Monday, April 27, 2009

Don’t forget to worry about the German banks

Posted on the Financial Times's Alphaville by Stacy-Marie Ishmael:

In the very early days of the crisis - circa August 2007 - Germany’s Landesbanken were daily in the headlines in the financial press. But as the meltdown of the global financial world continued apace, attention shifted from the subprime IKB, Sachsen and their ilk to the bond insurers, and the German banks moved out of the spotlight.

Their problems, of course, did not go a way - as this recent FT piece reminds us:

Berlin will unveil plans to help German banks shed their troubled assets within two weeks, a move senior coalition politicians said could leave taxpayers facing a bill of up to €1,000bn ($1,290bn, £882bn).

Economists see ridding the banks of toxic assets as a vital stage in efforts to repair the financial system. Berlin has already established a €500bn bank rescue fund, including €400bn of guarantees and €80bn of capital. About €210bn has been tapped by banks.

Otto Bernhardt, a Christian Democratic MP and banker, said the total cost could be between €500bn and €1,000bn, with the latter figure reflecting the - unlikely - loss of the assets’ entire value. However, Mr Weber, speaking before the Berlin meeting, said mending banks’ balance sheets could be done within the overall headline figure of the €500bn set aside for the bail-out fund by focusing on the most impaired assets and illiquid market segments.

Nonetheless, Lisa Hintz, analyst at Moody’s Capital Markets Research Group - which is like the hipster younger brother of the more staid ratings unit - thinks “not enough attention has been focused on the degree to which the various levels of government in Germany may need to provide financial support to their banks.”

In a note published on Friday, Hintz argues thus (emphasis and link FT Alphaville’s):

the degree to which the federal government can be called on is unclear, because it is tied up with “Federalism Reform II,” which is hostage to current political uncertainty.

IKB proved how problematic bank intervention can be. The call to set up “bad banks” looks stuck in regional and political debate over terms and asset types. German bank spreads have been among the tightest in Europe, owing to the solid fiscal position of the government, its early intervention, and partial public ownership through the Landesbanken. However, with poor economic performance of the first quarter, and Germany increasingly being called upon to be “lender of last resort for Europe” by virtue of its largest position in the ECB and the regional component of the IMF, the system is under increasing stress. We feel that these factors are not yet fully expressed in German bank spreads.

Moody's chart of average CDS-implied rating for European banks

Worth keeping an eye on.

No comments: