The confidence in the European banking system is decreasing on an almost daily basis. Six years after the global financial crisis, most of the European banks are still struggling to meet the minimum requirements of the regulatory bodies that are supervising the ‘health’ of the financial system. After the GFC, the European system had to deal with a Greek, Italian, Portuguese and Spanish crisis, and several banks needed to be bailed out through either a straight ‘nationalization’ or a ‘government-incentivized’ merger with a stronger counterparty (which was used in both Spain and Portugal).
One would think that in all these years the banks would have been able to clean up the mess on their balance sheets. The American counterparties have just recently started to pay (more substantial) dividends again after their shareholders had to survive on water and bread for a few more years. Unfortunately that’s not what the European banks did, and most of them continued to pay very attractive dividends to their shareholders, even when their portfolios had to absorb losses related to the PIGS-exposure.
Needless to say the European financial system isn’t anywhere as ‘strong’ as the American system, and as the banks are starting another round of releasing financial results that are missing expectations, the fears are increasing again. Throw in the fact the interest rates on savings accounts are barely positive and you’ll understand why we think an explosive cocktail is developing in Euro-land.
After seeing the total value of the deposits on the banks in the Euro-system peak at 3 Trillion Euro in 2012, everything started to slide downhill until a bottom at the end of 2014, followed by a sharp reversal towards a sharply increasing amount of deposits on the banks’ balance sheets. You might think this is the result of an increased level of confidence in the banks, but oh no. A large part of this effect was caused by more countries joining the Eurozone (Latvia and Lithuania), and even though these two Baltic countries were quite small (the total GDP is just $80B on a combined basis), the perception of the increasing amount of deposits should be considered in light of what really happened.
Source: ECB
And what’s going on right now? According to the recently disclosed data from the European Central Bank, the total amount of deposits decreased for the first time in 15 months, in March. The ECB hasn’t disclosed any more recent data but we dare to bet the total value of the deposits on the accounts will continue to decrease in April and May as the health of the financial system has once again been undermined. Combine the increased uncertainty with the ultra-low interest rates, and there’s no reason why anyone would like to keep the cash on the bank, risking a bail-in.
Source: ECB
Indeed, that’s exactly what happens with the cash that is being injected in the financial system. In the previous image you can see a visualization of the M3 money supply in the Eurozone, and these data points are also provided by the ECB. Sure, a part of the additional money creation is also caused by the new countries joining the Eurozone, but as we explained before, the economies of the new participants are relatively small and haven’t moved the needle as much as the printing presses of the ECB did.
So what happens with the all the money that is being pumped in the Eurosystem if the M3 Money supply continues to increase whilst the total value of the deposits at the banks is decreasing? That’s right. Europeans have started to hoard cash, and we don’t think the next image needs any more explanation.
Source: ECB
Indeed. Approximately 30% of the total value of the cash + deposits consists of hard cash, and that’s exactly the reason why the stories of a cash-less society have been surfacing again. In just one year, the members of the Eurozone have increased their cash positions with approximately 65B EUR. Or to make it even more interesting, in excess of 11% of the total GDP of the Eurozone is now circulating in cash. This doesn’t sound impressive, but if you realize that back in 2002 just 4% of the GDP of the Eurozone was held in cash, the evolution is pretty clear.
Since 2002, the size of the Eurozone has increased by 74% whilst the total amount of cash in circulation has increased by a stunning 267%.
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