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Why These Huge Bank Stocks Could Go to Zero

by Doug Casey, Casey Research:

Europe’s banking system looks like it’s about to implode.

As you probably know, Europe has serious problems right now. Its economy is growing at its slowest pace in decades. Policymakers are now more desperate than ever and are on the verge of introducing more “stimulus” measures. And Great Britain just voted to leave the European Union (EU).

These are all major concerns. But Europe’s biggest problem is its banking system.

Over the past year, the Euro STOXX Banks Index, which tracks Europe’s biggest banks, has plummeted 46%. Deutsche Bank (DB) and Credit Suisse (CS), two of Europe’s most important banks, are down 63%. Both are trading at all-time lows.

We’ve warned you to stay away from these stocks. As we explained two weeks ago, Europe’s banking system is a complete disaster. And it’s only getting worse by the day

European bank stocks have crashed over the past couple days. Yesterday, every major European bank stock ended the day down. Several fell more than 5%. A few plunged more than 10%.

These are giant declines. Remember, these banks are the pillars of Europe’s financial system.

Today, we’ll explain why this banking crisis could reach you even if you don’t live in Europe. But first, let’s look at why European bank stocks are crashing.

• Europe’s banking system has major problems…

Europe’s economy is barely growing. And negative interest rates are killing European banks.

Regular readers know negative rates are a radical government policy. The European Central Bank (ECB) introduced them in 2014, thinking they would “stimulate” Europe’s economy.

You see, negative rates basically turn your bank account upside down. Instead of earning interest on your money in the bank, you pay the bank to hold your money. The geniuses at the ECB thought they could force people to spend more money by “taxing” their savings.

But Europeans aren’t spending more money right now. They’re pulling cash out of the banking system and sticking it under their mattresses…where negative rates can’t get to it.

• Negative rates are also eating into European bank profits…

Today, the ECB’s key interest rate is at -0.4%. This means European banks must pay €4 for every €1,000 they keep with the ECB.

That might not sound like much. But it’s a big problem for European banks that oversee trillions of euros. According to Bank of America (BAC), European banks could lose as much as €20 billion per year by 2018 if the ECB keeps rates where they are.

• The Euro STOXX Banks Index plunged 2.8% on Monday…

Yesterday, it fell another 4.9%. The selloff hit everywhere from Frankfurt to Milan.

Spanish banking giant Santander closed the day down 5%. The Bank of Ireland fell 8%. And Commerzbank AG, one of Germany’s biggest lenders, fell 9% to a record low. Commerzbank’s stock plunged after it said negative rates were eating into its profits.

Meanwhile, Deutsche Bank and Credit Suisse fell 3.7% and 4.7%, respectively. Investors dumped these stocks after learning that both are going to be dropped from the Euro STOXX 50 index, Europe’s version of the Dow Jones Industrial Average.

• Italian stocks fell even harder yesterday…

UniCredit, Italy’s largest bank, fell 7% before trading on its stock was halted. Regulators stopped the stock from trading due to “concerns about its bad loan portfolio.” The stock has plunged 72% over the past year.

Bank Popolare di Milano, another large Italian bank, fell 10%. And Banca Monte dei Paschi di Siena, Italy’s third biggest bank, plummeted 16%. Monte Paschi plunged after a banking watchdog said it was in the worst shape of all European banks. It’s down 85% over the past year.

• Italy is ground zero of Europe’s banking crisis…

Right now, Italy’s banks are sitting on about €360 billion in “bad” loans, or loans that trade for less than book value. That’s almost twice as many bad loans as Italian banks had in 2010.

According to the Financial Times, bad loans now account for 18% of all of Italy’s loans. That’s more than four times as many bad loans as U.S. banks had during the worst of the 2008–2009 financial crisis.

• Policymakers are scrambling to contain the crisis…

Last month, the Italian government said it may pump €40 billion into its banking system to keep it from collapsing. A couple weeks later, Mario Draghi, who runs the ECB, said he would support a public bailout of Italy’s banking system. That’s when the government gives troubled banks money and makes taxpayers pay for it.

We said these emergency measures wouldn’t fix any of Italy’s problems. At best, they’ll buy the government time.

Unfortunately, policymakers will almost certainly “do something” if Europe’s banking system continues to unravel.

The ECB could cut rates again, which would only make it harder for European banks to make money. It could also launch more quantitative easing (QE). That’s when a central bank creates money from nothing and pumps it into the financial system.

Right now, the ECB is already “printing” €80 billion each month. But again, this hasn’t helped Europe’s stagnant economy one bit.

• Whatever the ECB does next, you can bet it will only make things worse…

As we’ve shown you many times, governments don’t fix problems. They only create them or make problems worse.

If you understand this, you can make a lot of money betting that governments will do the wrong thing. Casey Research founder Doug Casey explains:

The bad news is that governments act chaotically, spastically.

The beast jerks to the tugs on its strings held by various puppeteers. But while it’s often hard to predict price movements in the short-term, the long-term is a near certainty. You can bet confidently on the end results of chronic government monetary stupidity.

Read More @ CaseyResearch.com

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