Today S&P downgraded the giant French bank Credit Agricole (GCA). The reason given is GCA’s massive exposure to Greek debts. Credit Agricole is sitting on a volcanoe of Greek debt and also owns Greece’s Emporiki bank which means it is therefore potentially on the hook for Emporiki’s insolvency as well. Not a surprise then that the French Bourse, the CAC, fell nearly a percentage point on the news.
More interesting, however, is the fact that the German DAX fell 1.25% at the same time on no direct German news. The fact is, of course, that for French banking exposure to Greek debt and default, you can read German as well. Anything the French can do the German’s can do better – as the song goes. The German banks are as badly exposed to Greek losses and default as the French. So even if the rating agencies haven’t stuck the boot in to the German banks yet the markets aren’t waiting.
In fact I think the German banks face a potentially more dangerous time. For not only are the German banks hugely exposed to Greek and Spanish debt but they are also looking very nervously indeed at possible defaults in America by US Municipalities.
German banks, particularly their Landesbanks are, I think, going to be found to be massively exposed to any defaults in US municipal bonds. The Muni bond market is looking very unwell indeed, though as yet nothing major has imploded. But if municipal funding woes, which are already dire, were to get worse, which they very well might given how splendidly well the ‘recovery’ has gone so far, then all those who bought the ‘super safe’ Muni bonds would be spit roasted.
Now the bulk of Muni bonds are generally thought to be bought by US customers. But it is also true that European banks have been aggressive players in the Muni market. Dexia bank based in Brussels and Paris was a very big player. So big, in fact, that the Fed felt obliged to save it from bankruptcy simply to protect the Muni market. It was felt at the time of the first bail outs, though we didn’t learn about it till later, that if Dexia had gone down it would have taken Muni market with it.
But Dexia was not on its own in the Muni market. Our old friend UniCredit was also a big player and still is, as far as I know, via its huge US subsidiary Pioneer investments. So too was Ireland’s, now Germany’s, Depfa. And it is Depfa that brings me to the Landesbanks. Depfa’s market was to sell Pfandbrief bonds to the Landesbanks backed by municipal debts. Depfa lent to almost every municipality in Europe, from Barcelona to Manchester. I think it’s a fair bet that when Depfa pushed into Nrother America it snapped up lending to US municipalities. So, this is why I am betting that we will find the Landesbanks massively exposed to any defaults in US Muni bonds.
This, combined with losses at banks like Commerz and Deutsche would be a nightmare scenario for Germany. I think this goes some way to explaining why the German market fell more than the French on news of Credit Agricole’s debt worries. It’s just a theory – from an outsider.
If I’m right about teh MUNI connection then defaults among Maerica’s municipalities could also, I think, cripple Italy’s largest bank UniCredit as well, because of its Pioneer subsidiary. It will be interesting to see if Pioneer start to get nervous and if the markets get nervous about UniCredit in turn.
Golem,
A personal experience I had in the San Diego City Council Chamber a few years ago would tend to confirm your suspicions. I was giving public testimony against a $102m "lease-lease" bond the City was proposing to issue.
Lease-lease is where a city creates "revenue" to support a phony revenue bond by leasing something back to itself. In that particular case the City of San Diego was leasing back a number of its municipal water pumping stations to itself and servicing the bond debt through increased water rates. The $102m was just one of many. It had already "leased" its police stations, bridges, you name it.
I approached the bond counsel who had just testified before City Council that this was perfectly legal and that every city in America was doing it. I asked him how in the world the bond markets would buy such junk. He smilingly told me that the money came from the Fed through foreign banks. In other words financial insiders like himself knew that there were fortunes to be made peddling these phony municipal bonds to foreign banks who were borrowing the money from the United States Federal Reserve.
Since then these insiders have funded the Presidential campaign of an apparent black reformer, who is really their Harvard and Yale trained puppet, who then appointed another trained puppet, Tim Geightner, as Treasury Secretary. In other words a financial coup d'état.
Now the dollar is strengthening and the euro weakening as the same market insiders pick the winners – Wall Street of course. They now control the full economic power of the American Government plus its military. These guys play to win. And the Euro is not in trouble?
I guess however it will be politically more acceptable for the Germans to bail out their own banks than to bail out Greece's crony state.
As ever Golem your understatement amuses me. The point is that all the formerly AAA rated Greek junk has been used as collatoral for God knows how many more loans and is, of course, on these banks' books marked to model.
Greece is a minnow in world terms, a tadpole in a large pond. Yet the domino effect of such a small player failing is palpable. I have to ask is it a race between the US and EU to crash their currency first.
The whole financial world seems to be a competion measured in high farce.
bill40
Pat,
Good grief Pat! What a sordid example.
In all this, it has become hugely expensive to do simple things, as we have to pay 'professionals' for almost non-existent services like conveyancing and estate agency – let alone £200K a year to not deal very effectively with 'nuisance families'. It's like playing Monopoly with a banker who's brought in secret stash of Monopoly money in his back pocket, whilst betting real money on the outcome.
The Germans seems to have the idea ( although its hard to tell from here) that they are somehow more virtuous than the rest of Europe especially those pesky southerners. Your brilliant uncovering work undermines that jolly lederhosen viewpoint. I hope Angela is reading it.
By the way Have you seen this? A rundown on likely events What happens when Greece defaults
Interestingly, "muni" is a word used in Switzerland for "bull" (the animal).
What Pat highlights above is the same the world over.
Labour came up with these PFI scheme because they said the private sector was cheaper or more efficient (which it probably is). The problem is the private sector is also better at negotiating than the government and so the taxpayer ended up overpaying enormously for the same old crap.
Of course, these PFI deals ended up being highly leveraged, so after the credit crunch, they didn't make profits for the lucky winners of contracts. So Mandelson said (in all seriousness) the government should offer the PFI providers taxpayer subsidised low interest loans as well just to keep the Ponzi scheme going.
FFS, if the PFI people can only provide things more cheaply if they are given subsidies, then the whole thing is a joke.
Mark,
I laughed and then I cried and then I laughed again before having to go and lie down for a while. I would say thanks for making clear just how..how…how I can't even find the word… but I'm not sure that 'thanks' is right either.
@Golum, @Pat @wirplit I swear, you guys! I dunno, I think I threw up my breakfast, I dunno, I was blaming the dog I don't have, my son woke me up on the couch, holy crap, what a way to start a day. Its two days later, I'm back at the scene of the crime and wirplit posts that link. I'm done, I'm finding sand for my head.
Ken,
I know how you feel. I think we all do.