FinancialEdge - Disbanding The Euro - A Worst-Case Scenario

Although the title of this column mentions the worst-case scenarios for the collapse of the Euro, that is not quite what it is about. Instead, it is more about the probable negative outcomes should the Euro go away. If I was to talk about true "worst case scenarios", I'd have to talk about the risk of virtual economic collapse in Southern Europe, competitive devaluations throughout Europe, the risk of less-democratic governments in some areas of Europe, and, ultimately, the outbreak of war as political demagogues pander to financially desperate populations and rile them up with notions that other people/countries are responsible for their problems and must be punished. 

Only time will tell if we are past the worst of the debt crisis in Europe, or simply enjoying a calm amidst the storm. In either case, the crisis in Greece and the fears of its spread into Spain, Italy and Portugal have led many financial analysts and commentators to seriously consider what had once been mostly the domain of crackpots - the notion that the euro could collapse and vanish altogether.

This is no small matter. Of the 10 largest economies in the world, four use the euro as their currency. Roughly 330 million Europeans use the euro every day, while nearly 200 million people use currencies that are pegged to the euro (many of them in Africa). It is also the second most-used currency as a reserve currency, with roughly one-quarter of the world's reserves held in euros. 

For the full column, please continue on to:
http://financialedge.investopedia.com/financial-edge/0610/Disbanding-The-Euro---A-Worst-Case-Scenario.aspx 

Has Europe Risen To The Challenge?

This is a bit out of date now, as it seems like the market has more or less digested the ECB rescue package and deemed it "good enough ... for now".

After seeing punishing increases in interest rates, declines in the euro and chaos in the equity markets in response to slow and unsteady action on Greece, the ministers of the European Union decided to try to get ahead of the next round of worry and launch a massive liquidity measure for its members. The announced package immediately sent the euro higher along with equities of all stripes, but especially those exposed to the financial chaos in Europe.

What HappenedEarly on Monday morning, the finance ministers of the EU announced an enormous liquidity package designed to restore faith in the euro and the solvency of its members. The three-part program is worth almost $1 trillion and it consists of 60 billion euros in loans, 440 billion euros in future loan guarantees and as much as 250 billion euros in funding from the IMF.
  
The full column can be read at: http://financialedge.investopedia.com/financial-edge/0510/Has-Europe-Risen-To-The-Challenge.aspx

Can BBVA Be B-B-Believed?

Amidst all the talk of Europe going back to a financial Stone Age, we got to see the earnings from Spain's second largest bank, Banco Bilbao Vizcaya Argentaria (BBVA). In a way, it was something of an anticlimax - no howls of pain, no eye-popping losses, no dire projections or grim predictions of failure. It was an okay report ... maybe almost too okay?

Gross loans were down just slightly from last year, and up a little on a sequential basis. Spain's unemployment is 19%, Portugal's is about 9% (though I've seen a wide range on this stat), and Mexico's is officially about 5 or 6% (but common assumption is that the real rate is much higher). So who, exactly is BBVA lending to? I mean, I realize loans don't disappear just because the economy is bad, but it's just the first oddity that hit me.

Net interest income was up a bit from last year, and down a little on a sequential basis. Deposits were likewise mixed - up a little on a yoy basis, down a little sequentially. Okay, no big deal there. 

Here's where things get really squirrely for me. The non-performing assets ratio was flat from December, at 4.3%, and up from last year's 2.8%. Impairments were up 17% from last year to 1.1B, but down a fair bit from December. Provisioning was up about 8% sequentially (to 9.3B) and up 73% from last year's level. Surprisingly, the company has also been showing really strong recoveries as part of its non-performing assets -- recoveries of 2.4B were booked this quarter, and that was up 20% sequentially and nearly double the year-ago level.

On a net basis, then, the company added 874M euros to NPA, the lowest rate of increase in quite a while; half of December's increase, and a third of last year's. The coverage ratio has gone from 76% in March of 2009 to 59% now.

Now let's just think about this for a moment. With everything we've been seeing in Spain, Portugal, Mexico, and so on, do you really think it makes sense that coverage ratios are decreasing and net provisioning additions should be declining?

BBVA's actions seem to be suggesting that the worst is over ... but the general thought seems to be that trouble has only begun in Spain. What makes this even worse is that Spanish banks used to have a reputation for playing a little fast and loose with numbers - being slow to classify loans as non-performing, extending new loans to bad debtors to allow them to continue making payments on the prior loans, etc, etc.

Now, I happen to like BBVA to a point. I generally like the markets that the company is in, and I think there is good long-term growth potential here. But something about this earnings release just doesn't sit well with me. I hope I'm misinterpreting things or making mountains out of molehills. If I'm right, though, and my suspicions have merit, then BBVA management may be fiddling while their credit burns.

If you have a lot of confidence that Spain and Portugal will somehow walk through the minefield safely, and a faith that BBVA's management is taking a conservative approach to their credit, then this may be a great opportunity to buy while everyone else is panicking.

I, however, don't have that kind of confidence, nor that strong of a stomach. So I'll sit tight for now. I wish BBVA the best and will keep them on the watchlist, but I want to see at least a couple more quarters before I pony up my own cash for these shares.