoldBroker.com 2015 October 29th)

From what we understand about the BRRD, when a European Bank that is part of the directive becomes insolvent, the banks first turn to shareholders and secondly to bond holders to pick up the tab. If this is not sufficient, it appears the banks will be allowed to use customer accounts if the bank become insolvent.

If this in fact is the case that would mean that even accounts that fall below the 100,000 euro guarantee could be fair game if a bank runs into problems. All European bank deposit holders should be aware of this development. 

This is especially concerning given how challenging it is to evaluate the true health of a bank. It is another reason to hold Gold in physical form and become aware of one’s possible exposure to banks in your region.

US Banks Vulnerable

It not just European banks that are in the news. A recent article by Sovereign Man highlights issues in US banks. The article reports that a group of financial regulators in the US, which included the Federal Reserve and the Federal Deposit Insurance Corporation issued some concerning statements about the US banking system. One of the highlighted quotes was:

“continuing gaps between industry practices and the expectations for safe and sound banking.”

In addition, in a report they publish annually called the Shared National Credit (SNC) Review, they identified a huge jump in risky loans due to overexposure to weakening oil and gas industries. (Source: sovereignman.com 2015 November 9th)

With banks continuing to make risky bets, it again brings into question how truly safe the western banking system is. Should these bets go bad it could undermine the banks ability to meet depositor needs.

Credit problems among corporations are likely going to be an issue as the global economy continues to slow down. This means that debt defaults could be a problem for banks, especially if the economic slowdown triggers a crisis or becomes a deeper recession.

Bank of Ireland Bans Small Cash Withdrawals at Branches

Lastly, later this month the Bank of Ireland will banned cash withdrawals of less than 700 euro at branches. This from ZeroHedge:

Under new rules, designed to streamline in-branch services, Bank of Ireland said withdrawals of less than 700 euro will no longer be facilitated with the assistance of tellers. (Source: ZeroHedge 2015 November 5th)

Customers will have to start to use mobil devices and ATM’s for small to midsize withdrawals. This looks like Bank of Ireland is paving the way to condition its customers to rely more on online and mobile banking.

Making it more difficult for customers to access physical cash is another warning sign for customers. What’s interesting is that the article reports that there was very little protest from Bank of Ireland customers over the new policy

Summary

A slowing global economy is bad news for banks. Higher default rates because of too much debt will likely become a big story starting as soon as next year. Undercapitalized western banks may pose a risk to depositors. This is why holding physical Gold outside the banking system is a effective strategy to consider.

Author: celticgold.eu

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