When the Chief Market Analyst of FX Solutions, Mr Joseph Trevisani, in an interview on CNBC on 23rd Sept 2011,was asked about fluctuating currency values, his reply created a stir. What he said was that you had to look at what was going on in Europe – everyone then expected him to mention Greece – but instead he said,
“There was a story out in a German newspaper this morning talking about a trillion euros, supposedly, unconfimed. of losses hidden in German Banks.”
He offered nothing further but the implication was that big players believed that the one stable and solvent European nation, the nation that was supposed to bail out the others was sitting on a time bomb of its own. Which would mean that Germany, the nation that liked to lecture others about lying, was lying. Lying about a potential trillion euro hole in its banks.
The story was around for a while but then faded because no one could add much to it, let alone confirm it. Could it really be that German banks were hiding, and lying about, a trillion in undeclared bad debts? What debts could they be if they weren’t just the exposure to bad debts in Greece and the other southern nations we already knew about? And where could they have been hidden? No answers no story.
First the easy part – what could the debts be? It has been an open secret that the Landesbanks bought up two lots of debt as fast as the ink on the contracts would dry. The first was securities made from sub-prime US mortgages. A trillion Euros of this sort of debt was created and sold in 2004-5 alone. One senior banker at one of the banks which sold this debt told me the Landesbanks would buy these securities from them before the deals were even complete. Much as property speculators further up the same stream would buy the property developements before they were even built. That debt, I have been told more than once, is still there. Sachsen LB collapsed but others are still hoping something miraculous will hatch from their egg of shit if they just sit on it long enough.
This is a pattern of hopeful deceit that is rampant globally. So it really shouldn’t be a surprise that German banks are doing it too.
The other lot of debt is home grown. There is a vast amount of regional european debt which was considered AAA rated when it was securitized and sold on and which is still being held at par because of the now somewhat threadbare but still holding fiction that no nation will ever default or let one of its cities or regions default either. For example Depfa, the German bank, made very large, long term loans at fixed rates which it then sold on in return for shorter term funding at floating rates. I know of several such deals: to Barcelona (a massive 20 year bond), another to Manchester, another to Luton for its bypass and a large number done with French arrondissments. My guess is that a large number of loans to places in nations not so secure themselves are held at par only because no one has been alowed to look at them very closely.
But that still leaves the ‘where are they hidden’ question. Because no one has actually seen a spread sheet with large negative numbers on it this remains what it has been – a rumour. And it still is. The only reason I bring it up is that a couple of weeks ago I was told by a European banker that he had come in to information from an insider in German financial oversight, that the debt was real and was currrently on the books of the 9 regional Landeszentral banks.
The Landeszentralbanks are the remains of the old Pre-Euro system when each of Germany’s powerful regions (remember Germany is a Frederal nation composed of what still are very powerful even if not quite autonomous states) not only had its own bank, the landesbank of the region, but also had its own central bank. These central banks of the German states were slimmed down from 11 to the current 9 and the heads of these banks form part of the governing board of the Bundesbank. According to what I was told the official who spoke said the debts were huge, the finances of his region, at least, were a mess and he, for one, expected the situaion to blow up by the end of the year.
As I say I cannot verify the truth of what my source was told and which I have just related. It could be a hoax though it seems an odd hoax for a German official to engage in. Or the official could be horribly wrong.
If we had not already suffered 4 years of blatant lies and manipulation on the part of all our banks and all our governments I might be loathed to believe this story or pass it on. But given what lies we know we have been told over and over by the finanacial sector and our politicians I do not feel that this rumour is impossible to credit.
If the story has any validity at all then it says that Germany and its banks are playing an even more desperate and far higher stakes game of extend, pretend and hope for miraculous growth, than ever Greece was, or Portugal and Italy are.
Post script – What isn’t a rumour is that there are real and large problems above and beyond the insolvency of Greece and soon Portugal as well, lurking in the Euro system and in Germany in particular. One such problem, different from what I have written about, can be seen in this article from Der Spiegel. This article looks at the way the European banks are shackled together by the outstanding claims they have on each other. Which means the money they owe each other which would NOT be paid by any country that fell out of the Euro system. It just adds to the impression that the Euro has sown its member together in such a way that to part ,will rip the skin off them.