If there is one thing we all ought to have learnt about bank debts by now, it’s that there are a million ways of hiding them.
Off-balance Sheet, Off-shore, out of sight (of the public ) or just out of your mind ( the AIG model) take your pick. There is an financial wizard ready to fleece… sorry, advise you.
So before anyone accepts at face value ideas such as, ‘Germany will bail out Greece’ or ‘Santander is a great bank offering terrific savings rates’ step back one pace and consider that debt and truth are inversely related.
Let’s look at Germany. Described as Europe’s ‘power house’ or ‘paymaster’. And it is true Germany is better off than the UK. But to assume that Germany will just bail out Greece is to suppose that Germany has no debt problems of its own. But it does.
The key thing to remember about many European countries is that while national debts are what hit the headlines state and municipal debts often get forgotten. (Portugal falls importantly into this category.)
BUT last year the German government itself estimated that as much as 500 billion euros in toxic debt was still festering in German Landesbanks. These are the banks majority owned by the German states. Bavaria’s Landesbank to take just one is in a very deep hole. It already stiffed many of its bondholders once and may do so again. The Landesbanks in general have seen their credit rating downgraded and their debts accumulate.
Now their debts are not counted as German national debt. BUT given a choice between bankrolling terminally sick landesbanks or Greece which do you think is politically most likely? It’s all a matter of ‘implicit’ guarantees. Who stands behind whom even if there is no formal guarantee.
So far Germany has done with them what the US did with its troubled banks – Saxony LB was saved (bought) by another larger Landesbank just like Washington Mutual was ‘saved’ by JP Morgan .
But these are stop gap measures. And the Landesbank debts are not going away. They are not in much better shape now than they were a year ago. In some cases they are worse off. Time for them is money in the negative sense. Add to this a minimum of €200B still rotting in Germany’s private banks ( if you believe that figure you should definitely apply for the job of risk controller at Deutsche bank) and the total of €700B is the second largest dung heap of illiquid or structured toxic assets outside the U.S.
Now for Spain and Santander. Santander has been bothering me for a while. I see it as the RBS of Spain.
Spanish banks were ‘saved’ by a 1999 law forcing them to hold higher reserves than most other european banks. They were also less exposed to US subprime than French, German and UK banks. Better capital reserves and low defaults rate have helped them trade borrow and buy. Santander and others have traded on this. But the longer and deeper the Spanish property crash becomes the more miraculous it is that the Spanish banks continue to have so few losses.. And this is where the problem is going to come from.
The Spanish Central Bank is already examining IF Spanish banks (Santander being the biggest) are artificially postponing reporting of bad debts. If, as expected, 2010 is a second year of contraction for Spain losses should start to appear very fast.
How fast?
Well let’s take a comparison between Santander and the smaller BBVA. Both lent to Spanish developers to put up huge numbers of flats. BBVA is reporting 17% of its loans to developer as in doubt. Santander says only 8% of its are classified as bad. BBVA increased its reserves for dealing with debts of Spanish property development to a massive 32%. No bank does this unless it thinks it HAS to.
Finally, BBVA said non-performing assets in Spain and Portugal nearly doubled in only three months from €1.99B in September to €3.77B in December. BBVA’s profit in the fourth quarter dropped 94%!! to 31 million euros.
Now BBVA could just be a very poorly run bank OR it could be the more realistic estimate of what faces Santander.
A last word- if rates in the UK start to go up later this year defaults will rise sharply. I think this will hurt Santander a great deal. Because I think they have been relying on cash flow from UK mortgages to help off-set losses in Spain. Santander bought up UK Building societies in order to get this cash flow. If it dries up just when Spanish losses can’t be hidden any longer it will be a double blow they will have trouble surviving.
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