Bank Bail out in the making.

Most of us don’t get to witness a bank bail out in its formative, embryonic stage. We aren’t usually aware of them until they are fully formed.

But in Hungary we might be able to see one being created.

Hungary, as we all know, is hurting. Last week Hungarian politicans began to talk about asking the EU amd IMF for what they called a “precautionary deal” of 10-20 Billion Euros for 2011-12 AND a “little leeway” on the amount of debt reduction they could achieve. Hungary is thinking of asking that the cap on its budget be lifted from the previously agreed austerity limit of 3% up to a more permissive 3.8%. Now as critics have asked, is it worth the ire of the EU, IMF and Bond market for a measly 0.8%? The other way of asking the same question,however, is how dire must their situation be that they are even entertaining the idea for 0.8%?

But they are which tells us they are expecting a sizable hole in government finances by 2011.

At the same time, trying to find its own solution, the government has been talking to the nation’s big banks about a bank tax. The government wants to tax the banks, as the bank’s contribution to austerity measures. Why should the people tighten their belts but not the banks? However, the banks have declined to talk about such a tax at all. Refusing to suggest a workable figure or even to reply at all. Leaving the government to have to put a proposal to the Hungarian Parliament without any discussion, let alone help from the banks.

Now this gets more intersting when you realise the banks in question are Hungarian banks OWNED by foreign, Western European Banks. The six banks the government has been trying to negotiate with, are units of KBC, Erste Group Bank, Intesa Sanpaolo, Raiffeisen International, BayernLB and UniCredit.

Let’s look at this list.

KBC is a good place to start. KBC is itself in the news today. KBC sold its derivatives busniness and some of its bond business to Daiwa, sold its reinsurance arm to QBE insurance of Australia and this follows the sale of its Private Banking business to India’s Hinduja Group. All of these fire sales and the many that preceeded them, are because KBC had to be rescued by the Belgian Government.

So we know KBC was insolvent and is still in all kinds of pain and trouble. But how much? Well the figures don’t look good. KBC has a market value (what its worth) of about 6.3 Billion Euros. Its loan book – what it has lent out and is owed is a gargantuan 523 billion euros. That’s a crepe load of leverage. (Sorry, sorry! Criminal, I konw, but I couldn’t resist.)

And in just the last year KBC has lost 84% of its market value. 84%!

I think that clears up why KBC might not be wanting to talk to the Hungarian government about how much tax it is going to pay to help Hungary balance its budget. No sooner has KBC got some cash in the door from selling whatever it can, but Hungary tries to take some of it away.

It also tells you what might happen if Hungary were to press ahead and deliver KBC a large tax bill anyway. KBC get’s tax bill. KBC can’t pay. KBC needs rescuing.

Intesa San Paolo and Unicredit are Italian Banks. Unichem is worth 27 Billion has a debt book of 1.5 Trillion! Gotta love those Italians. Nearly as reckless as the Brits! San Paolo is worth 84 billion and has loans of 840 billion. Uni lost 66% of its worth last year. San Paolo 53%. They are, to use the technical term – in shit up to their noses.

BeyernLB is one of the LB that is most horribly exposed to East European debt. I don’t have figures for it but I know it is in very deep trouble.

So here’s the situation. Hungary knows it can’t meet its austerity measures. It is so desperate it is trying to squeeze its banks for taxes. It is also trying to sweeten the pill for the banks by trying to set up some sort of Bad Bank. But the government has so little cash with which to do so, it is trying to concoct some sort of Public/Private partnership deal. I really don’t think it has a chance of working. It is simply a measure of desperation.

So either Hungary insists on a bank tax which pushes insolvent Western Banks closer to their own ruin, or the government backs down in which case it probably can’t meet its own debt payments, defaults, restructures and … pushes the very same European banks who it owes money to, … to their ruin.

Either alternative sends the West European Banks spiralling down. In both cases you will likely hear about how Hungary’s finances are out of control and how Hungary needs to be bailed out. But the real people who are in need of being bailed out, to whom any bail out money would actually go, would be the Western banks.

Hungary could defaut or restructure. But the Western banks could not allow this to happen. It would kill them. So once again the real urgency for a bail-out comes not from the nation involved ( it would survive) but from Western Europe’s banks. But their involvement is hidden beneath a veneer of talk about the debts and mis-management of a nation.

It is dishonest, dishonourable and, I were Hunagrian, I would see it as despicable.