European banking system set to collapse after coronavirus black swan?

I’m just looking at Europe in search of potential business opportunities. My radar is always switched on and completely proof of any political issue. I’m on a trip to Europe, and I was deeply impacted by empty airports, empty stores and restaurants, and desolate downtowns, in particular in my native Italy.

Europe is facing, like the rest of the world, an economic recession, probably the worst after II world war with significant pressure on stock markets and a collapse in consumer spending.

The main question I’m asking myself is how all of this is impacting the European banking system and whether there is any business opportunity around. Is it better to invest in the US, in Europe, or any emerging market?

The consensus is pointing at around a 10% decline in the European economy, with Italy probably exceeding 12%. Bad credits are set to explode in Europe because of deteriorating assets.

Is this enough to foresee a credit crunch with a snowball effect implying bank defaults and a financial meltdown with global ramifications?

Honestly, I think there are still some issues that need to be assessed to answer this question. We don’t know how long the coronavirus impact will last and how deep it will jeopardize the real economy.

My guess is that the worst still has to come because European banks and Italian, in particular, still had to recover from the last financial crisis, which began in late 2008 with toxic real estate debt, spread to eurozone sovereign debt, and lasted for more than seven years.

If I look at Deutsche Bank in Frankfurt or Santander in Spain or even the plethora of popular banks in Italy, they are all facing poor profitability, an inefficient scale of operations, and the continuing cost of cleaning up old bad credits. This is crazy to me! If I believe at the potential value disruption for shareholders, I can’t figure out how most of them are still stuck to their junk shares.

Let’s look at some figures, and let’s try to be serious! The European economy relies on the banking system to a much greater extent when compared to the US. European companies are much more exposed to the banking system than US peers. More than 2/3 of European companies’ debt is represented by bank loans, while American firms tend to diversify their source of finance by placing bond. Less than 30% of American firms’ source of funding is represented by bank debt.

All of this means that sooner or later, bad credits will destroy the assets of the banking system despite the efforts of the European Central Bank to continue flooding the financial system with cash.

Someone may argue that a mega-merger trend might save the sector. It worked in the past for other mature industries, but it doesn’t work this way for the banking system. When the entire system has deteriorated, it fails in being the pivot of the economic system. And this is not recoverable by simply merging banks and scaling up dimensionally.

The European Central Bank is called to make all possible efforts to sustain sovereign debts (see Italy) on top of the banking system. I foresee a turmoil future ahead for the European economy, the European banking system, and I would definitely be scared if I had shares of any European bank in my portfolio.

I prefer to remain invested in the US, prefer digital assets, and continue to firmly believe that the US economy will come out of the crisis at a much faster pace than Europe.

About Antonio Velardo

Antonio Velardo is an experienced Italian Venture Capitalist and options trader. He is an early Bitcoin and Ethereum adopter and evangelist who has grown his passion and knowledge after pursuing the Blockchain Strategy Programme at Oxford University and a Master’s degree in Digital Currency at Nicosia University.

Velardo manages an 8-figure portfolio of his investment company with a team of analysts; he is a sort of FinTweet mentor, people interact with him online, and he has more than 40,000 followers after his tweets. He has built a fortune in the great tech years and put together a tail strategy during the pandemic that allowed him to take advantage of the market drop. “I did not time the market, and I did not think this was even a black sworn,” he says.

On the side of the financial markets, Velardo has a unique combination. He was a real estate entrepreneur that developed several projects in Tunisia, Miami, Italy, the UK, and many other countries and cities. But he has always been passionate about options trading. Still, contrary to the volatility player and quant trading, he always had a value investing touch in his blood. Antonio studied Value Investing at Buffet’s famous business school at Columbia University. Even though the central concepts of value investing are antagonists to the venture capital pillars, Antonio’s approach tries to bridge elements of both worlds in order to seek alpha. Velardo has learned the importance of spotting pure growth stories and taking advantage of their S-Curve position. This is an essential element of Velardo’s approach as he looks forward to embracing great tech stories at the right time of the adoption cycle. This applies to stocks but also to blockchain projects.