Unthinkable thoughts about German banks
By John Dizard
Published: March 13 2003 20:58 | Last Updated: March 13 2003 20:58
The best kind of speculation is where someone with effectively unlimited funds is gladly providing whatever amounts are necessary to make sure your gamble pays off. Sadly, most of the time these opportunities are hard to find, assuming you're not a cabinet minister in a country with flexible rules of governance and compliance.
This week, though, you're being given a couple of offers along those lines. And we're not talking about unconditional Argentine guarantees or the full faith and credit of the Ivory Coast. We're talking about Germany and Japan.
You may have noticed that the German DAX stock index is down about 55 per cent over the past twelve months. Bank and insurance stocks have been badly hit, as credit losses have been compounded with losses on equity holdings. Deutsche Bank, traditionally the most secure German bank, has seen its share price decline 38 per cent in the past year. Credit default swap spreads have widened dramatically as the markets have begun to discount the unthinkable: German bank failures.
Last autumn there was open talk that Commerzbank's problems led to interbank credit line reductions among German institutions. That got the attention of central banks outside the eurozone, who began to ask the European Central Bank what plans it had to deal with any German bank liquidity or solvency problems. (Liquidity is when you can't turn assets into ready cash; solvency is when you don't have sufficient assets, liquid or not, to cover your liabilities as they come due). The ECB replied with the sort of bland assurances that only induce further concern.
Before the introduction of the euro, lines of responsibility for systemic banking crises would have been clear: the national central bank, in this case the Bundesbank, would supervise the risk management policies, manage a monetary policy that fit with the country's economic and fiscal cycle, and, if necessary, force reorganisations of failing institutions and provide liquidity in an emergency. With the end of the national currencies, the ECB has taken over monetary policy. It has not taken over the supervisory function, does not co-ordinate policy with the various national budgets, and its responsibilities in a banking failure are not clear, if indeed it has any. Whatever you think of European integration, it isn't complete and that creates a lot of problems in times of stress. Times like, say, now.
So this week the German authorities have passed a message back to other central banks: make sure the banks under your control maintain their lines to ours. Don't worry, we're going to announce very soon, within a month, if not within days, that a German state institution will buy many of the bad loans of the German banks at or close to book value. Then the German banks will have the balance sheets and cash flows to do what they can to restart the German economy.
The institution is the federal government's Kreditanstalt für Wiederaufbau, or KfW. It was used from the early postwar days to finance the mid-size private companies that are the core of the productive German economy. In the 1990s, along with the Treuhand, it was a key conduit for financing the rebuilding of the former East German länder, or states.
The German government will support an increase in the KfW's funding. The KfW will use the additional funding to buy the bank's dodgy assets. Those assets earn some money, though probably less than what it will cost in interest charges to fund them. The government will effectively make up that difference, which will be a much smaller (immediate) increase in its deficit than if it just immediately charged off the entire cost of the bailout. Eventually gigantic write-offs will have to be taken, but that's a long way off, probably an election or two. There are a lot of logistical, regulatory, and legal issues to be resolved. The KfW's staff haven't even been included in the planning up to now.
When the plan is announced, you can be reasonably sure German bank stocks will look a lot better. After all, if you can keep your winnings, and pass along your losses to the German taxpayer, that must be a good deal. Among the winners would be various insurers, such as Allianz, the owner of Dresdner Bank.
Not to be outdone, the Japanese government, through the Ministry of Finance, has decided that the dollar/yen exchange rate will not go through 115. Exporters have told the MOF they need a yen weaker than the 105-110 range to make a profit on goods sold abroad. The 115 target is not just a break-even rate, but encourages more export activity.
That means that if you're a currency speculator, you can sell options that give the buyer the right to buy yen for 114 to the dollar, however low the dollar goes. Since the Bank of Japan, following the orders given by the MOF, will keep buying dollars all day to keep the price at 115, you'll be collecting option premium income without assuming any risk. Go to it. johndizard@hotmail.com |
