By Gareth Gore and Sudip Roy
LONDON, June 29 (IFR) - German lenders will be among the
biggest beneficiaries of a Spanish bank bailout, with rescue
funds helping to ensure they get paid back in full for poor
lending decisions made in the run-up to the financial crisis,
and helping politicians in Berlin avoid a politically sensitive
bank bailout of their own.
German lenders were among Europe's most profligate before
2008, channelling the country's savings to the European
periphery in search of higher profits. Spanish banks borrowed
heavily to finance a property boom, and still owe their German
peers more than 40 billion euros, according to the Bank for
German banks were facing deep losses linked to potential
Spanish bank failures. However, a bailout of Spanish banks -
backed initially by Spanish taxpayers and potentially later by
the European Stability Mechanism - will ensure creditors won't
take losses, making the bailout effectively a back-door bailout
of reckless German lending.
"There are a number of political considerations for Germany
here," said Jens Sondergaard, senior European economist at
Nomura. "The Spanish bailout in effect is a bailout of German
banks. If lenders in Spain were allowed to default, the
consequences for the German banking system would be very
Last night European leaders agreed to allow the ESM to lend
directly to banks for recapitalisation purposes. Although this
breaks with a former policy of lending to banks through national
government, something that pushed up financing costs for them,
it leaves German and other creditors off the hook.
Among European lenders, those in Germany are by far the most
exposed to Greece, Ireland, Portugal, Spain and Italy, with
outstanding loans worth 323 billion euros at the end of last
year, according to BIS data. Bankers say little has changed
since then, with lenders unable to sell or hedge those loans.
German lenders' exposure to Spanish banks, corporates and
governments amounts to 113 billion euros; their Italian exposure
is 103 billion euros.
Total periphery exposure equates to about 4 percent of the
7.3 trillion euros of assets held by German banks and almost an
eighth of the country's annual GDP. Perhaps because of the size
of the exposure, Germany has continually pushed against private
sector losses - and was initially hostile to writing down Greek
"Germany has resisted recapitalising domestic banks since
the first Greek bailout in 2010," said Ebrahim Rahbari, an
economist at Citigroup. "But with Spain and Italy, it's a
completely different order of magnitude. Recapitalisation needs
wouldn't be moderate, but could bring down individual banks or
even the banking system."
Ratings agencies have already voiced concern about German
banks' exposure to the periphery. Earlier this month, Moody's
downgraded six German banks, citing "securities of and other
exposures to stressed euro area countries".
German banks are the most leveraged in the Western world
with a tangible assets to tangible common equity ratio of 28,
according to the IMF's Global Financial Stability Report
published in April. This compares with just 11 in the U.S.
"Germany, by lending money to the peripheral countries, is
trying to prevent its fragile and leveraged banks from getting
hit, effectively orchestrating a back-door recapitalisation of
its own banking system," said Stephanie Kretz, private banking
investment strategist at Lombard Odier.
There are particular concerns about the country's
Landesbanken, once seen as bastions of safe regionally-based
lending but now synonymous with reckless investments. Of the six
German banks that Moody's cut its ratings on last week, three
were Landesbanken. Adding to that pressure is the fact that
their state-guaranteed debt rolls off from 2015 meaning their
historic funding advantages are soon coming to an end.
Still, German policymaking is driven by many factors. At
stake is the survival of the euro, a politico-economic idea
spearheaded by Germany, while the costs of break-up could be
huge: the German finance ministry is reported to have forecast a
10 percent drop in GDP in the year following a collapse.
In addition to the banking sector's potential losses, the
German state would also be on the hook for bailout loans to
other governments should a peripheral country default. German
guarantees of the European Financial Stability Facility, which
have provided funds to the periphery, stand at 211 billion
"The bank exposures are a significant factor, but perhaps
they are not the most important driver of German policymaking,"
said Rahbari. "Bailing out sovereigns helps German banks, but
there is obviously some hope that the bailed-out countries would
actually repay the loans. Importantly, the major strategic
political agenda of the European project is seen to be at stake
LOOK TO ICELAND
Nonetheless, protecting German banks - and others - against
losses is another example of excluding creditors from the pain
of their own bad lending decisions. In Iceland, creditors were
forced to take losses, allowing the banks to write down assets
and begin lending to the economy once again.
"Iceland's banks were too big to rescue: bondholders were
bailed-in," said Rob Baston, a managing director in global
capital solutions at UBS, who worked on the restructuring. "The
banks were comprehensively rebuilt and strongly recapitalised
giving substantial room for the restructuring of their loan
books, almost completed. In this way fresh equity put to work in
the banks flowed through to take losses and thereby inject
equity into the real economy. The economy is growing strongly as
An added complication is that many retail investors were
sold bank debt in countries such as Spain and Germany.
Politicians are avoiding imposing losses on the general public,
many of whom invested their savings in accounts linked to bank
debt, in order to avoid provoking widespread anger.
"In Europe, the focus is on liquidity provision - sovereigns
bailing-out senior creditors, recapitalising with sub-debt not
equity," said Baston. "As a result, debt restructuring and
growth are much delayed."
The European Central Bank, through its refinancing
operations, may also be heavily exposed to bank debt. Some firms
may have posted bank debt as collateral in order to get ECB
loans. Mass bank defaults could leave the central bank with
losses of its own.
"If you have a potentially big problem, you are very careful
not to draw too much attention to it," added Rahbari. "The cost
of cleaning up the German banking system could be enormous and
politicians are conscious of that."
(This article is from the June 30 issue of the International
Financing Review, a Thomson Reuters publication, www.ifre.com)