Germany’s Hidden Risk
By Peter Coy, BusinessWeek
December 14, 2011, 11:00 PM EST
Germany’s Bundesbank-BuBa for short-has quietly, automatically lent €495 billion to the European Central Bank via Target2. That lending has balanced correspondingly huge borrowings from Target2 by the central banks of weaker nations including Greece, Ireland, and Portugal-and lately Spain, Italy, and even France. They are technically “claims,” not loans. To find them you have to root around in the footnotes of the reports of the 17 national central banks of the euro zone.
If the euro zone breaks into sorry little pieces, Germany could possibly lose its entire €495 billion claim. That’s more than $650 billion. It is 60 percent bigger than Germany’s annual federal budget-and larger than the lending under the European Financial Stability Facility and other aid programs that have received more scrutiny.
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Germany’s Bundesbank-BuBa for short-has quietly, automatically lent €495 billion to the European Central Bank via Target2. That lending has balanced correspondingly huge borrowings from Target2 by the central banks of weaker nations including Greece, Ireland, and Portugal-and lately Spain, Italy, and even France. They are technically “claims,” not loans. To find them you have to root around in the footnotes of the reports of the 17 national central banks of the euro zone.If the euro zone breaks into sorry little pieces, Germany could possibly lose its entire €495 billion claim. That’s more than $650 billion. It is 60 percent bigger than Germany’s annual federal budget-and larger than the lending under the European Financial Stability Facility and other aid programs that have received more scrutiny.
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Here’s how it happened. When a Greek businessperson buys a truck from Germany with money from a checking account, the transaction is carried out between the two nations’ central banks via Target2. The truck seller isn’t interested in financing the purchase-it wants euros now. So the Bundesbank has to come up with money in order to deposit it in the seller’s checking account. In accounting terms, the Bundesbank acquires a liability (what it owes to the truck seller’s checking account) and an asset (a claim on the ECB).The transformation of the Bundesbank’s balance sheet through this slow-but-steady process has been stunning-and to hard-money Germans, sickening. At the end of 2006, Target claims represented just 7 percent of the Bundesbank’s assets. By this October they represented 64 percent, according to data compiled by economists Aaron Tornell of the University of California-Los Angeles and Frank Westermann of Germany’s University of Osnabrück. The collateral the ECB holds to back those loans is primarily the sovereign debt of the euro zone’s weakest nations. It’s a far cry from the gold that’s the Bundesbank’s second-biggest asset (17 percent).
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As Europe’s financial crisis has worsened, the ECB has benevolently turned a blind eye to the poor quality of collateral posted by the Bank of Greece and others. But a reckoning is due. In an interview with Bloomberg News on Dec. 13, Bundesbank President Jens Weidmann expressed more concern about the collateral than the volume of ECB balances. “In a situation like the current one, where we are providing solvent banks with liquidity,” he said, “for me the size of the Target2 balances is less important than the risks we are taking on. It is my concern that we limit these risks as much as possible.”
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Germany faces a dilemma familiar to anyone who has ever made a bad loan-whether to keep throwing good money after bad to keep the debtor afloat or pull the plug and suffer the consequences. The half-trillion-euro claim the Bundesbank has on the ECB is an important but poorly understood factor in the decisions over the future of the euro.
European Banks Get ‘False Deleveraging’ in Seller-Financed Deals
By Anne-Sylvaine Chassany, Simon Packard and Neil Callanan, Bloomberg News
Nov 22, 2011 7:01 PM ET
Because most buyers of distressed assets fund purchases with debt, which has become increasingly expensive and difficult to obtain, banks are financing transactions themselves, even if it means retaining loans on their balance sheets. That will slow deleveraging and make more asset sales necessary, analysts say.
“A lot of those asset sales might be dependent on the banks themselves, the sellers, providing financing to the buyers,” Raoul Leonard, a London-based RBS analyst covering southern European banks, said on a conference call with clients Oct. 20, without referring to any specific deal. “It’ll be almost false deleveraging going on, but it’s off your book and you can argue that the risk-weighting changes.”
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European banks will dispose of less than 100 billion euros of the more than 500 billion euros of distressed loans and other impaired assets because they can’t afford to take losses on the sales, Huw van Steenis, a Morgan Stanley analyst in London, wrote in a Nov. 13 note. Banks may have to unload some of their good assets to U.S. or Asian competitors, he said. Van Steenis estimated banks in Europe may shrink assets by between 1.5 trillion euros and 2.5 trillion euros in two years.
The IMF-ECB ‘Plan’ – Fig-Leaf Upon Fig-Leaf
Authors: Warren Mosler & Philip Pilkington, EconoMonitor
November 29th, 2011
The latest Euro fashion is for the IMF to fund distressed sovereigns while being, in turn, funded by the ECB – while all this includes the fashiony gimmick that the IMF guarantees the loans.
The end result, of course, is that the ECB writes the check – which is precisely what it takes to make any of these schemes work. In fact, whenever you hear of any of these wacky evasions… er… sensible proposals, you can be safe in the knowledge that it will always work as long as it is the ECB writing the check. But we digress; and so here is how this latest one scheme will function.
When the ECB buys European national government bonds it credits member bank accounts on the ECB’s spreadsheet. Those accounts count as ‘money’ while the bonds did not count as ‘money’ and so, this action is said to be ‘printing money’ – and printing money is bad for some reason or other according to our German friends… and so the ECB undertakes a further step: sterilisation.
The ECB offers different euro accounts – which are also just numbers on an ECB spreadsheet – with relatively short maturities that pay interest. This is called ‘sterilisation’ because these deposits don’t technically count as money. Cool, huh?
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When the ECB buys Special Drawing Rights from the IMF it credits an IMF account with the required euros. This does not count as ‘printing money’. And when the IMF loans those funds on to Italy or whoever, it does not count as ‘printing money’ either even though, when all is said and done, the same euros sit in the same ECB accounts and they effectively come from the same place. How clever.
ECB puts emergency plans in place as German banks feel the heat
Heather Stewart, Jill Treanor and Patrick Collinson, The Guardian
Thursday 8 December 2011 15.33 EST
Following European-wide “stress tests”, Germany’s banks were found to need more than double the amount of capital anticipated, with the focus immediately turning on Commerzbank, in which the German state already owns a 25% stake, and amid speculation the government may need to step in with a fresh capital injection.
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When the initial results of stress tests intended to protect banks against the eurozone crisis were announced in October the European Banking Authority announced that €106bn (£90bn) of extra capital would be needed to shore up banks against the eurozone crisis and restore confidence in the battered sector. But that shortfall was revised up to €115bn and the gap for Germany’s banks raised to €13.1bn from €5.2bn. Commerzbank alone needs €5.3bn of the total for Germany, up from €3bn, Deutsche Bank needs €3.2bn, while the amounts needed by Spanish banks remain unchanged at €26.2bn – with Santander needing to find €15bn of the total. Commerzbank is confident it can find the extra capital by its own means.
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Those banks with shortfalls have been given until 20 January to present their proposals to their regulators and must find ways to fill gaps without leading to a “reduced flow of lending to the EU’s real economy”. The EBA reiterated that they should reduce bonuses and retain their profits to bolster their capital before attempting assets sales. Efforts already announced by French banks reduced their shortfall by €1.5bn to €7.3bn.
Europe Still Heading For Collapse
Author: Tim Duy, EconoMonitor
December 15th, 2011
The half-life of the effectiveness of European summits is growing increasingly shorter. While I have been a long-term Europessimist, market participants are more willing to trade on whatever appears to be positive news, thus markets jump whenever it appears the Europeans are taking action. But eventually the game will wear thin as market participants increasingly realize European “solutions” are never more than half-measures intended to kick the can down the road another few months.
And the last summit was no exception. The reality is quickly sinking in that, relative to the dimensions of the challenge, very little was really accomplished two weeks ago. And very little will be accomplished until European leaders come to the realization that they continue to treat the symptoms of the disease, not the cause of the disease. They need to find a mechanism to address Europe’s internal imbalances that does not rely exclusively on deflation as a cure.
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Arguably, European policymakers might see the fundamental problem, but also recognize a real solution in years away.
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Europe doesn’t have years. The vice of austerity packages will eventually crush to hard, and the cost of staying within the Euro will exceed the costs of exit.Meanwhile, the ECB is at best having mixed results. On one hand, recent actions appear to have stabilized government debt markets in Spain, Belgium, and France. On the other, Italian yields have retraced much of their collapse. Probably more importantly, however, stabilization of the banking crisis remains elusive.
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Germany needs to issue a massive amount of debt to support demand in Europe, even at the cost of higher relative inflation. And, better yet, to support debt writedowns in the periphery. The response from Germany: Nein.Bottom Line: I still don’t see where this ends well. Play the news cycle if you are so inclined, but keep one eye on the key issue. Is Europe working to resolve their fundamental internal imbalances with anything other than deflation? As long as the answer continues to be “no,” be afraid. Be very afraid.
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