Posts filed under “Finance”

Austrian bank collapse furthers fears of contagion

The Austrian government has nationalized the insolvent bank Hypo Group Alpe Adria (HGAA). The financial institution, which has 40 billion Euros in assets, is the country’s sixth largest bank. But, in relative terms, this is a very large bankruptcy – using GDP at purchasing power parity, an American HGAA would have assets of $2.5 trillion, larger than any of the American banks. So, this is a very big deal and it speaks to the size of Austrian banks’ international exposure, renewed risks in banking and the possibility of contagion.

HGAA is considered a subsidiary of the troubled German state-controlled bank of Bavaria BayernLB.  Just last month BayernLB pointed to trouble when it reported a huge loss over 1 billion Euros for the second quarter running. The trouble: HGAA.

The FT reported at the time that:

HGAA would report a significant loss for the year and a capital injection for its subsidiary would be unavoidable, BayernLB said. The bank warned it would take a goodwill impairment charge at the end of the year on the value of its HGAA investment.

“Increased risk provisions and the expected impairment at HGAA will weigh significantly on… earnings in the fourth quarter. It is not yet possible to quantify it exactly, but it can be expected that as a result of these effects, the group will report a loss of well over €1bn,” BayernLB said in a statement.

The problems are the latest sign of how Germany’s Landesbanken – regionally owned public banks – have been thrown off course by risky attempts to boost profits by diversifying away from their core regional lending activities. BayernLB lost more than €5bn last year after writedowns on its huge stock of toxic assets, forcing it to seek a bail-out from the Bavarian regional government.

The bank’s purchase of HGAA in 2007 is already the subject of an inquiry by Germany state prosecutors, who are considering whether the former chief executive of the German bank committed a breach of trust by paying too high a price for HGAA.

Along with other Landesbanken, including HSH Nordbank and WestLB, BayernLB is reducing the scale of some of its foreign ventures. Michael Kemmer, chief executive, said the “more focused business model” was improving the bank’s performance.

This is what is commonly known as reckless lending and it happened in spades during the boom in Eastern Europe. Most of the actors are banks in Scandinavian and German-speaking countries.  HGAA was most exposed to the former nations of Hapsburg empire, with the Balkans in first place on that list.  The purchase of HGAA by BayernLB even after a global housing bubble had popped needs investigation and reminds me of the flyer taken by Hypo Real Estate in Ireland via its purchase of Depfa. And the fact that two large German institutions increased international exposure into Austria, the Balkans, and Ireland at the top of the market demonstrates the laxity in banking regulation globally.

The fact that the HGAA bankruptcy is happening now should remind you of the Dubai situation again.  When the crisis there first struck I talked about exogenous shocks and contagion, saying:

But now that Dubai is back in the news, I have looked back in my archives to see what (if any) links I have had on the situation in the country. The last two were in April about developers defaulting and in May about an S&P debt downgrade. Since then – as the global equity markets have turned up – nothing.

What does this tell me? First and foremost, it hints at the fragility of this recovery and the real risk exogenous shocks pose.  We are barely recovering now and a lot of debt and unemployment put us at stall speed, making the risk posed by events of this nature that much greater.

More importantly, however, the Dubai World events underline the unpredictability of exogenous shocks. All of these potential crisis situations — dollar carry trade unwind, debt crisis in the Baltics, oil price spike, an unexpected surge in interest rates, war in the Middle East — are still there lurking in the background. We don’t see coverage in the press on them everyday, but they are still there.

I have been optimistic about the near-term prospects for the global economy in large part due to the myriad pro-cyclical effects of recovery. Longer-term, however, there are some serious obstacles to a sustainable recovery.  This is not a garden-variety recession and recovery. It is a recession within a longer-term depression.  And while we are in a technical recovery, I believe much of the fundamental problems which triggered this downturn are still there, lurking. The debt troubles at Dubai World bring this point home.

[emphasis added]

The first signs of Dubai contagion popped up in Greece and Ireland because of similarities to Dubai regarding mountainous sovereign debt problems. Now that we have this rather large bankruptcy in Austria, we can talk about further contagion. Looking back in my archives at Austria this time, it has been a long time since I have discussed the banking situation in Austria.  It was most critical in the December 2008 to March 2009 time frame when we were in serious crisis mode.  Below are the posts I wrote relating to that topic.

That’s it! As with the situation in Dubai, it was radio silence until the Dubai World panic. 

I should add that no post on banking in Austria is ever complete without reference to Creditanstalt’s 1931 bankruptcy as the trigger event for the global banking crisis which gave the Great Depression its ‘greatness.’ So when we we talk about contagion, Creditanstalt is the gold standard of contagion, if you will.

The most telling statement in my earlier posts on Austria is this one which comes via the Vancouver Sun about comments by International Economy magazine’s David Smick:

Internationally, Smick said export-dependent developing countries, and the western banks that financed their growth, are particularly vulnerable.

“If too many of these emerging markets go down, the IMF (International Monetary Fund) lacks the necessary resources to mount rescue operations,” writes Smick, author of the 2008 book The World Is Curved: Hidden Dangers to the Global Economy.

“To put things in perspective, Austrian banks have emerging-market financial exposure exceeding $290 billion. Austria’s GDP is only $370 billion.”

As in the U.S., the critical thing in Eastern Europe is maintenance of asset prices underpinning this financial exposure. There is zero chance Austria will survive a further collapse in asset values in Eastern Europe without EU or IMF support.  This is the major reason central banks are flooding the system with liquidity.

Now, if the Dubai contagion does result in renewed weakness in asset prices, then I may have to eat my words about how unlikely it is that Ireland or Greece leave the Eurozone. My comments from last January on Ambrose Evan-Pritchard’s Euroscepticism are still my thinking today:

My take on events is that a number of countries within the Eurozone will face banking crises, starting with Ireland.  At that point, leaving the Eurozone will make no sense because the damage has already been done.

Evans-Pritchard’s calculus is more to the point: Ireland must threaten to leave now if it wants to maximize any EU help it expects to receive, before the scope of other EU banking crises become apparent.  Weakness in the financial sector has infected all of the Eurozone members. I have mentioned that Austria has a weak banking system (see posts here and here). But, there is even growing evidence that Germany too has a fragile banking system.  To be clear: this is an ‘every nation for itself’ strategy pitting Eurozone members against each other, where those nations savvy enough to request help sooner are likely to benefit at the expense of others. The question is whether the Germans would go along with this.  If they do not, tensions will rise and that will change the calculus for Portugal, Italy, Ireland, Greece, and Spain. I don’t have a view on this as yet because the situation is still evolving.  However, I lean toward believing the Eurozone will remain intact even while individual nations or banking systems collapse.

This is a guest post by Edward Harrison. A version of this post originally appeared at Credit Writedowns. See also Too big to rescue as the Icelandic collapse is the scenario feared by every government in a small country with a large banking system that is too big to bail.  Has the policy response in Europe been enough to avert renewed crisis? Let’s hope so.

Category: Bailouts, Currency, Finance

The Greatest Deception in the History of Finance

What is the greatest deception in the history of finance?  Depending upon your perspective, some entities and events of deception that come to mind might include corporate accounting scandals, rogue traders, Ponzi schemes, and various entities and events related to the financial crises (market bubbles) throughout history. “The greatest hazard of all, losing one’s self,…Read More

Category: Finance, Psychology

New York vs Singapore vs London: Best Financial Center?

Fascinating stuff: “New York has withstood the worst economic crisis in seven decades and remains the leading global financial center, followed by Singapore, which topped London as investors’ preferred place for doing business, according to Bloomberg Global Poll. Twenty-nine percent of respondents in the quarterly poll of investors, traders and analysts who subscribe to the…Read More

Category: Finance

Afternoon Reading

A few interesting reads for your Tuesday: • Goldman Sachs: U.S. Stocks Primed for Takeovers (Bloomberg) • Climbing the Golden Wall of Worry (Barron’s) • Zen Lessons in Market Analysis (Hussman) • Home rescue plan delaying, not solving crisis (Reuters) • End the war on drugs, start the legalization (Marketwatch) • The Years of Magical…Read More

Category: Finance, Financial Press, Markets

StockTwits and the Power of Social Leverage

“The Human Ticker”


“The Human Ticker”: StockTwits and the Power of Social Leverage
Aaron Task
Aug 26, 2009 04:13pm”The-Human-Ticker”-StockTwits-and-the-Power-of-Social-Leverage

Category: Finance, Technology, Video

Professionals Are Buying The Stock Market Rally. Are You?

My quote:

“This is a trading rally not a multi-year rally,” he says. Eventually something’s got to give: “We’ve never had six-month period before where we’ve lost two million jobs and the market’s gained 50%,” he says. “That’s simply unprecedented.”



Professionals Are Buying The Stock Market Rally. Are You?
Peter Gorenstein
Yahoo Tech Ticker, August 21, 2009 08:00am EDT

Category: Finance, Video

Falling Imports versus Falling Exports (GDP = -2.38%)

I noted earlier that the oddity of imports versus exports calculation would produce a positive contribution to GDP. Let’s look at the details of this, and find a way to understand what this means. First, off conceptualize the difference between what imports and exports are. At the most basic level, Imports represent our consumption of…Read More

Category: Data Analysis, Economy, Finance

There will be some good news and some bad news this morning at 8:30. That’s when GDP will be released. The Good News will be that we are no longer contracting at the painful rate of 6% annually; Call it the end of the Freefall period we saw from September 2008 to March 2009. The…Read More

Category: Economy, Finance

Withholding Taxes Chart (July 15, 2009)

We have not run these charts from Matt Trivisonno in some time;  they are simply jaw dropping: > >

Category: Economy, Finance, Taxes and Policy

Quarterly Review

I have the lead quote in the this page one NYT Business section article on the Markets — which came out prior to this NFP: “Less-worse isn’t the same as better,” said Barry Ritholtz, chief executive of FusionIQ, a research firm. “We want to see ‘good.’ In order to grow profits, in order for earnings…Read More

Category: Economy, Federal Reserve, Finance, Friday Night Jazz, Media