Warning: Creating default object from empty value in /home3/tandem/public_html/golemXIV/wp-content/themes/canvas/functions/admin-hooks.php on line 160

Dominoes falling from the East

Chapter one –  The Debt train.
Today the Irish will to hear what further humiliations their political and financial classes are going to heap upon them.  So naturally everyone is looking at the line of dominoes in Western Europe.  Ireland, knocking confidence in Portugal, knocking on to the big kahuna of ‘too big to save’, Spain.  But there is a line of dominoes in Eastern Europe that we should not forget.

Hungary was yesterday downgraded by Moodys.  The reason was that Hungary is quite obviously NOT going to hit its IMF/EU mandated ‘austerity’ targets.  Which will mean its debt will grow, its banks will face higher borrowing costs  and the country may not get any more help from the IMF or the EU.  Until it is about to fall over when help will forced on them Irish-style.

Not only that, but it is equally obvious that the Hungarian economy which was this year officially limping along at about 0.6% growth will now certainly contract as the global slow down starts to loom clearly out of the fog of denial.  Bulgaria will also contract. Bulgaria’s banks saw delinquency rates double this year from 6% last year to 12% of all loans now.  The situation is similar in Romania where the economy is set to contract 2% and the value of assets underpinning loans is declining rapidly.

In short, there is another train load of banking losses being loaded in the East. The question is where is the train headed to dump/deliver the debts?  Well, sadly, a third of Bulgaria’s banks are owned by Greek banks! They also own about 12% of Rumania’s banks. So as the Balkans default, their losses will fall upon Greek banks who will not be able to contain them.  They will give the Greek banks the final push and they will fall over in their turn.

So first stop for the debt train is Athens.  Where some of the Balkan debt will be dumped and will trigger a new crisis of Greek bank insovency and debt.  The combined debt will then be loaded together onto a new Greek debt train to continue west. That train, now loaded with a toxic brew of Balkan and Greek debt, will make two main stops.  Paris, where, eventually, it will unload about €100 billion of exposure to Balkan debt into French banks, and Frankfurt where it will unload a further €80 billion into German banks.

But we should return to the original Balkan train still loaded with debt, because it has further deliveries itself.  While the Greek train heads to Paris and Frankfurt, the original Balkan train will now head to Austria.  There it will have two main stops, Erste Group of Vienna and Bank Austria, the largest bank in Austria, which prided itself on being the largest western bank in Eastern Europe.

Bank Austria, is, I estimate, in a world of trouble.  It has loans throughout Eastern Europe from Poland to Bulgaria and as the downturn intensifies in Eastern Europe, so will its losses.  Austria has kept out of the spotlight, but I think its moment approaches. I think Austria, to mix my metaphors in an unforgivable manner, is the next domino to watch in the east.  But it is not the last.

Austria and its German neighbor Bavaria have a history of financial troubles, bankruptcies, write downs, dark allegations of political/financial corruption and exposure to bad loans, which are emerging into the light.  I think we will see bad debt exposure accumulating in Austria next year.

Now the Erste consignment will have to be dealt with in Austria.  But the Bank Austria, the larger part of the problem will not. It will head onward to Italy and to Italy’s largest bank, Unicredit where it will deisgorge its freight of debt.  Because Bank Austria, Austria’s largest bank, is in fact, owned by Unicredit, Italy’s largest bank.  How and why the pride and jewel of Austria is owned by the pride of Italy, and why it will be Italy that has to deal with a trainload of Balkan debt is the next chapter of the story.

Chapter Two –  Too Big to Mention.
In this global debt crisis we have heard several new notions: Too Big to Fail (AIG) and Too Big to Bail (Spain) and now I would like to add one more – Too Big to Mention. And to that category I would like to assign Unicredit as its founder member.

Unicredit is an institution that never gets mentioned because it is SO big relative to its parent nation that their fates are one.  Whatever happens to Unicredit happens to Italy. Thus whatever problems Unicredit may or may not have, no one mentions them because everyone knows Unicredit has the 100% backing of the Italian State and Treasury.  You mess with Unicredit, you mess with Italy.

So…caution meet wind and here goes.

How Unicredit came to own Bank Austria is a story worth taking a minute to tell. It shows how interwoven East and West actually are.  And why I think the Balkan debt train will eventaully disgorge its cargo in Milan, endangering the stability of one of Europe’s largest banks and the nation it sits in.

The story starts in Bavaria with its two largest banks, Beyerische Hypotheken-und Wecshel Bank and Beyerische Vereins-bank .  Beyerische was a huge lender in East Germany. Back in 1998 Hypotheken and Vereins had a shot gun wedding.  An unusual one because both bride and groom were holding shotguns.  The reason, both had large losses to write down.  Hypo blew up first.  Not hard to imagine that the losses came from its exposure to East Germany.

The marriage was hardly consummated when the joint bank (now called Hypo Veriens Bank HVB) had to write down €3.5 billion inherited from the Hypo half.  The Vereins half held on for 7 more years before it too puked up its dowry losses.  So this was a bank, that though large, was obviously not overly well run.

Nevertheless only two years later the combined bank, HVB, bought the largest bank in Austria.  A German banker who was willing to talk to me on condition of annonymity, who had knowledge of the acquisition, said, it was rumoured at the time that HVB’s purchase was extremely aggressive and unwelcome. What was it HVB wanted to get their hands on?   Bank Austria were and I think still are, the largest western presence in Eastern Europe and the Balkans of any Western bank.  As such it was seen as the avenue to new markets, new money, Russian money, and the bubbling Eastern European property markets in places like Poland.

HVB continued to grow. Eastern money and eastern loans, thanks to HVB, now flooded as far as Bavaria. HVB became the largest real estate financier in Europe and Germany’s second or third largest bank by number of customers.  However, all did not go well. By 2003, according to a second very senior banker who was also willing to speak, and who claims personal knowledge, HVB had accumulated a vast pile of less than wonderful and non-performing assets.  He quoted a figure of 57 billion euros worth.  I have not been able to verify this figure of course.  So let’s say somewhere in excess of 40 billion euros of not-so-super loans, just to err on conservative side.  Either way it’s a lot.  HVB, he told me, wanted rid of this new bolus of bad debt.

Chapter Three – The Irish Connection
How to get rid of it became the question. 2003 was also, and not coincidentally, the year Hypo Real Estate (HRE) was born.  The infamous Hypo Real Estate which had to be bailed out first by the German taxpayer  and, now indirectly, also by the Irish Tax payer.

HRE (Hypo Real Estate) was spun out of HVB (Hypo Veriens bank) in 2003, at the moment HVB wanted rid of its non-performing loans.  In the event HVB decided to spin out all its non German residential business which, my source claims, included the very large majority of those pesky non- performing loans HVB wanted to get rid of.  So, HRE was the solution to the problem. HVB spun out this non German business and the non-performing loans but sweetened it with a large, very large, amount of cash.  Another source has told me that the deal was also done to allow Georg Funke to have his own bank.  He really, really wanted one of his own but couldn’t have HVB, so they created HRE and gave that to him instead. Again, I can’t verify the story but yet another banker (I know, I know, I need to get out more and meet other people) did say this sort of ego driven thing was “definitely part of modern banking.”  Make of it what you will.

Hypo Real Estate (HRE), was housed in Dublin by the simple expedient of giving it the banking license of HVB Ireland.  Same license, same bankers, new bank.  HVB Ireland became HRE.  Magic.  Over night Hypo Real Estate became Ireland’s largest bank.  It was Irish registered, Irish ‘regulated’, was bigger than any other Irish bank, including AIB, but was listed not on the Irish exchange but, via a holding company, on the Frankfurt stock exchange. It was that holding company based in Munich that controlled Hypo Real Estate and that is why the bail out when it came properly fell on Germany not Ireland.  It was not a case of Germany bailing out an Irish bank. Germany bailed out a German bank which had been squatting in Ireland to take advantage of low taxes.

But I am getting ahead of myself.

At the moment we are still in 03 and are just about to enter THE property and debt boom.  This means that HRE, although it was born deformed, with non-performing assets, probably saw them recover as the boom years floated all boats.  The rest of HVB (from which HRE was spun out remember) also continued to grow and lend.

But by 2005 yet more bad banking was taking its toll.  This was the year the Vereins side wrote down €2.5 billion. I hope you are beginning to get the feeling that bad banking is an almost constant feature of this saga. According to the snappily entitled “Strategic planning for accountants: methods, tools and case studies.” by Dimitris N. Chorfas,  by 2005, “Analysts and investors,…, wondered how, with all these assets HVB was in danger of going under? Also, why did HVB’s exposure skyrocket?” (p. 556).  The author goes on to list “mounting losses”, “Tumbling credit ratings” and “A share price less than half of what it was a year earlier” as symptoms of the rotten and parlous state of HVB.  My question, is what sort of bankers manage to make one enormous lot of losses after another and never learn?

Stay with me now. We’re nearly there.

Chapter Four –  Last stop, Milan
In 2005 Unicredit enters our story.  As a German banker said to me last week, “There is no way the Bavarians would give the Italians the keys to the vault, unless the alternative was death.”  HVB was near death.  But this was not a simply rescue of a sick bank by a healthy one.  Unicredit had to offer 5 shares in Unicredit for every one of HVB.  And after the marriage, who should emerge as Chairman of the new, vaster Unicredit but a Dieter Rampl, CEO of HVB – A German/Bavarian banker.  The Italian nationalist element in Unicredit were, I am told, very unhappy.

The share swaps and Rampl’s ascendancy together, tell me Unicredit had some of its own weaknesses.  To which it had now added a sick, bad-debt riddled HVB.  What it had also got however, was now a huge presence in Germany AND, via Bank Austria, – the largest banking presence in Eastern Europe and the Balkans.

Fast forward to today, and we can now see why the debt freight train is headed for Milan. Unicredit owns HVB and its losses and Bank Austria and its Balkan losses.  My question is –  is Unicredit robust enough contain its own losses plus those of HVB, and Balkan losses out of Bank Austria?

To which we need to add one more detail.  In the boom years, Unicredit also bought Pioneer Asset Management in the USA.  Through Pioneer Unicredit also bought Vanderbilt Capital Advisers.  Vanderbilt were in the CDO business. In fact they were up there with Bear Stearns in terms of how many CDOs they managed.  And not all of them fared well.  A coinsiderable number of those they managed collapsed, and some were the object of law suits. A recent estimate put Vanderbilt’s expected losses on its CDOs at about 4 billion dollars. And now Unicredit is trying to sell Pioneer.  Wonder why?

Oh,  and Pioneer were and may still be one of the bond holders of Anglo Irish Bank. See the bond holder list I posted previously.  That they used to buy up Irish Bonds was also confirmed for me by a former insider.

So… what this very long journey has been about is to say there is a line of dominoes in the Eastern ‘periphery’ waiting to start falling towards those falling from the West. When they do we should look for the first signs of real trouble in Austria and if we see it, we should then turn to Italy which is the joker in the pack.

,

33 Responses to Dominoes falling from the East

  1. Whistleblower IRL December 7, 2010 at 10:54 pm #

    Dear Golem,

    Whilst there is no way for me to know who your banking sources are, it is evident that they have an intricate knowledge of the banking industry.

    Thank you for a most insightful 'tour' of the paths that link Dublin to Frankfurt/Milan/Vienna/Paris on the one hand, and to New-York and Boston on the other. Your learned knowledge might also shed some light (and sound) on the deafening silence emanating from the Irish government in relation to the 1900% (Yes, one thousand and nine hundred percent) breach of liquidity regulation that I had reported to the Regulator while working as the Risk Manager of a foreign-owned bank in Dublin.

    Curiously enough, Brian Lenihan, the Irish Finance Minister, only recently acknowledged that the Regulator had indeed been informed of said breach, which amounted to BILLIONS of Euro. However, he went on to say that he did not deem such a breach to be of consequence to the Irish banking system.

    What is even more bizzare, is the mystery surrounding the simple question of whether the Irish Regulator had informed the relevant European regulator of the chaos at this bank?

    Has the Irish government been embarrassed into silence, or is it acting in the interest of other governments, by maintaining its silence on this affair?

    Only time will tell.

    Regards from Dublin,
    WhistleblowerIRL

    PS
    There are many more unanswered questions regarding the actions, or lack thereof, taken by the Irish authorities in relation to the liquidity problems that occurred at this bank. These can be found at:

    http://whistleblowerirl.blogspot.com/

  2. stephen December 7, 2010 at 11:14 pm #

    Mixed metaphor saps the strength of the piece. Go with the train journey, ending in a wreck – not enough energy in dominoes.

    Interesting follow up to the post on who bankrupted Ireland. Curious about the reliability of the sources.

  3. HavocBunny December 8, 2010 at 3:00 am #

    You're right on the money about "this sort of ego driven thing":

    Funke bought Depfa when no other bank would touch it with a barge pole, yet Funke was boasting: "Depfa, that's pure quality".

    http://www.spiegel.de/spiegel/print/d-63947500.html

  4. RichGB December 8, 2010 at 9:01 am #

    Meanwhile, back in the Wild West, a serious problem is developing regarding 2011 municipal funding in the States – see this.

  5. RichGB December 8, 2010 at 9:20 am #

    I should also mention that Bruce Krasting has some interesting takes on financial events, having worked on Wall Street for 25 years.

    See here.

  6. john December 8, 2010 at 10:39 am #

    Thought that this article might be some good evidence for another option:

    http://www.guardian.co.uk/business/2010/dec/07/iceland-exits-recession-third-quarter

    'Iceland's decision two years ago to force bondholders to pay for the banking system's collapse appeared to pay off after official figures showed the country exited recession in the third quarter.

    The Icelandic economy, which contracted for seven consecutive quarters until the summer, grew by 1.2% in the three months to the end of September.

    Iceland famously agreed in a referendum to reject a scheme to repay most of its debts that were once worth 11 times its total national income.

    In contrast to Ireland, Iceland's taxpayers refused to foot the bill for the debts accumulated by the banking sector. Bondholders were told to accept dramatic reductions in the value of repayments on bank debt after the sector borrowed beyond its means to fund ambitious investments abroad.

    The return to growth is likely to put pressure on Irish politicians to explain why Dublin rejected a more radical restructuring of its debts and a departure from the eurozone.'

  7. Golem XIV - Thoughts December 8, 2010 at 10:49 am #

    John,

    The contrast is both painful and inspires hope. The Irish need to purge themselves of their political class the way the body rids itself of bad food. Explosive expulsion without warning.

    Then we need to do the same.

  8. Ben Gabel December 8, 2010 at 11:53 am #

    Superb long post. Thank you David for making it comprehensible.

    On another front, I have made a brief animation about the Irish bank bail-out.

    This effort is inspired by Davids repeated mantra that we must get the word out to the normal people as to what is going on.

    I keep meeting friends and when discussing the banking system they always say 'Oh, I see! Why on earth can't anyone in the media explain it like that – clearly in terms that laymen can relate to?"

    So this is my effort. Hugely simplified – but then it is explained by teddy bears after all.

    Now I have something I can email to people rather than having to start again from scratch.

    http://www.youtube.com/watch?v=n5N6i0DuYpc

    Ben

  9. wirplit December 8, 2010 at 12:41 pm #

    Great post. And with Iceland now officially out of recession
    having let the private banks fail and the debts be taken by those who took them out the pressure on the Irish Political class must be extreme. Admittedly Iceland could let the currency devalue the krona is down 25% but that is not that much considering the supposedly dire consequences being actively propagated. Its helped exports just as a similar drop in sterling has helped us.
    Defaulting works and once that is fully grasped by the suffering victims of the cuts being preposed by the IMF and the cabal behind the EEC then all hell will finally break loose and the last defenders of "We had no choice" option discredited.
    Hope you managed to take up offers to go to Ireland to give talks David… The Irish may be stunned and they may have a rotten political class but they are also well educated and think and once this stuff enters the daily craic of the layman as Ben says… It can seem for a long time you are talking to very few but every straw counts …

  10. JonboyGrant December 8, 2010 at 1:00 pm #

    Not sure of the accuracy but thought you'd be interested:
    http://www.guardian.co.uk/business/2010/dec/07/iceland-exits-recession-third-quarter

  11. Unclear December 8, 2010 at 3:04 pm #

    I've been looking at 10 year bond spreads again. Sorry.

    Over the past week, the US (7.7%) and Germany (6.8%) have the highest rises while Ireland and Portugal both fell by over 10%.

    Over the past calendar month, Japan (29%), USA and Germany (25%)lead the way. Portugal down 11%.

    Yours interestingly, Unclear.

  12. RichGB December 8, 2010 at 3:51 pm #

    Here is an interesting paper by the Levy Institute. In it they argue convincingly why the UK QE has not increased bank lending and suggest that there is no evidence that QE could ever increase lending.
    Skip to page-13 to get the basic facts.

  13. Dope Addict December 8, 2010 at 5:48 pm #

    Ben Gabel said…
    So this is my effort. Hugely simplified – but then it is explained by teddy bears after all.

    Ben — I don't think it's creepy enough!

    But seriously, good effort. Speech synthesis is improving, though it has a little ways yet to go.

  14. Uncle December 8, 2010 at 5:58 pm #

    Ben,

    I tried to watch the video but I get the following message (from the UK)

    This video contains content from Comcast Entertainment Group, who has blocked it in your country on copyright grounds.

    Anyone else having similar problems? I want to see those teddy bears!

  15. Ben Gabel December 8, 2010 at 6:45 pm #

    what country are you in Uncle? I can't find a list of who they block. Obviously hoping it isn't Ireland . .

  16. DAD December 8, 2010 at 6:51 pm #

    France is also blocked.

  17. Ben Gabel December 8, 2010 at 6:55 pm #

    Uncle, you could try http://www.xtranormal.com/watch/7985093

  18. Pat December 8, 2010 at 6:58 pm #

    Ben: thank you for your excellent vid. I hope it goes viral.

  19. Ben Gabel December 8, 2010 at 7:22 pm #

    Sorry. Video should be fine now. YouTube's copy-right-protection software had blocked it – scary! Fixed.

    Pat, thank-you. It would be nice if it went out widely. That is my idea; Trying to bring David's insight to the masses.

    Please send the link to anyone you know who isn't as angry as they should be. http://www.youtube.com/watch?v=n5N6i0DuYpc

  20. 24K December 8, 2010 at 8:32 pm #

    GOLD STAR for Ben Gabel.

  21. JamieGriffiths December 8, 2010 at 10:50 pm #

    Haha! I'd been waiting all day to watch that due to the same copyright message. It didn't disappoint.

    Well played, Ben. I'll be Tweeting the link tomorrow before heading off to march on Parliament with the students. Hope we'll scare a conscience back into the Lib Dems.

    Great post Golem. Unicredit's history reminds me of the catalogue of awful acquisitions made by RBS in the run up to the crash (ABN Ambro anyone?) brilliantly expounded by John Lanchester in this article for LRB.

  22. Golem XIV - Thoughts December 9, 2010 at 12:02 am #

    Ben Gabel,

    How can something so creepy also make me laugh out loud.

    Just got home but had to watch. Like Jamie said, – It didn't disappoint.

  23. RichGB December 9, 2010 at 9:15 am #

    Excellent video Ben.

    If you imagine the voices of Eric Idle and John Cleese you have a Monty Python sketch.

  24. RichGB December 9, 2010 at 9:21 am #

    Oh, that was freaky! That last post brought up 'bankabi' during the word verification.

  25. wirplit December 9, 2010 at 10:59 am #

    Ben and quite a few others
    to disseminate your links FAST you need to make a link This is very easy see here
    So your link is LINK

    if I managed to copy your link correctly

  26. liberaleye December 9, 2010 at 12:07 pm #

    Here's another great animation from nef – the new economics foundation. (H/T David Boyle)

    http://www.neweconomics.org/press-releases/who-will-tame-the-giant-vampire-squid

  27. Becca December 9, 2010 at 2:09 pm #

    Ben,

    Great vid – but the response of the Irish media to that would be that the bail out is for the schools and hospitals, that only a small portion of that is for the banks (25bn out of 85bn I think they said) and that the banking portion is just going to be kept as a reserve of some sort and will probably never be drawn down.
    I myself am now so confused that I don't know if the public spending deficit is due to
    a) original bail out,
    b) loss of tax revenues due to the implosion of the construction industry,or
    c) becuase Irish workers priced themselves out of jobs by stupidly thinking they deserved to eat in the cafes, drink in the pubs and rent the apartments, that were only put there for visiting bankers?
    I don't know and the Irish press has moved on from asking the new line is were here – deal with it. The new focus is private vs public sector and Fianna Fial vs their slightly more responsible twin Fianna Gael. Anybody still talking about the banks is portrayed as just not getting the fact that we have to have a 'fiscal correction'.
    Sadly we don't have anything like a fourth estate here – more like the Dail Mews. There is little to no investigative journalism apart from the odd, after the fact, doc. 90% of what's written in the Irish press could have come striaght from the FF/EU/FG joint press office with tthe kind of careful rewording that you might do in college when you're trying to make it look like you're not blatantly palgiatising on textbook.
    The Irish press actually has the audacity to chastise the nation for living above their means when they have been constantly championing the idea of Ireland as some sort of Orange County, E.U. for the past ten years. In their lifestyle and property sections they tried their best to convince you that everybody who wasn't a loooserr had a house with four bathrooms, a rental semi-det and kid fitted out in Abercrombie & Fitch from the de rigeur December trip to New York.
    The crap they peddled made the people who could hardly afford the scandalous rents and inflated prices of everyday items feel marginalised and left behind and those are the same people who are now being made to pay the most % wise in this EU/IMK dictated budget.

    Sorry I am beginning to just rant about everything so I'll stop – just wanted to give you a feel for the response your vid would get here

  28. Rebecca December 9, 2010 at 2:23 pm #

    Golem,

    Just another thank you from Ireland for your great blog, you fill a very perilous info gap over here. Reading about all this makes me both really mad and also afraid but in a wierd way it keeps me sane – probably beacuse its such a relief to feel your having a reasonably in depth discussion of this stuff rather than the 'pat them on the head, tell some white lies' approach we seem to have over here. Vincent Browne has his heart in the right place but he does not have the detail necessary to back his views alot of the time, and so he is too easily dismissed as jus tthe token lefty opinion column.

    Thanks again and if any other Irish readers are around you can count me in as someone who wouldn't mind chipping in to get David over here to talk.

  29. ODSI January 20, 2012 at 3:41 pm #

    Yes Agreed. Cool post ink here

  30. Css Valley February 24, 2012 at 10:39 am #

    Worth reading this article nice one.

  31. angry birds oyunları November 17, 2014 at 7:15 pm #

    Thanks again and if any other Irish readers are around you can count me in as someone who wouldn’t mind chipping in to get AKsu over here to talk.

Trackbacks/Pingbacks

  1. Greece, Hungary and Italy – a nexus of failure? | Golem XIV - Thoughts - September 28, 2011

    […] Dominoes falling from the East […]

  2. Hungary’s default – the first victim, Erste bank. | Golem XIV - Thoughts - October 10, 2011

    […] Dominoes falling from the East […]

Leave a Reply