16 Comments

  1. “Vendor financing works successfully as long as the lender makes sure the customer can pay back the loans”

    Hmmmm….can pay back the loans. Seems like deja vu every where I look….

  2. I personally worked out the bad vendor financing deals at LU from ’03 – ’05 (have a lot of stories!!), so I know what you are talking about here! It does make sense….and German export order plummeting in September confirms the story.

    Either ECB goes all in (I still see this as the outcome as German politicians and central bank buckle when really really pushed to a corner by Italy and maybe France!) or Eurbonds (which I don;t see happening).

    • I think the ECB will have to go all in because of Italy. And if it weren’t Italy eventually it would be France. It’s an institutional thing really. The euro zone needs a lender of last resort. The Germans and the ECB don’t want to have this lender though because they want the ‘profligate’ countries to practice better fiscal discipline across the business cycle.

      It’s this mentality which is at odds with the very vendor financing we are discussing that creates a problem for the euro zone. The current accounts, private savings and government deficits are all inter-related. You can’t change one without having an impact on the others, domestically and abroad. The people fixated on the fiscal side of things are not cognizant of the inter-relationship. I know I was not thinking about it three years ago.

      The only way to rein in deficit spending is through greater fiscal integration. You have to give up sovereignty if you want the benefits of the common currency without the negatives. there’s no way around it. People are learning this, but too slowly.

  3. You sound more and more like zero hedge.

  4. I am friends with the guys over at Mercenary Trader and Jack Sparrow been saying the same thing for a while. I totally agree with this Vendor financing idea.

    If you follow de Spiegle (what am I saying – you read it in German!) when they started pushing back on the euro breakup back late last year, you can see this said almost word for word by major business heads in Germany. They are quite frank about it.

    This is why I am so shocked at how Germany seems determined to push Greece off the political cliff.

    But great work and I’ll forward it to him.

  5. But What Do I Know?

    I used to do be in the equipment business in the 90’s and the common assumption in the international market was that vendor financing would be available from the German and Japanese manufacturers–in my mind, it was a huge part of their competitive edge (the necessary bribes could be hidden there as well). Easy credit was just another part of their industrial policy.

    I always wondered who would be on the hook when the loan went bad. . .

    • This isn’t a problem for Japan because they issue their own currency. But in the euro, it’s a problem.

  6. If this crisis is nothing more than vendor financing then the lenders should take their losses. Longer term could this be resolved by having a EU tax on the net balance on the country with a net positive position. So If Germany had a consistent balance surplus with Greece of €1 billion then it should pay a “tax” of 40% (of the €1 billion) to Greece. This could be used as a quick alternative to fiscal transfers which seem bogged down in nationalism right now. That would solve the trade imbalances.

    Then add in bans on banks operating outside the country of incorporation. So Germany could not lend to Greece, except via its Greek subsidiary. So if this had been the case when the crisis hit the losses would be taken within the Greek banks entirely. Though the german banks would have to take losses on the bankruptcy of their greek subsidiaries. This would eliminate contagion, and regulation arbitrage.

    • I don’t know why Germans are so upset about this problem. It’s not like they are innocent even a little bit.

      nice idea on the “tax”. I bet Germany thinks they are fairly competing in the world market with the EURUSD at 1.3000, and a 1:1 lock vs. the Drachma as long as they like.

      We’d also have to put something in place to prevent another Ireland – those are German banks.

      • Not just Ireland but Spain and Portugal who also had partly German funded property bubbles.

        The “tax” would actually give governments an incentive to boost purchases from deficit nations, hence minimising intra EU trade deficits. Glad you liked it.

        • The fiscal transfers must be done. It’s a matter of how. Calling them a tax might be the way to get them done. But you can imagine how much Germany would hate this.

          They’ve spent the last 20 years moving their economy to be 40% exports. And so much of these exports are to other EU countries…

          • The “tax” could be a quick alternative to fiscal transfers. Though I do agree that fiscal transfers are the permanent solution but even within a nation there can be long term problems if the fiscal transfers do not allow the recipient to become more self financing. Here in the UK the Conservative government are slashing transfers to the north of the country because they claim that public sector jobs are crowding out private sector job creation. Complete rubbish but since they did not vote for the government this could be viewed as simple retribution. This could happen with the recipient countries eventually especially given the attitude of the Germans and Finns.

  7. This is laughable. Germans are not to blame that the Irish, the Greeks lived a lavish lifestyle beyond their means, blaming the Germans is so dumb.

    • Well if the Germans had regulated the loans that their banks made all across Europe we would not have a series of bail outs. Where do you think that the majority of the bail out funds went? A lot has flowed back to Germany. Its banks are probably insolvent and you preach to the rest of the world about living within your means. Yes there are significant problems across the periphery. Most Greeks lived within their means, they just did not pay taxes because the super rich were given a no tax thank you for “helping” Greece. Ireland was never going to avoid a property bubble with cheap funds of the eurozone. The government and central bank ignored the bubble and put it down to their amazing skills and hard work. Asset bubbles are just that. Bubbles no matter what it is, It distorts investment and no government has sensible laws or taxes to deal with that problem. Germany funded that Irish property bubble with more than €100 billion.

      So Greece Ireland Italy Spain and Portugal all made mistakes but all funded with German money. Only this week Siemens Finance have been involved in a fraud in the UK. Hardly the actions of a well run bank.

  8. I would rather think to a kind of Ponzi scheme with money creation out of thin air…
    http://mgiannini.blogspot.com/2010/09/eu-stress-tests-inconvenient-truth-or.html

  9. I would rather think to a kind of Ponzi scheme with money creation out of thin air…
    http://mgiannini.blogspot.com/2010/09/eu-stress-tests-inconvenient-truth-or.html