Mortgage Crisis Hits France As Entire Sector Drops Off A Cliff


French banks may have to be nationalized as France’s mortgage sector has just dropped straight off a cliff and the banks are on the hook to cover the crash.

Editor’s note: This news comes as Wall Street cheerleader Jim Cramer warns of financial anarchy and bank runs hitting Spain and Italy within weeks.

The Mortgage Crisis Hits France Front And Center – French Bank Nationalizations Imminent?

Name the plunging bond below:

If you said some sovereign or corporate issue based out of Spain, Italy, Ireland, Portugal, or even Greece you would be close… but no cigar. No – the bond in question is an issue of Caisse Centrale du Credit Immobilier de France (3CIF), which together with its sister entity CIF Euromortgage (CIFE), is a 100% subsidiary of Credit Immobilier de France Development (CIFD), which as Fitch describes it, is a French “housing loans specialist, with business exclusively directed to France.” CIFD is in turn owned by Procivis Group, which just happens to be France’s second largest full-service real estate group.

In other words, CIFD, together with its subsidiaries 3CIF and CIFE represent a critical glance into the functioning (or lack thereof) of the French mortgage market. The various CIF mortgage entities are related as per the following Org Chart:

For the longest time, CIF was well off everyone’s radar. All that changed two weeks ago, on May 8, when trading of securities issued by 3CIF and CIFE was suspended at the request of French and Luxembourg regulators, the Autorité des Marchés Financiers and the Commission de Surveillance du Secteur Financier. The result was an immediate plunge as there was little to no additional clarification about the sudden trading halt, leading many to speculate the worst – namely that underlying operations had deteriorated substantially, to the point where little to no collateral and/or cash flow was left to service liabilities.

It subsequently surfaced that the halt was driven by a failure of the bank to file accounts by an April 30 deadline, which in turn prompted speculation that the group’s rating would see multi-notch downgrades, something which as explained below, would have profound impact on the wholesale market-funded mortgage lender, as well as on the far broader French cover bond market

Peripheral news only made it worse. As IFRE reports, “A report on French news website Mediapart likened the bank to Northern Rock. Last month, the same news outlet had warned of the risk of a small French Lehman Brothers, without naming the entity, explaining that a severe downgrade could activate some expensive guarantee mechanisms similar to margin calls. Moody’s had indicated in February that it could downgrade 3CIF by up to four notches, as part of a sweeping European bank rating review. The second Mediapart story was published on Tuesday, a public holiday in France. Unsurprisingly, the senior bonds, which remained free to trade, came under huge pressure the following day.”

Sure enough not only bonds of 3CIF, but more importantly, of covered-bond issuer CIF Euromortgage were likewise crushed beginning Tuesday:

But the biggest wildcard was what rating Moody’s would cut 3CIF to as part of its wholesale bank downgrade initiative announced back in February. Well, on Thursday the rating agency released its updated view on 3CIF, which in many ways was a crushing blow to the company which now has no choice but to be nationalized:

In other words, Moody’s has given France a loud and clear notice that while it will has not yet downgraded the non-standalone ratings of 3CIF, so critical for various collateral call arrangements, absent explicit government support, or an acquisition of the troubled lender by a third party, this downgrade would be imminent as “The long-term ratings now incorporate 12 notches of systemic support (previously two notches), based on the rating agency’s view that the French public sector is highly likely to provide both financial support over the short- to medium-term and assistance in orchestrating a longer-term adaptation of 3CIF’s business model, which is currently unviable.”

To summarize: 3CIF has an “unviable” business model whose long-term rating would be 12 notches below the provisional and pending downgrade A1 currently retained, or roughly Caa1. Needless to say, a Caa1 rating would unleash a full blown AIG-type collateral call on every entity in the org chart shown above.

Bottom line: absent Hollande breaking his key election promise, not only does the French mortgage market “get it” once Moodys follows up with the non-standalone rating downgrade (forget French Fitch – they will never issue a report that will results in the slow-motion death of the French mortgage market), but the contagion immediately spreads to the entire French covered bond market on the sudden uncertainty whether the French state will backstop the hundreds of billions in related bonds, putting the entire concept of a “covered bond” in jeopardy, with potentially sweeping consequences to a trillion+ market.

Ah yes, nothing like the ECB quietly stepping in and providing “liquidity” in exchange for repoable collateral of worthless value… until the stakes get so high that the lack of even one cent in incremental pledgable collateral results in something nobody could have foreseen, namely a full blown bank run.

Something tells us we have seen this before… Oh yes – Greece, Ireland, Portugal, Spain and of course Italy. In other words, as CIF was running out of real assets, the ECB allowed it to hypothecate via the repo market whatever dregs it could scrounge, (even if that meant bonds which are a liability yet promptly converted into an asset by the magic of shadow banking’s repo operations), on and off balance sheet, and pledge to Mario Draghi in exchange for 100 cents to the Euro collateral value: precisely what prompted us to explain back on March 21, when the market was at its 2012 highs, “Why NOTHING Has Been Fixed In Europe (And Why LTRO 3 Is Not Coming).”

At the end of the day, Europe’s main problem was, is and continues to be the active disappearance of any and all cash and money good assets, as well as collateral, as it is increasingly pledged (or re-pledged once repo mechanisms get involved) to other financial institutions, and primariliy to the ECB, in exchange for short-term funding (read loans, further explained here “Encumberance 101, Or Why Europe Is Running Out Of Assets”).

Alas the can kicking time is now over. And what many took for sacred previously, such as the French mortgage market, has suddenly, just like every other contraption of modern financial markets, been shown to be simply the latest naked emperor in a city full of in kind dressed supreme rulers.

And what it all boils down to is this: will Hollande, for all his pompous rhetoric, immediately do what the market expects him to, which is to unleash the French nationalization machine, first with CIFD, and soon, many other insolvent banks, or, will he stay true to his word, and watch as risk assets crash and burn all around him. Perhaps the question is better posed to the French citizens: is their hatred of bank bailouts greater than the fear of facing the fair value of all assets absent central bank and sovereign backstops?

Which, incidentally, is the number one question that will once again face everyone in the “developed” world. Back in 2008 the answer was made clear, even with a solid dose of buyer’s remorse in the years that followed. What will it be this time around? Because if Greece has so far been the only country willing to let it all go, and prepare to exist in a world unburdened by a bank-imposed status quo, the only reason for this is that Greek citizens have already lost so much, that the opportunity cost to overturning the status quo is virtually nil. What will it be the taxpayers of all other developed, pardon insolvent welfare-state, countries?

Categories: ECONOMY

Write a Comment

Your e-mail address will not be published.
Required fields are marked*