Hedge Funds

The next big short’? Eisman warns that Europe and its banks ‘are still screwed’

Eight years after the 2008 financial crisis, European banks remain in trouble as their balance sheets continue to feature a high level of non-performing loans, Steve Eisman, the hedge fund manager who famously predicted the crash,has told the U.K.'s Guardian newspaper.

The state of Italian banks is one of the main problems, but the German lender Deutsche Bank, which is seen as one of the most important institutions in Europe, also raises concerns, Eisman added.

"Europe is screwed. You guys are still screwed," Eisman told the newspaper in an interview published over the weekend.

"In the Italian system, the banks say they are worth 45-50 cents in the dollar. But the bid price is 20 cents. If they were to mark them down, they would be insolvent," he added.

Italian banking stocks have been under pressure for months. Last week, the Italian banking index dropped as much as 4.2 percent to the lowest level since early October, according to Reuters, with investors worried over the upcoming constitutional referendum.

Monte dei Paschi di Siena, the world's oldest bank, was singled out in stress tests conducted by the European Banking Authority earlier this year. The institution indicated it was the lender with the least capacity to sustain any potential economic shocks. Unicredit, another Italian lender, was also among the 10 of 51 borrowers with the shortest capital ratio.

THOMAS LOHNES | AFP | Getty Images

Deutsche Bank also featured in that top-10 list. The German-lender has been asked to pay a $14 billion settlement for the miss-selling of U.S. mortgage bonds.

Eisman believes that Deutsche Bank is a long way off from returning to profit as it is too dependent on leverage to improve its performance. Meanwhile, Credit Suisse said in a note last week that banks are "not clear winners" from Donald Trump's election victory. Despite expectations of less regulatory pressure under a Trump presidency compared to a Clinton win, there are concerns that his policies will negatively impact the economy.

"I think the regulators did a horrendous, just horrendous job pre-crisis. But under the (Federal Reserve), the banks have been enormously deleveraged and de-risked. There are no sub-prime mortgages any more ... the European regulators have been much more lenient than the U.S. regulators," Eisman told The Guardian.

Apart from non-performing loans and regulation issues, sovereign bonds are another concern in Europe, Eisman warned. "What is very negative is that in every country in Europe, the largest owner of that country's sovereign bonds are that country's banks," Eisman also said. This means that if the price of those bonds goes down, the balance sheet of the bank deteriorates.

You can The Guardian article here.

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