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Here’s How Much German Banks Are on the Hook To The Periphery For

It bears remembering that the German banks are very exposed to the periphery as we contemplate the Spiegel article on Greece’s alleged desire to defect from the euro zone.

Here is what the debt situation in the periphery looks like for German banks.

German Banks

Before we talk about this, let’s talk about why this is relevant.

The rumours out of Germany that Greece is considering withdrawal from the euro-zone are being denied vigorously by EU and Greek officials. But, where there is smoke, there is fire. Clearly, it is in Greece’s best interest to allow these rumours to persist. Not only has it savaged the single currency, it also gives the Greeks leverage in terms of negotiating a better bailout package.

Win Thin is right when he writes:

it seems more likely that Greece may be playing a game of chicken with euro zone policy makers in order to negotiate a more favorable aid package, with perhaps an extension of duration on its debt, or loosening up of tough austerity measures. In other words, Greece is using the threat of a potential collapse of the euro zone as a means to get concessions from the core euro zone in attempt to quell the rising complaints of the Greek people. Both Greece and the euro zone will be worse off if they choose the scorched earth solution. From a game theory perspective, the question is whether the two sides can come up with a cooperative solution.

-Greece Euro Zone Exit Seems Unlikely

Portugal has received a better bailout package than Greece because it is more clear now that the terms given to Greece won’t work. Nevertheless, it is likely that even the terms Portugal have received will not work for Greece as austerity and internal devaluation set out an impossible task for Greece in reducing deficits and growing enough to reduce debt. A default is likely. The question is when, under what terms, and whether it is a unilateral or a managed default. The logic from the last comprehensive post I wrote on the sovereign debt crisis handicapping scenarios is still operative:

Internal devaluation and austerity is not a solution. They are politically unsustainable. It is obvious to most that defaults are coming. For Greece, sovereign default is a foregone conclusion. For Ireland, by dint of its socialisation of bank losses onto taxpayers, sovereign default is a real possibility. In Spain, bank losses have not been socialised and so the sovereign remains relatively healthy. However, Spanish banks have been slow to recognize losses and that means many contingent liabilities keep the market for Spanish government bonds in a state of stress. Portugal is well above the Maastricht 3/60 hurdles and contagion has spread to Belgium, Italy and France. Meanwhile, the public in countries like Slovakia and Finland want no part of future bailouts, while the public in countries like Greece and Spain are fed up with double digit unemployment and the prospect of a decade more.

-The European Sovereign Debt Crisis, Dec 2010

The Germans know that they will take hits. Their aim is to extend this as much as possible while their export led recovery helps to recapitalise their banking system.

Greece has a solvency problem. The Irish banks have a solvency problem that has become the Irish government’s solvency problem. Portugal and Spain have liquidity problems. The austerity and the defaults will be negative for growth in the periphery but will also boomerang to infect the euro zone core. Growth across the euro zone and in the UK will be weak. That’s my take on the situation.

-The Irish stress tests and euro zone options: monetisation, default, or break-up, Mar 2011

For the Germans, delay is good because a default down the line may be more manageable than one in the near future. So the Spiegel article warning of the dire consequences of a Greek withdrawal from the euro zone must be considered with that in mind. Greece is a sideshow, though. Clearly, it is an Irish default which is most worrying to the Germans because the exposure is huge and the possibility of default is too.

As to solutions, I think the one put forward by Gary Evans and Peter Allen is a credible solution to Europe’s debt crisis. And I suspect this is the kind of arrangement we will eventually see. For now, it is ECB monetisation and bailouts that rule the roost. Eventually, though, defaults are coming. Greece will be first in line. A euro zone break up, however, is still an outlier in terms of likely scenarios.

Source: Euro Crisis – Spiegel

P.S. – I think the Greeks are following the (cynical) strategy I laid out for Ireland in early 2009.

Ireland must threaten to leave now if it wants to maximize any EU help it expects to receive, before the scope of other EU banking crises become apparent.  Weakness in the financial sector has infected all of the Eurozone members. I have mentioned that Austria has a weak banking system (see posts here and here). But, there is even growing evidence that Germany too has a fragile banking system.  To be clear: this is an ‘every nation for itself’ strategy pitting Eurozone members against each other, where those nations savvy enough to request help sooner are likely to benefit at the expense of others. The question is whether the Germans would go along with this.  If they do not, tensions will rise and that will change the calculus for Portugal, Italy, Ireland, Greece, and Spain. I don’t have a view on this as yet because the situation is still evolving.  However, I lean toward believing the Eurozone will remain intact even while individual nations or banking systems collapse.

As events occur in Eurozone banking, I will keep you abreast on developments.

-The Eurozone and the spectre of banking collapse

The Irish missed their chance to do this before their banking system completely collapsed. Now defaulting on bank debt is their best hope to prevent the ravages of austerity. It’s two years late but the Greeks could be reaching for the nuclear option – withdrawal from the euro zone. Let’s see what happens.

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.

11 Comments

  1. Dennis says:


    Their aim is to extend this as much as possible while their export led recovery helps to recapitalise their banking system. ”
    I’m not so sure if anything there is really “aimed”. Greece and Portugal are not really a theme any more in the german press, Portugal hardly received any news. Our big themes are now energy change (Fukushima), bin Laden, the record high energy prices, Karl Theodor zu Guttenbergs Ghost writers etc.
    I also don’t think that the periphery (exception is Spain) really owes germany that much money. The government now expects to collect 17 billion € more in taxes than they expected 5 month ago, that would be enough for a 50% haircut for greek bonds.

    I’m also not convinved that germany has lent much money to Ireland. I think (think, not know) that these are subsidiaries like the irish Depfa Bank that belongs to HRE. Ireland didn’t have a trade deficit (unlike Spain, Greece or Portugal) and so in my view it’s unlikely that somebody accumulated huge amounts of irish debt.

    • @twitter-29693259:disqus Yes, HRE is a big slug of that. I agree. But Depfa is an Irish institution. So the exposure is still there.

    • DavidLazarusUK says:

      @Dennis The issue with Ireland was while it was in surplus it was funding a huge property bubble. That also applies to Spain. The UK banks have lent the Irish more than £46 billion for property. That is at serious risk of default. With incomes in Ireland being hit by austerity, property prices are unsustainable. So epect further losses.

      So far all the bailouts have benefited the core nations banks. Whether they have managed to get their money out is debatable. It is also why Belgium is in serious trouble. Its banks have been as bad as anyone else in lending overseas. The good news is that the government have not guaranteed debts. Though who knows what will be left of the belgian and german banking system if there are large defaults? I suspect it will be much more grim than anyone suspects. Greece and Ireland need large write offs to recover and that will transfer the pain to the core nations. If the periphery leave the Euro then the rebound could be significant and that will have a devastating effect on german exports. If there is no write off then expect trouble, as austerity will devastate the periphery and make the eventual default a near certainty all round. Better to default as soon as possible so that the pain is lessened for the debtor nations and that they can start to rebuild. Without that GDP will stagnate as people will save for the end of austerity.

    • “The government now expects to collect 17 billion € more in taxes than
      they expected 5 month ago, that would be enough for a 50% haircut for
      greek bonds.”

      This is completely unsustainable. The government are heavily taxing an economy that is severely depressed. The result is that they will take large chunks of tax in the sort-run, but the damage to the economy — via a soaking up of aggregate demand — will be so severe that, in the long-run, tax takes will fall. In this situation the government deficit will continue to open as the automatic stabalisers kick in to counteract the downward cyclical effects of the tax increases (unemployment etc.).

      “I’m also not convinved that germany has lent much
      money to Ireland. I think (think, not know) that these are subsidiaries
      like the irish Depfa Bank that belongs to HRE. Ireland didn’t have a
      trade deficit (unlike Spain, Greece or Portugal) and so in my view it’s
      unlikely that somebody accumulated huge amounts of irish debt. ”

      The loans from Germany were to property developers — it didn’t have anything to do with trade (i.e. current account). Ireland, being an export-oriented economy, usually run current account surpluses. The German bankers — being restricted by their own government — sought to make some extra Eurobucks by loaning Irish property developers money and, in doing so, helped fuel the outrageous housing bubble that inflated here. This dynamic was well-known even before the crash — with commentators such as David McWilliams saying that Irish private debt was amassing on the back
      of German savers.

  2. Dennis says:


    Their aim is to extend this as much as possible while their export led recovery helps to recapitalise their banking system. ”
    I’m not so sure if anything there is really “aimed”. Greece and Portugal are not really a theme any more in the german press, Portugal hardly received any news. Our big themes are now energy change (Fukushima), bin Laden, the record high energy prices, Karl Theodor zu Guttenbergs Ghost writers etc.
    I also don’t think that the periphery (exception is Spain) really owes germany that much money. The government now expects to collect 17 billion € more in taxes than they expected 5 month ago, that would be enough for a 50% haircut for greek bonds.

    I’m also not convinved that germany has lent much money to Ireland. I think (think, not know) that these are subsidiaries like the irish Depfa Bank that belongs to HRE. Ireland didn’t have a trade deficit (unlike Spain, Greece or Portugal) and so in my view it’s unlikely that somebody accumulated huge amounts of irish debt.

    • @twitter-29693259:disqus Yes, HRE is a big slug of that. I agree. But Depfa is an Irish institution. So the exposure is still there.

    • Anonymous says:

      @Dennis The issue with Ireland was while it was in surplus it was funding a huge property bubble. That also applies to Spain. The UK banks have lent the Irish more than £46 billion for property. That is at serious risk of default. With incomes in Ireland being hit by austerity, property prices are unsustainable. So epect further losses.

      So far all the bailouts have benefited the core nations banks. Whether they have managed to get their money out is debatable. It is also why Belgium is in serious trouble. Its banks have been as bad as anyone else in lending overseas. The good news is that the government have not guaranteed debts. Though who knows what will be left of the belgian and german banking system if there are large defaults? I suspect it will be much more grim than anyone suspects. Greece and Ireland need large write offs to recover and that will transfer the pain to the core nations. If the periphery leave the Euro then the rebound could be significant and that will have a devastating effect on german exports. If there is no write off then expect trouble, as austerity will devastate the periphery and make the eventual default a near certainty all round. Better to default as soon as possible so that the pain is lessened for the debtor nations and that they can start to rebuild. Without that GDP will stagnate as people will save for the end of austerity.

    • “The government now expects to collect 17 billion € more in taxes than
      they expected 5 month ago, that would be enough for a 50% haircut for
      greek bonds.”

      This is completely unsustainable. The government are heavily taxing an economy that is severely depressed. The result is that they will take large chunks of tax in the sort-run, but the damage to the economy — via a soaking up of aggregate demand — will be so severe that, in the long-run, tax takes will fall. In this situation the government deficit will continue to open as the automatic stabalisers kick in to counteract the downward cyclical effects of the tax increases (unemployment etc.).

      “I’m also not convinved that germany has lent much
      money to Ireland. I think (think, not know) that these are subsidiaries
      like the irish Depfa Bank that belongs to HRE. Ireland didn’t have a
      trade deficit (unlike Spain, Greece or Portugal) and so in my view it’s
      unlikely that somebody accumulated huge amounts of irish debt. ”

      The loans from Germany were to property developers — it didn’t have anything to do with trade (i.e. current account). Ireland, being an export-oriented economy, usually run current account surpluses. The German bankers — being restricted by their own government — sought to make some extra Eurobucks by loaning Irish property developers money and, in doing so, helped fuel the outrageous housing bubble that inflated here. This dynamic was well-known even before the crash — with commentators such as David McWilliams saying that Irish private debt was amassing on the back
      of German savers.

  3. M.B. Drapier says:

    Besides (probably) Depfa, that figure likely includes exposure to many other tax vehicles still parked in the Irish Financial Services Centre. On the one hand, these IFSC companies generally have little exposure to the Irish economy or the “real” Irish banking sector – and on the other hand the Irish government has been pretty emphatic that it’s not going to bail any of them out anyway (though see http://www.independent.ie/business/irish/central-bank-had-836417bn-exposure-to-depfa-bank-2183474.html ). So probably the single nearest thing to the “real” number is the German banks’ exposure to the six institutions which were guaranteed by the Irish government’s guarantee scheme(s). (Other banks like Ulster Bank Ireland and the defunct Bank of Scotland (Ireland) have huge exposure to the Irish economy and Irish RE but were bailed out by the UK where their parent companies (RBS and HBOS respectively) were based, even though they were Irish banks for regulatory purposes.) IIRC Dennis is right that the German banks weren’t collectively among the biggest lenders to the Sick Six – weren’t the UK and US banks their biggest sources of funding? At the same time Philp Pilkington is correct that the Irish crisis was originally a problem of bad private-sector debt, which became a public debt problem through the Irish government’s (first voluntary, then forced) bank bailouts.

    • @twitter-217807418:disqus thanks for that insight on foreign exposure to the Irish economy and the sick six Irish banks. I have written quite a bit about the German banks’ lending habits in the periphery and elsewhere (see: German banks loaded with 816 billion in toxic paper
      as an example http://www.creditwritedowns.com/2009/04/german-banks-loaded-with-816-billion-in-toxic-paper.html). My experience in Germany showed me that German banks were burned by the reunification bubble and suffered heavy losses on real estate and construction loans. As the new millennium hit, the German property sector was dead and the German banking system is overbanked and was dominated by public institutions like the Landesbanks and the Sparkassen on the one hand and the Big Three Deutsche, Commerz and Dresdner on the other.

      The return on equity in the core business is exceedingly low. So the big three (and WestLB) bulked up on investment banking activities and made a splashy acquisitions in London and New York. The Landesbanks and lower-profile private financial institutions like HRE went abroad to the property bubbles of Spain and Ireland (see: Hypo Real Estate need for 10 billion also reveals huge problems in Spain http://www.creditwritedowns.com/2009/07/hypo-real-estate-need-for-10-billion-also-reveals-huge-problems-in-spain.html or HRE:defusing the German financial time bomb http://www.creditwritedowns.com/2009/04/hre-defusing-the-german-financial-time-bomb.html).

      These banks knowingly took on risks abroad and in investment banking because the domestic market returns were so low. They also loaded up on toxic assets that were ‘AAA’ in order to comply with Basel rules about leverage while trying to boost returns. Now these problems are coming home to roost. The German banks were reckless and should be rewarded for their recklessness with losses.

      In the periphery, The Irish in particular erred in letting the banks’ creditors off the hook, especially given the recklessness of both the lenders and the property developers. They really do need to cut the cord on the banks rather than saddling taxpayers with the burdens of the reckless few.

      In Greece, the government simply was reckless. Rather than trying to undergo an austerity that cannot possibly work, they need to revamp their finances while getting debt relief much as we saw with the Brady Bonds in the 1990s. I highly recommend the post A Credible Solution to Europe’s Debt Crisis http://www.creditwritedowns.com/2011/04/a-credible-solution-to-europes-debt-crisis.html because that is a solution that will work.

      • I forgot to add this post:”Hypo Real Estate: 600 billion in off-balance sheet assets”
        http://www.creditwritedowns.com/2009/02/hypo-real-estate-600-billion-in-off-balance-sheet-assets.html

        It reveals the extent of the derivatives exposure at these banks. There was plenty of reckless investing in Spain, Ireland, the US and elsewhere. As David Lazarus indicated, the same goes for the Swiss and Austrian banks in Eastern Europe and the Scandinavian banks in the Baltics. In each case, the home countries were savaged by austerity and depression while the banks got of scot-free.

      • M.B. Drapier says:

        @edwardnh:disqus No disagreement from me there. It’s certainly true that the German banking system has a deep problem with bad external loans – it just seems to be the case that proportionately little of them were to Ireland, and that German institutions largely preferred to make their reckless loans elsewhere. And of course that doesn’t mean that the German financial system will be free and clear if (when?) there are defaults on Irish sovereign or senior bank debt. If nothing else, the CDS wizards at Deutsche might have some issues. (Speaking of which, there’s evidence of Deutsche CEO Ackermann’s keen interest in Ireland
        http://finance.yahoo.com/news/European-officials-to-lift-apf-432727550.html – there’s even video http://tvnewsroom.consilium.europa.eu/story/index/story_id/16015/media_id/36908/media_type/video )

        (BTW, here are two very good Irish-crisis blogs: Nama Wine Lake http://namawinelake.wordpress.com/ and Lorcan Roche-Kelly’s Corner Turned http://blog.cornerturned.com/ . Neither are associated with me.)

        • @twitter-217807418:disqus I wouldn’t say the amount is proportionately little. I think the proportion of German banks in Ireland compared to the size of the economy is pretty large if you think about how large Ireland is in comparison to Spain for example. But, yes the Germans have more invested in places like the US, Spain or Italy.

          Thanks for the tips on the blogs. I chat with Roche-Kelly on Twitter often. The other blog, I will have to check. Cheers.

        • DavidLazarusUK says:

          I agree that the total liabilities of Ireland to German banks are not enough to cause that much damage to german banks, but the CDS market is probably many times the level of irish debts owed to german banks. That will will be the killer blow to the german banks. In fact greek debt might actually do a significant amount of damage. It only needs one bank to have significant losses to cause another panic.

  4. M.B. Drapier says:

    Besides (probably) Depfa, that figure likely includes exposure to many other tax vehicles still parked in the Irish Financial Services Centre. On the one hand, these IFSC companies generally have little exposure to the Irish economy or the “real” Irish banking sector – and on the other hand the Irish government has been pretty emphatic that it’s not going to bail any of them out anyway (though see http://www.independent.ie/business/irish/central-bank-had-836417bn-exposure-to-depfa-bank-2183474.html ). So probably the single nearest thing to the “real” number is the German banks’ exposure to the six institutions which were guaranteed by the Irish government’s guarantee scheme(s). (Other banks like Ulster Bank Ireland and the defunct Bank of Scotland (Ireland) have huge exposure to the Irish economy and Irish RE but were bailed out by the UK where their parent companies (RBS and HBOS respectively) were based, even though they were Irish banks for regulatory purposes.) IIRC Dennis is right that the German banks weren’t collectively among the biggest lenders to the Sick Six – weren’t the UK and US banks their biggest sources of funding? At the same time Philp Pilkington is correct that the Irish crisis was originally a problem of bad private-sector debt, which became a public debt problem through the Irish government’s (first voluntary, then forced) bank bailouts.

    • @twitter-217807418:disqus thanks for that insight on foreign exposure to the Irish economy and the sick six Irish banks. I have written quite a bit about the German banks’ lending habits in the periphery and elsewhere (see: German banks loaded with 816 billion in toxic paper as an example http://www.creditwritedowns.com/2009/04/german-banks-loaded-with-816-billion-in-toxic-paper.html). My experience in Germany showed me that German banks were burned by the reunification bubble and suffered heavy losses on real estate and construction loans. As the new millennium hit, the German property sector was dead and the German banking system is overbanked and was dominated by public institutions like the Landesbanks and the Sparkassen on the one hand and the Big Three Deutsche, Commerz and Dresdner on the other.

      The return on equity in the core business is exceedingly low. So the big three (and WestLB) bulked up on investment banking activities and made a splashy acquisitions in London and New York. The Landesbanks and lower-profile private financial institutions like HRE went abroad to the property bubbles of Spain and Ireland (see: Hypo Real Estate need for 10 billion also reveals huge problems in Spain http://www.creditwritedowns.com/2009/07/hypo-real-estate-need-for-10-billion-also-reveals-huge-problems-in-spain.html or HRE:defusing the German financial time bomb http://www.creditwritedowns.com/2009/04/hre-defusing-the-german-financial-time-bomb.html).

      These banks knowingly took on risks abroad and in investment banking because the domestic market returns were so low. They also loaded up on toxic assets that were ‘AAA’ in order to comply with Basel rules about leverage while trying to boost returns. Now these problems are coming home to roost. The German banks were reckless and should be rewarded for their recklessness with losses.

      In the periphery, The Irish in particular erred in letting the banks’ creditors off the hook, especially given the recklessness of both the lenders and the property developers. They really do need to cut the cord on the banks rather than saddling taxpayers with the burdens of the reckless few.

      In Greece, the government simply was reckless. Rather than trying to undergo an austerity that cannot possibly work, they need to revamp their finances while getting debt relief much as we saw with the Brady Bonds in the 1990s. I highly recommend the post A Credible Solution to Europe’s Debt Crisis http://www.creditwritedowns.com/2011/04/a-credible-solution-to-europes-debt-crisis.html because that is a solution that will work.

      • I forgot to add this post:”Hypo Real Estate: 600 billion in off-balance sheet assets”
        http://www.creditwritedowns.com/2009/02/hypo-real-estate-600-billion-in-off-balance-sheet-assets.html

        It reveals the extent of the derivatives exposure at these banks. There was plenty of reckless investing in Spain, Ireland, the US and elsewhere. As David Lazarus indicated, the same goes for the Swiss and Austrian banks in Eastern Europe and the Scandinavian banks in the Baltics. In each case, the home countries were savaged by austerity and depression while the banks got of scot-free.

      • M.B. Drapier says:

        @edwardnh:disqus No disagreement from me there. It’s certainly true that the German banking system has a deep problem with bad external loans – it just seems to be the case that proportionately little of them were to Ireland, and that German institutions largely preferred to make their reckless loans elsewhere. And of course that doesn’t mean that the German financial system will be free and clear if (when?) there are defaults on Irish sovereign or senior bank debt. If nothing else, the CDS wizards at Deutsche might have some issues. (Speaking of which, there’s evidence of Deutsche CEO Ackermann’s keen interest in Ireland
        http://finance.yahoo.com/news/European-officials-to-lift-apf-432727550.html – there’s even video http://tvnewsroom.consilium.europa.eu/story/index/story_id/16015/media_id/36908/media_type/video )

        (BTW, here are two very good Irish-crisis blogs: Nama Wine Lake http://namawinelake.wordpress.com/ and Lorcan Roche-Kelly’s Corner Turned http://blog.cornerturned.com/ . Neither are associated with me.)

        • @twitter-217807418:disqus I wouldn’t say the amount is proportionately little. I think the proportion of German banks in Ireland compared to the size of the economy is pretty large if you think about how large Ireland is in comparison to Spain for example. But, yes the Germans have more invested in places like the US, Spain or Italy.

          Thanks for the tips on the blogs. I chat with Roche-Kelly on Twitter often. The other blog, I will have to check. Cheers.

        • Anonymous says:

          I agree that the total liabilities of Ireland to German banks are not enough to cause that much damage to german banks, but the CDS market is probably many times the level of irish debts owed to german banks. That will will be the killer blow to the german banks. In fact greek debt might actually do a significant amount of damage. It only needs one bank to have significant losses to cause another panic.

  5. Overleveraged, reckless banksters.

  6. Overleveraged, reckless banksters.