It is my opinion that no matter what Sarkozy and Merkel agree, it will not be enough and will not work. Why? There is one simple fact which is moving like a wall of mud towards our leaders and their mad scramblings – there is not enough money to pay the debts. And creating more debts – no matter what time frame, no matter how far in to the future they reach – will not solve the problem because interest on those debts is accumulating faster than we are growing and will continue to outstrip growth unless another bubble can be inflated that is far, far larger than all those we have ridden since the 1980’s.
Signs of this basic fact are now everywhere. Here are three which lock together to form a kind of rudimentary trigger.
Last night I heard from a banker friend that people in Germany are beginning to get a somewhat incredible letter from HVB (Hypovereinsbank – now part of UniCredit). The letter says – and I have not seen the letter myself, so you may chose to hold this as ‘rumour’ for the moment – that HVB offers to increase to 3% in the interest paid on their account, IF they agree to let the bank hold their money without being covered by any government deposit scheme.
It’s so bizarre you have to think about it for a second. Why would UniCredit ask its customers to do this? I asked my friend and the answer could be simple. I say ‘could be’ because frankly neither of us is sure of the legality of such a request. But here is what we came up with as the only thing we could think of that explained the bizzare letter.
Banks are required by Basel 2 to retain in the bank something around 8% of any deposit as their ‘contribution’ to the deposit insurance scheme. If a depositor agrees to waive this protection could it be that the bank gains a massive 8% new money to invest? If so then ithe banks could certainly afford to siphon off 1% out of the 8% as the incentive for the depositor.
Question? How utterly desperate does a bank have to be to write letters to clients to ask them to waive deposit insurance? How close to destruction must a bank be to risk the utter ruination of everyone involved that would come from depositors losing absolutely everything?
The answer comes from an article ZeroHedge ( I recommend reading the whole piece) lifted from a Hungarian web site called Index.hu. The piece is an Op Ed written by the current head of UniCredit global securities Attila Szalay-Berzeviczy, who was previously Chairman of the Hungarian stock exchange.
What he says in the article is,
“the euro is “practically dead” and Europe faces a financial earthquake from a Greek default”… “The euro is beyond rescue”… “The only remaining question is how many days the hopeless rearguard action of European governments and the European Central Bank can keep up Greece’s spirits.”….”A Greek default will trigger an immediate “magnitude 10” earthquake across Europe.”…”Holders of Greek government bonds will have to write off their entire investment, the southern European nation will stop paying salaries and pensions and automated teller machines in the country will empty “within minutes.”
Remember this man is in one of the top jobs of one of the world’s largest banks and THE bank which will bring Italy down. It is the bank which is massively exposed to East European debt in part through its lending in Greece and in part through its other subsidiary Bank Austria which is itself one of the banks most exposed to East European bad debts.
Which brings us to the final part of the trigger. It is part of what Mr Szalay–Berzeviczy refers to in his article and is I suspect a major reason for his outburst. Hungary is about to default. While all eyes have been on Greece and its certain default, it seems the markets and certainly the media have not been paying attention to humble Hungary. And yet over the last few months it has been getting more and more desperate. I wrote a few weeks ago how the Swiss decision to peg the Swiss franc to the Euro was probably all that saved Hungary from imploding some while ago. But it was obviously not enough. Hungary’s debts, like those of Greece, are too deeply rooted and widespread throughout domestic, government and commercial sectors. What Hungary did on 19th September was to pas a law allowing Hungarians who took out loans in Swiss Francs, which they cannot now pay back, to pay back the loan in Florints at a heavily discounted exchange rate. The discount will be up to 22%.
This is a default. It is unilaterally telling the banks they will take up to a 22% loss on their loans. If the loans were securitized and sold on then those holding those securities will take a 22% ‘haircut’.
Hungary is not a massive player, its loans are not in the league of Spain or Italy. But what matters is not how much they owe but who to and how parlous a state they are in. One of the countries whose banks operated widely in Hungary is…Greece. Another is UniCredit directly and via Bank Austria. If you want to read more about the railway of debt running East to West I wrote about it in Dominoes Falling form the East.
The Greek banks cannot withstand heavy losses in Hungary. I don’t think UniCredit can either.