DISCLAIMER: I am no financial analyst, economist and any knowledge that I have in these areas is largely gained by reading. Hence the article below might contain wrong or incorrect conclusions or be just plain hyperbole on my behalf. However the facts mentioned and sources named are correct.
Like so many people I was amazed when I read the news last night that Germany had “found” 55 billion euro which had been overseen through an accounting error. The whole thing just doesn’t make sense. Because, to find 55 billion, you have to first “lose” it. And to put it frankly what moron loses 55 billion?!
So I decided to read a bit more about it and discovered some astonishing facts:
- Apparently the 55 billion is equal to a ridiculous 1% of the country’s debt to GDP ratio. “Germany’s 2010 debt-to-GDP ratio also drops, to 83.2% from the previous 84.2%…
- This money obviously only exists electronically so is this just some creative QE?
- the value represents a quarter of Germany’s new ESFS obligation.
the German government welcomes the substantial progress FMS Wertmanagement has made in reducing the portfolio it took over from Hypo Real Estate a year ago”.
And that’s when a light went on in the back of my head. Something about Hypo and the Irish banking crisis. I recalled reading some references to Hypo & Ireland on the excellent Golem XIV blog. A quick search there led me to the articles I was thinking of. The information contained therein showed a clear historic link between the Irish banking crisis, Depfa and Hype Real Estate.
For those who aren’t already familiar with the Depfa and HRE story, here it is in a very small nut shell. Hypo Real Estate was the huge German bank which we were all suddenly told, back in 2008, had to be bailed out by the German State at vast cost. But, they said, they had no choice, because Hypo (HRE) was so large and its debts so huge that if it collapsed it would, at the very least, bring down German banking. It was Europe’s AIG – to big to be allowed to fail. Then the back story emerged. HRE had bought ‘Irish’ bank Depfa at the top of the market at almost the same time as RBS bought ABN Ambro. Both purchases were insane and both killed the purchasing bank.
the collapse of HRE was in fact due to a huge funding crisis at Depfa always referred to as ‘its Irish subsidiary’. From that came the notion that Depfa must have hidden its true state from HRE
The above has apparently created a lot of bad blood in German financial & political circles. Depfa is seen as an Irish problem and hence it is the fault of the Irish that Depfa nearly killed Hypo. Some say that the Irish government should have bailed HRE/Depfa out. This suggestion is in itself ridiculous for one single reason alone. At the beginning of this year Ireland’s IMF bailout was in the region of 85 billion euro. The HRE/Depfa bailout alone stood at nearly 100 billion euro at that point…
The article goes on to explore the reasons why Depfa had located itself in Ireland. Apparently the Irish Financial Services Centre had built up a bit of a name as a “financial wildwest”. Regulation was loose or not enforced.
Money in various shades of shadiness flowed to Ireland.
What gave Ireland the edge over Luxembourg was it offered faster turn arounds on setting up deals and far more lax regulation.
So in short, Depfa was a German bank based in Ireland because of its lack of strict regulation. This allowed a lot of financial transactions and off the books accounting which was not possible in Germany itself. On of the main instruments for raising funds by Depfa was the so-called pfandbrief a triple-A rated German bank debenture. At the time of the Depfa bail out there were €806 Billion in Pfandbrief outstanding! If Depfa had gone down, it would have taken the AAA rated dependability of the Pfandbrief with it. There was no way that Ireland would have been able to absorb this astronomical amount so Hypo buying Depfa was probably the most logical option.
To now read that 55 billion was just found on Hypo’s books that wasn’t there makes me extremely sceptical. In my opinion it’s just another case of smoke and mirrors that EU financial decision-making is full of. For years now we have been forced to pour vile amounts of money into black holes to pay for debts that we didn’t incur. None of the bailouts benefit the people who are actually paying for it and the EU/ECB seems to be set on accelerating this midnight train to nowhere.
It’s time to put a stop to this.