Bankers prepare for eurozone break-up risk

20/1/2017

By Martin Arnold

Big European banks cutting back on some lending ahead of elections

Some of Europe’s biggest banks are cutting back on lending within eurozone countries to prepare for the risk of a possible break-up of the eurozone if anti-EU politicians should come to power in the Netherlands, France or Italy.

Ralph Hamers, chief executive of ING, said the Dutch bank was seeking to more closely match its loans and deposits in each European country while stress testing what would happen if any of the markets in which it operates decided to exit the eurozone.

“If the euro changes to another currency in a country, any mismatch between assets and liabilities gives you an open currency imbalance,” he told the Financial Times on the sidelines of the World Economic Forum in Davos. “In Italy, for instance, the assets would become lira and the liabilities could potentially remain in euros.”

After being wrongfooted by last year’s election of Donald Trump as US president and Britain’s vote to leave the EU, many executives and politicians at the WEF want to avoid similar shocks at the hands of insurgent anti-establishment movements.

In particular, bankers are taking measures to prepare for the possible success of an anti-euro candidate this year, whether in The Netherlands’ March parliamentary election, France’s April-May presidential contest or a snap election in Italy.

“We stress test everything and we look at exposures to every country,” said another European banking boss. “If everyone exits Italy that is not helpful. The Armageddon attitude around Brexit and the eurozone is really unfounded.”

Mr Hamers said that if many banks decided to pull back from lending in some countries, the European Central Bank would be forced to step in.

“Liquidity is fluid, so banks will withdraw and the ECB will have to start funding [that country’s banks].”

If ING stops lending in the countries where it has an excess of loans to deposits, it would “reverse the benefits of the euro”, he said. But he added that the risks of a eurozone break-up were lower than two years ago when Greece came close to leaving the single currency.

Other senior London-based bankers said they had been running scenarios to check their exposures to a potential euro exit in various countries since the Greek financial crisis erupted in 2012.

But many of the bankers are now worried that Brexit could be the precursor to a deeper break-up of the eurozone. Marine Le Pen, leader of France’s far-right National Front, is campaigning on a pledge to pull the country out of the euro and to hold a referendum on EU membership.

While many analysts expect Ms Le Pen to reach the second round of May’s election, most reckon she is unlikely to win. JPMorgan Chase chief executive Jamie Dimon told Bloomberg TV: “If you have a Le Pen presidency and other nations [follow suit] the eurozone may not survive.”

In the Netherlands, Geert Wilders, the Dutch anti-EU and anti-Islam politician, and his rightwing Party for Freedom, or PVV, is far ahead in the polls with only two months to go before a general election.

Italy may also hold an election later this year, while Beppe Grillo’s anti-establishment Five Star movement is rising in the polls and promising a referendum on the euro.

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