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German and French banks call the shots Print Email  NormalLargeExtra Large ShareNew  0  0   Also in European Debt crisis: European shares edge lower and growth worries persist bank of England's Tucker 'wasn't encouraged to lean on Barclays' Draghi keeps door open to further interest rate cuts Marks and Spencers sales hit by summer deluge Spain's debt tops 7pc danger level as Madrid gets more time European Home "Shocking" 2012 HoroscopeWhat Does 2012 Have In Store For You? Shockingly Accurate. See Free!www.PremiumAstrology.comExpat Health InsuranceQuick, Compare, Trusted Website Expatriate Health Insurance Quoteswww.ExpatFinder.com/Instant-Quoteshttp://www.googleadservices.com/pagead/aclk?sa=L&ai=BMEejVeb8T8fDKoSG_QaAhrTCB-q_1OYBmoqphxvAjbcB0NkREAMYAyDgw6kIKAU4AFD4gumFAmCpsL6AzAGgAairsfEDsgESd3d3LmluZGVwZW5kZW50LmllyAEB2gFfaHR0cDovL3d3dy5pbmRlcGVuZGVudC5pZS9idXNpbmVzcy9ldXJvcGVhbi9nZX

d, for reasons best

known to itself, the ECB -- in clear contravention of both previous market precedent and financial logic -- has insisted that the senior bondholders be repaid in full and has lent the Irish banks, institutions which it must have known were hopelessly insolvent, €70bn to do so.

At the inception of the euro, it was thought possible to have a centralised monetary authority and decentralised bank supervision, but the inability to separate sovereign-debt problems from those of bank stability has led the leaders of the member states of the EU to agree to centralise supervision in the Single Supervisory Mechanism.

Almost a year ago, as the euro crisis raged, Europe’s leaders boldly pledged a union to break the dangerous link between indebted governments and ailing banking systems, where the troubles of one threatened to pull down the other.

Almost everyone involved agrees that in theory a banking union ought to have three legs.

In New York and London, banks have set up dedicated crisis teams, and rehearsed elaborate responses.

Citigroup has $84 billion in loans, bonds and other types of exposure to troubled European countries, plus France. The bank’s filings indicate that all but $8 billion of that exposure is offset with collateral it has collected and hedges on the portfolio.

Some banks are testing their systems to deal with the possibility of new currencies and preparing guidance for clients on how to operate in such an environment.

French loans to Spanish banks plunged 34 percent in the fourth quarter of 2011 compared with the previous quarter, according to the latest data from the bank for International Settlements.

For Italian banks, French bankers cut their exposure by 16 percent. German banks have also been increasingly wary of their Italian and Spanish peers, reducing lending to them by about 19 percent last year

German exporters were major beneficiaries of this growth. German banks and financial institutions helped finance the growth.

Exports have provided the majority of Germany’s growth in recent years. Germany is heavily reliant on a narrowly based industrial sector, focused on investment goods—automobiles, industrial machinery, chemicals, electronics and medical devices. These sectors make up a quarter of its GDP and the bulk of exports.

Germany’s service sector is weak with lower productivity than comparable countries. While it argues that Greece should deregulate professions, many professions in Germany remain highly regulated. Trades and professions are regulated by complex technical rules and standards rooted in the medieval guild systems. Foreign entrants frequently find these rules difficult and expensive to navigate.

While countries like Greece and Spain often face criticism for a lack of prudence that got them into trouble and caused the eurozone crisis, French and German banks were the enablers. During the boom years before 2008 they made huge loans to countries in Southern Europe, and today many banks remain vulnerable to the problems of those countries.

German banks are less exposed to Greece but are owed 134 billion euros by Italian borrowers and 146 billion euros by Spanish customers.

Private and public borrowers in Spain still owed 115 billion euros to French banks at the end of 2011, according to the bank for International Settlements. Italian borrowers owed 332 billion euros to French banks, and Greek borrowers owed an additional 44 billion euros.

Mr. Weber, who is also a member of the European Central Bank’s governing council, said that the statistics reflected Ireland’s status as a financial center: much of what is recorded as claims on Ireland is in fact money funneled through Irish subsidiaries of German Banks, and ultimately bound for elsewhere, Mr. Weber said. He said total German exposure was closer to $30 billion.

In both cases more than half of the exposure was to Ireland’s private sector, rather than lending to the government or Ireland’s beleaguered banks.

In Germany, Hypo Real Estate, a property and public sector lender owned by the government after a bailout, owed its near collapse largely to problems at Depfa, its subsidiary in Dublin. Last month Hypo transferred most of its troubled assets to a so-called bad bank that will slowly wind down the investments.

Deposit flight from Spanish banks has been gaining pace and it is not clear a euro zone agreement to lend Madrid up to 100 billion euros in rescue funds will reverse the flows if investors fear Spain may face a full sovereign bailout.

Many banks are reorganising, or being forced to reorganise, along national lines, accentuating a deepening north-south divide within the currency bloc.

Since government credit ratings and bond yields effectively set a floor for the borrowing costs of banks and businesses in their jurisdiction, the best-managed Spanish or Italian banks or companies have to pay far more for loans, if they can get them, than their worst-managed German or Dutch peers.

The crisis has also transformed the European Union into something radically different from what was originally intended. The EU was meant to be a voluntary association of equal states but the crisis has turned it into a hierarchy with Germany and other creditors in charge and the heavily indebted countries relegated to second-class status. While in theory Germany cannot dictate policy, in practice no policy can be proposed without obtaining Germany's permission first.

Italy now has a majority opposed to the euro and the trend is likely to grow. There is now a real danger that the euro crisis may end up destroying the European Union.

Lenders in Germany, France and the U.K. had $1.19 trillion of claims on those four nations at the end of 2011, Bank for International Settlements data show.

Lenders in Germany and France saw an increase in deposits of 217.4 billion euros, or 6.3 percent, in the same period.

To prevent contagion, countries in the euro area would have to form a full-fledged political and fiscal union immediately and implement uniform guarantees on bank deposits throughout the region, Thomas Wacker and Juerg de Spindler, economists at Zurich-based UBS, said in a separate note. They said such a response can be ruled out.

Hopefully the following ten observations are less controversial in 2013 than in previous years.

As long known by elementary textbook readers, austerity policies have contractionary effects.

Debt reduction is a very long process; we're talking about decades,

The recently created European Banking Authority has only limited powers over national supervisors, whose daily work is guided mainly by national considerations.

Moreover, the ECB already bears de facto responsibility for the stability of the eurozone’s banking system. But, until now, it had to lend massive amounts to banks without being able to judge their soundness, because all of that information was in the hands of national authorities who guarded it jealously and typically denied problems until it was too late.

Consider the case of a bank headquartered in Italy, but with an important subsidiary in Germany. The German operations naturally generate a surplus of funds (given that savings in Germany far exceed investment on average). The parent bank would like to use these funds to reinforce the group’s liquidity. But the German supervisory authorities consider Italy at risk and thus oppose any transfer of funds there.CommentsView/Create comment on this paragraphThe supervisor of the home country (Italy) has the opposite interest. It would like to see the “internal capital market” operate as much as possible. Here, too, it makes sense to have the ECB in charge as a neutral arbiter with respect to these opposing interests.

Reading the official documents from the June 28 summit requires linguistic and divination skills.

The clearest result is that EFSF/ESM funds can be used directly to support banks.

This coincided with the bubble years in peripheral Eurozone countries (2003-07). The effect of this is that Germany accumulated large net claims on Eurozone countries, which at the end of 2011 amounted to €634 billion.

These current account surpluses did not lead to TARGET2 claims during the bubble years because the counterpart of these surpluses were increasing claims held by (mainly) German banks against the other Eurozone countries.

the German banking system was lending the money to other Eurozone countries to allow them to buy surplus German products – a highly risky affair.

Bear in mind that the implosion of the 1990s stock bubble, while nasty — households took a $5 trillion hit — didn’t provoke a financial crisis. So what was different about the housing bubble that followed?

The short answer is that while the stock bubble created a lot of risk, that risk was fairly widely diffused across the economy. By contrast, the risks created by the housing bubble were strongly concentrated in the financial sector. As a result, the collapse of the housing bubble threatened to bring down the nation’s banks. And banks play a special role in the economy. If they can’t function, the wheels of commerce as a whole grind to a halt.

FRANKFURT—The European Central Bank said it would reject Greek government bonds as collateral for its normal lending operations beginning Wednesday,

Government bonds and other debt securities backed by Greece "will become for the time being ineligible for use as collateral" in the ECB's monetary policy operations, the bank said in a statement.

Greek banks, which are largely shut out of private markets for financing, depend critically on cheap ECB loans to meet their daily funding needs. In June, Greek banks tapped the ECB and Greece's central bank for a combined €136 billion ($166 billion) in loans through normal refinancing operations and emergency credit, an amount roughly equal to two-thirds of the country's gross domestic product.