Meet Andorra: Europe's Next Failed State

Submitted by Tyler Durden on 03/30/2015 14:25 -0400

• China
 
• Eurozone
 
• France
 
• Iceland
 
• ratings
 
• Ratings Agencies
 
• Sovereign Debt
 
• Transparency
 
• Treasury Department

inShare8

Nestling idyllically between France and Spain in the foothills of the Pyrenees, Andorra - which has enjoyed the benefits of European borders without the restrictions of EU membership - has seen itsrisk "increase beyond our expectations," according to S&P. As a reminder, when Cyprus was "templated" and depositors awoke with a 47% haircut, its total financial assets to GDP was around 8x, Andorra is now at a stunning 17x. As The Telegrpah explains, in the last three weeks, the state has been gripped by a banking crisis that threatens to take it to the brink; and Andorra, which is not a member of the eurozone but uses the single currency on an informal basis, would have no way of bailing them out (with no central bank or lender of last resort). In short, the country faces a catastrophe if its banks fall apart.

Andorra has for many years enjoyed the benefits of European borders without the restrictions of EU membership, allowing light-touch regulation that has brought in tourism and wealthy expats from its bordering countries. However, as The Telegraph reports, in the last three weeks, the state has been gripped by a banking crisis that threatens to take it to the brink.

Bankers have been thrown in jail, savers’ deposits have been restricted, and the country’s government is scrambling to convince powerful regulators thousands of miles away that the country is not a haven for tax evasion.

On Tuesday March 10, the US Treasury Department’s financial crime body, FinCEN, accused Banca Privada d’Andorra (BPA), the country’s fourth-largest bank, of money-laundering. The authority said “corrupt high–level managers and weak anti–money-laundering controls have made BPA an easy vehicle for third–party money-launderers”.

Three senior managers at the bank accepted bribes to help criminals in Russia, Venezuela and China, to funnel money through the Andorran system, according to FinCEN.

The next day, the state took charge of BPA, dismissing three directors. On the Friday, the bank’s chief executive, Joan Pau Miquel, was arrested and detained. Mr Miquel remains in a jail cell in La Comella, the country’s only prison, with a capacity of 145.

At BPA, the Andorran authorities have installed new management. After international banks cut off links, withdrawals were capped at €2,500 (£1,830) a week, a limit many people are maxing out.

Banco Madrid, the Spanish subsidiary of BPA acquired as part of an expansion spree in recent years, filed for administration on Wednesday.

The Andorran government insists that BPA is an isolated case, saying it is committed to transparency and that the rest of the sector is clean. For its sake, it had better be right, but many experts fear this is not the case.

*  *  *
This is a major problem... When Cyprus was "templated" its banks assets were only 8 times bigger than the economy and Iceland's troubles hit at 10x...

Andorra’s banks have assets under management 17 times bigger than the economy, and the sector accounts for a fifth of GDP...

Which means, were its banks to get into trouble, Andorra, which is not a member of the eurozone but uses the single currency on an informal basis, would have no way of bailing them out.

The crisis is a classic example of how countries seeking to welcome financial services by promising a hands-off approach to regulation, can become dangerously vulnerable to them.

Andorra’s exposures to its banks provoke echoes of Iceland and Cyprus – both of which suffered painful economic crises when their lenders fell into trouble. But unlike Cyprus, which received a last-minute bail-out, Andorra has no central bank to act as a lender of last resort: if its banks go under, it goes under.

A single bank is one thing, but contagion would be an altogether different beast. A collapse of the entire banking system would spell disaster, especially after the hubristic expansion of recent years.

The crisis has now led Standard & Poor’s, one of the three major ratings agencies, to downgrade the value of the principality’s sovereign debt.

“The risk profile of Andorra’s financial sector, which is large relative to the size of the domestic economy, has increased beyond our expectations,” S&P said two weeks ago.

“The absence of a central bank or a lender of last resort in the Andorran financial system exacerbates the risks, in our opinion.” S&P said

*  *  *
The Telegraph sums it up perfectly - In short, the country faces a catastrophe if its banks fall apart.

Average: