One answer to Europe’s €944bn bad loan problem could be securitisation. But like a great many things in life, it’s free to those who can afford it, very expensive to those that can't.
Every morning, on my way to work, I walk past a rarefied Kensington salon that advertises fish pedicures. I’ve never actually tried a fish pedicure, but I am reliably informed they are just the tonic for those who wish to remove tiresome dead skin from their feet. For some reason, this morning, as I peered through the window and watched a pair of leisured ladies with their feet in a couple of goldfish bowls, I could not help but think of non-performing loans.
“Why … on earth?” I hear you ask. It’s simple. Last week I saw that Intesa Sanpaolo – one of Italy’s foremost purveyors of bad loans – had done a deal with a Swedish credit management firm, called Intrum, to transfer €10.8bn worth of non-performing loans off its balance sheet.
In simple terms, this is how it works: Intrum has persuaded a consortium of banks to fund a special purpose vehicle – or SPV - that will buy Intesa’s dodgy loans. Obviously, this SPV will not pay the full price for the loans. Far from it. Intesa will take a 70% hit on their original value. The bank lent €10.8bn but it will only get back €3.1bn. It’s a large piece of humble pie to swallow, that much is certain, but the upside is that, finally, the bank is freeing itself of a large slug of toxic debt that it might never have shifted – or at least not for another few decades. As for Intrum and the consortium of banks, well, they’ve got the opportunity to bring some of this debt back to life – get a potentially healthy income stream – and anything over €3.1bn they can reclaim is pure beer money.
A fishy business
These loan servicing agents have popped up all across Europe – but especially targeted at Italy’s hefty €278bn of non-performing loans. They can smell big potential profits in the offing. And like those little pedicuring fish, they are nibbling off all the bad debt and leaving bank balance sheets cleaner and healthier – like those manicured ladies’ feet. Everyone is a winner, surely? The banks clear their balance sheets of toxic debt – and so can start to lend more freely again - and the debt-servicing fish get fat on all that delicious dead skin.
Well, not so surely – as it turns out. While securitisation (as above) is a tremendously effective way to clear bank balance sheets crippled by bad loans – it is only really effective if the bank in question falls under the ‘too big to fail’ category. These guys have enough reserves to soak up a 70% loss on the value of their loans – plus tacit government support. But what of the smaller banks? Few could afford to take such a large hit. It would bankrupt them.
And so we are back where we started. Lots of banks unable to lend to the real economy - and kick start growth - because they are sitting on a huge pile of moribund debt they cannot afford to shift. The answer? Just keep waiting and hoping – with a Mr. Micawber-like determined optimism - that something will turn up.
Like the banks, it’s only the wealthy leisured ladies who can afford fish pedicures. Not those of us who reside lower down the food chain.