Yesterday I wrote about the collapse of construction output in Spain, Slovenia, Romania, Hungary, Bulgaria, Italy, Greece and Ireland. Today I want to talk about whose banks this collapse will impact.
But first I only just realized I forgot (it was late) to actually get to Ireland. Sorry about that.
So before I get to today’s post – the story on Ireland is that for the last half of ’09 Ireland was showing an 11% YoY decline in construction output. Then, mysteriously, in the fourth quarter the figures became ‘confidential’ – so no figures – and after that Ireland was no longer required to post any figures. I’ll leave you to imagine what that means. But refer to the recent post on “the truth leaking out” for a quote from someone who knows.
So now for today.
Whose banks are going to get kicked in the guts by the collapse in construction? Well obviously local banks, like the Caja’s in Spain, are the ones whose loans permitted the building and speculating. So expect further blood to get coughed up there. What is more interesting is to look at which domino might get pushed over after that? Which banks in which other countries are exposed to the local banks? If a domestic tragedy becomes a systemic danger, that is the point at which the bond market might start to take serious notice.
Greece is once again ground zero. Greeks banks going to take large losses on the collapse of Greece’s its own construction industry of course. But even supposing Greece can (and it cannot) solve its own debt problems, its banks are doomed due to their exposure to massive bad loans on construction in Hungary , Romania, Bulgaria and Serbia. All nations where construction is plummeting.
Next in line is Austria. Its banks are massively exposed to losses via Greece banking losses and directly to losses in the same countries Greece is exposed to. Plus Austria is hugely in trouble from loans in Latvia, Lithuania, Estonia and Hungary. Everyone wanted a part of the bubble expansion in these countries on the way up. And leveraged in order to get in. Now they have no way out of the mess they bought into.
Austria, is in my opinion, the next most vulnerable and exposed nation after those in the front line. Just as Greece was the weak spot in the front row, Austria could well be the weak link in the next row up.
Next to them is Belgium. Not exposed to Greece, but heavily exposed to all the same countries Austria is. They were rivals for lending in the same ‘peripheral’ nations. Plus Belgium will face losses from construction in Spain and Ireland.
The point is that the collapse in construction is not a local problem but a systemic one. The losses are seriously large and show zero signs of abating. The losses will seep from country to country. From Hungary and Romania to Greece, to Austria.
The question that immediately springs to mind is that so memorably posed by the group Champaign – "How 'bout us?"
For the purposes of answering the question, you may assume that the song was about UK banks' vulnerability to falling construction indices in minor European states.
Always Unclear.
As far as I can tell, and don't forget I'm doing this very much from the outside, the UK's exposure is mainly in Spain and Ireland and I do not think it is so much in constrcution.
Our exposure to both together is enough to shake us but is not in the same league as our continental cousins. They had far more presence in the european periphery than we did.
But if Europe has a melt down we will get pulled down.
I think we are more likely to get caught in CDS trades and a general SIV debacle. For which no one, not Eurostat, not the central banks has any figures. I have asked and they say they don't know.
The bif change COULD come Oct 22nd when Eurostat said it will publish its new figures for european debts. It 'hope' these will include figures for much if not all the so far undisclosed currency swaps in Greece an elsewhere and include the consolidation of bad bank debts on to national debt levels. Prime amongst thsese would be th einclusion of Hypo Real Estates 240 billion odd euros on to Germany's debt level. Which could bring it up to around 90% of gdp.
Many thanks for your reply.
Well that is heartening news. That there's a debacle that doesn't involve our banking sector, comes as something of a shock.
I wonder if there's a spread betting market on the number of Eurostat figures that will be replaced by the letter 'c' on the 22nd October.
As ever, Unclear