Last month, I noted that the pace of global and local events had become frenetic but, instead of slowing down into the traditional summer doldrums, it has actually intensified.

It is thus hardly surprising that people, in general, focused on football and whatever are the hot issues in their country – and especially for us, Israelis, who have their news and nerves stretched far beyond even the lunatic level that passes for normal in this country – have probably missed out on some important developments. This is particularly the case regarding secondary or tertiary countries outside of the Middle East.

I mean, be honest: do you follow the Portuguese stock exchange? Could you name the largest bank in Austria? And if either of these were in trouble, would you lose sleep over it (assuming you were able to sleep normally, without sirens and booms disturbing you)? Nevertheless, despite your disinterest, there have been important developments in these and other countries, markets and institutions, which are worth bringing to the attention of distracted and disturbed readers.

Let’s start in Austria. Americans were busy with their Independence Day last Friday, and the real fireworks here hadn’t yet started, so the news from Vienna didn’t register in New York, or even make an impact on the generally soporific European markets – although it did send the Wiener Borse into a vertical dive.

“Erste predict record loss as Romania adds to Hungary woes” was the rather complex headline over Boris Groendahl’s story on Bloomberg, but the story itself was clear enough.

Erste is Austria's biggest bank, but it also owns the largest bank in Romania and the second-largest in Hungary, making it the no. 3 institution in Eastern Europe. Last Friday, it announced it would report much bigger losses (€1.6b.) than it had estimated – although it had already shocked the market by announcing a large upcoming loss and write-off. The new bad news stems from regulatory moves in Romania to reduce banks’ income, as well as from Hungarian efforts to get banks into shape to pass the stiffer European Central Bank “stress tests." But the underlying story is that most large European banks are still in very bad shape, sitting on large undeclared losses because of the deterioration of assets (i.e. loans) they hold.

Erste is not unique. At worst it is in worse shape than its peers and hence more vulnerable to moves to make banks clean up their balance sheets. The ECB is caught between the rock of trying to reflate demand in an economic bloc drowning in excess debt, and the hard place of trying to prevent the next banking collapse by pushing banks to write off their existing dud loans – and thereby killing the debtors and potentially triggering a recession.

This policy conundrum, which is fundamentally irresolvable, is at work across the continent, but is more apparent in the weaker, peripheral economies (Romania, Hungary) than the stronger central ones (Germany, Austria). That’s why the trends in Portugal are so important.

One of the original crisis-countries, bailed out by the EU and ECB, Portugal has supposedly recovered enough to have regained access to the bond market. Like Spain and Italy, the yield on its sovereign bonds dropped dramatically and the prices of bonds and shares soared, after the ECB coordinated the massive rescue operation of the Eurozone markets two years ago.

However, the efforts of the ECB, backed by the Fed and subsequently supported by large-scale buying of European government bonds by Japanese investors, have not changed the underlying economic realities of countries like Portugal, Greece, and even Italy and Spain. The Portuguese stock market, which had sunk to a low of 4,500 points in June 2012, climbed as high as 7,800 in April 2014, on the back of the plunge in interest rates in the “rescued” European countries. But it is now back at 6,300 and most of that decline has come in the last month, with the pace rising steadily.

The renewed slump in share prices reflects a general rise in bond yields and, most recently, a crisis in Espirito Santo International, parent of one of the country’s major banks, which has been found by the central bank to be in “serious financial condition,” requiring government intervention to prevent collapse.

In short, the “negative feedback loop” between the banking system and government debts and deficits and that underlay the crisis in the PIIGS (Portugal, Ireland, Italy, Greece and Spain) countries and the wider Eurozone in 2010-2012 has re-emerged – proving nothing fundamental has been fixed either in the financial or economic spheres, although the socio-political backdrop has worsened.

www.pinchaslandau.com

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