Germany’s politicians are up to their necks in the cover up of the true state of their banking system. Getting serious about cleaning up their banks would have meant admitting the financial crisis was not all the fault of Anglo Saxon bankers. The price that Germany and Europe as a whole pays for this disingenuousness is likely to be another full-blown banking crisis. Only this time it will be Chancellor Angela Merkel and her colleagues that end up being cast as the villains.
Instead of owning up to the failures of Germany’s regulators, Merkel and her Christian Democrat/Social Democrat coalition government have played a wicked game of deceit with German voters. Rather than admitting that German banks are more heavily leveraged and have more exposure to toxic debt than American ones, Germany pulled a veil over their banks’ operations – at the very time that America set about increasing transparency. And they continue to protect the banks from effective regulation.
With Germany’s political class asleep at the wheel, the Landesbanken – the public banks – recklessly hoovered up high-yield assets such as foreign mortgages in the first half of the last decade in response to a European Commission ruling that abolished state guarantees by 2005. Conveniently, this export of capital would have helped to create excess demand for German manufacturing goods – so Germany’s export machine may not be quite what it appears at first glance. These investments now form a mountain of toxic debt, as can be seen in this IMF chart of German banks’ net foreign asset position.
The scale of the lending in Eastern Europe and on the periphery of the euro-zone is such that lending in Germany is still at risk. While German banks may not be as exposed to Eastern Europe as Austria or Sweden, its “dumb money” banks are particularly exposed to Greek bonds.
This is, of course why Merkel panicked in June and was willing to throw more good taxpayers money after bad, bailing out Greece. One of the biggest holders is Germany’s now publicly owned Hypo Real Estate, a mortgage bank seeking to shift $262.5 billion of impaired assets into a public “bad bank” or Erste Abwicklung Anstalt.
One can only imagine how bad the true financial strength of the German banking system must be that the government allowed six major banks to hide their sovereign debt holdings during the recent stress ‘tests’ of European banks. Every other European bank, bar Greece’s ATE bank, which failed the test, complied with the disclosure requirement, but six of the 14 German banks tested – Deutsche Bank, Postbank, Hypo Real Estate, mutual groups DZ and WGZ, and Landesbank Berlin – did not publish the expected detailed breakdown of sovereign debt holdings. The secretary-general of the Committee of European Banking Supervisors, the pan-European banks regulator, has even gone so far as accusing the German government of reneging on a deal to do so.
Germany’s excuse? Bafin and the Bundesbank said local law meant they could not force banks to publish such details. But this has been flatly contradicted by the banks, who say they would have had to publish the sovereign debt exposures if Bafin had told them to.
Despite the politicians’ best efforts at brushing everything under the carpet – only one of the Landesbanken, tiny Sachsen LB, has been shut down; merging with Stuttgart based Landesbank Baden-Wurttemberg, after running an asset backed security operation nearly 11 times its equity – analysts suspect that most German banks would be insolvent without taxpayers’ guarantees. According to leaked estimates by the German financial services regulator, Bafin, German banks’ toxic assets are worth around €800bn, or 30% of German GDP. To deal with these assets, a “bad bank” law was passed in early July to facilitate the transfer of bad assets to special purpose vehicles in exchange for government-guaranteed bonds. This moves the bad assets off balance sheet – but doesn’t exactly let the taxpayer off the hook.
Whether or not the German government may have hoped avoiding giving an honest account of the banks’ failures would be a way to avoid moving debt onto the government’s balance sheet – affecting the country’s debt to GDP ratio, and its cost of borrowing – a recent decision by Eurostat requires Germany to include the balance sheets of public-owned bad banks in its overall debt ratio. The bailout of Germany’s banking sector – so far – may swell the country’s national debt to 90% of GDP, if Hypo Real Estate is added to the equation.
Anyway, it’s not as if the markets don’t already have a good idea of the fix Germany is in. The Bank of International Settlements calculates that the German banking sector’s exposure to the public sectors of Spain, Portugal, Ireland, and Greece is 340% of its aggregate shareholder equity in 2008 – in addition to a similar exposure to its own public sector. In striking contrast to Germany – and France whose exposure is nearly as large as Germany’s – the UK’s exposure is 50%.
Germany therefore faces the very real risk of a secondary credit crunch if its banking sector isn’t recapitalized, as the US and UK banking sectors have been. A big fear is that the banks could run out of cash to maintain credit to the export sector. The German bank rescue fund, SofFFin (Sonderfonds Finanzmarktstabilisierung) has warned, for example, that downgrades of structured products could “massively” increase risk-weighted assets at major German banks.
With at least $5 trillion of medium to long term funding maturing over the next three years, banks internationally face a refinancing challenge, but Gemany faces a bigger one this year than other countries. S&P warns that not all European financial groups “will survive the journey intact.”
Despite Germany’s fastest rate of growth in 20 years in the second quarter, the cost of bailing out banks has caused the country’s budget deficit to more than double in the first half of this year. In a reversal from previously announced tax cuts the coalition now plans to save about €80 billion by 2014 , with a package of budget cuts and taxes touted as Germany’s biggest austerity drive since World War Two. Merkel wants Germany’s finances to stand on their own two feet in the future. It is hard to know how hard this will be, without knowing whether the finances of Germany’s banks can stand on their feet.
Related: Worse Than Wall Street – How shaky European banks could tip the world back into recession [Newsweek], Germany’s Asset Berg [FT Alphaville], The IMF on Germany’s Bank-Asset-Berg [FT Alphaville]
What A Wicked Game to Play: The Truth Germany Conspires to Hide
Germany’s politicians are up to their necks in the cover up of the true state of their banking system. Getting serious about cleaning up their banks would have meant admitting the financial crisis was not all the fault of Anglo Saxon bankers. The price that Germany and Europe as a whole pays for this disingenuousness is likely to be another full-blown banking crisis. Only this time it will be Chancellor Angela Merkel and her colleagues that end up being cast as the villains.
Instead of owning up to the failures of Germany’s regulators, Merkel and her Christian Democrat/Social Democrat coalition government have played a wicked game of deceit with German voters. Rather than admitting that German banks are more heavily leveraged and have more exposure to toxic debt than American ones, Germany pulled a veil over their banks’ operations – at the very time that America set about increasing transparency. And they continue to protect the banks from effective regulation.
The scale of the lending in Eastern Europe and on the periphery of the euro-zone is such that lending in Germany is still at risk. While German banks may not be as exposed to Eastern Europe as Austria or Sweden, its “dumb money” banks are particularly exposed to Greek bonds.
This is, of course why Merkel panicked in June and was willing to throw more good taxpayers money after bad, bailing out Greece. One of the biggest holders is Germany’s now publicly owned Hypo Real Estate, a mortgage bank seeking to shift $262.5 billion of impaired assets into a public “bad bank” or Erste Abwicklung Anstalt.
One can only imagine how bad the true financial strength of the German banking system must be that the government allowed six major banks to hide their sovereign debt holdings during the recent stress ‘tests’ of European banks. Every other European bank, bar Greece’s ATE bank, which failed the test, complied with the disclosure requirement, but six of the 14 German banks tested – Deutsche Bank, Postbank, Hypo Real Estate, mutual groups DZ and WGZ, and Landesbank Berlin – did not publish the expected detailed breakdown of sovereign debt holdings. The secretary-general of the Committee of European Banking Supervisors, the pan-European banks regulator, has even gone so far as accusing the German government of reneging on a deal to do so.
Germany’s excuse? Bafin and the Bundesbank said local law meant they could not force banks to publish such details. But this has been flatly contradicted by the banks, who say they would have had to publish the sovereign debt exposures if Bafin had told them to.
Despite the politicians’ best efforts at brushing everything under the carpet – only one of the Landesbanken, tiny Sachsen LB, has been shut down; merging with Stuttgart based Landesbank Baden-Wurttemberg, after running an asset backed security operation nearly 11 times its equity – analysts suspect that most German banks would be insolvent without taxpayers’ guarantees. According to leaked estimates by the German financial services regulator, Bafin, German banks’ toxic assets are worth around €800bn, or 30% of German GDP. To deal with these assets, a “bad bank” law was passed in early July to facilitate the transfer of bad assets to special purpose vehicles in exchange for government-guaranteed bonds. This moves the bad assets off balance sheet – but doesn’t exactly let the taxpayer off the hook.
Whether or not the German government may have hoped avoiding giving an honest account of the banks’ failures would be a way to avoid moving debt onto the government’s balance sheet – affecting the country’s debt to GDP ratio, and its cost of borrowing – a recent decision by Eurostat requires Germany to include the balance sheets of public-owned bad banks in its overall debt ratio. The bailout of Germany’s banking sector – so far – may swell the country’s national debt to 90% of GDP, if Hypo Real Estate is added to the equation.
Germany therefore faces the very real risk of a secondary credit crunch if its banking sector isn’t recapitalized, as the US and UK banking sectors have been. A big fear is that the banks could run out of cash to maintain credit to the export sector. The German bank rescue fund, SofFFin (Sonderfonds Finanzmarktstabilisierung) has warned, for example, that downgrades of structured products could “massively” increase risk-weighted assets at major German banks.
Despite Germany’s fastest rate of growth in 20 years in the second quarter, the cost of bailing out banks has caused the country’s budget deficit to more than double in the first half of this year. In a reversal from previously announced tax cuts the coalition now plans to save about €80 billion by 2014 , with a package of budget cuts and taxes touted as Germany’s biggest austerity drive since World War Two. Merkel wants Germany’s finances to stand on their own two feet in the future. It is hard to know how hard this will be, without knowing whether the finances of Germany’s banks can stand on their feet.
Related: Worse Than Wall Street – How shaky European banks could tip the world back into recession [Newsweek], Germany’s Asset Berg [FT Alphaville], The IMF on Germany’s Bank-Asset-Berg [FT Alphaville]