Posts Tagged ‘ecb’

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.
And then I spotted this statement from the Telegraph:
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.

All about banks and mortgages…

Posted: March 3, 2011 in news
Tags: , , , ,

While driving my kids to school this morning I listened to David McWilliams talking on Newstalk radio. David was talking about the ECB/IMF “bailout” and about the growing mortgage crisis in Ireland. Now I have always respected David for his frankness and clearcut analysis. However this morning I disagreed with the duality in his argument.

Here’s why:

On the ECB/IMF “bailout” he argued that this was not a bailout and that we as a population could never repay this loan. The interest payments would eat up 10% of our GDP and anyone considering this as something that would constitute a solution to our problems was wrong. He went on to state that a default was coming down the line and that it would be better to enter into a structured default now rather than have a systemic collapse further down the line when everything spins out of control and we have no choice in what happens. Furthermore the bondholders, who are the ones who benefit from this bailout, wilfully & knowingly bought these bonds hoping to make a high profit. They were also aware of the risks associated, or they should have been, and now it was time for them to be made face the risks of this type of business.

So far I agree with him.

He then went on to say that the best way to deal with the impending mortgage crisis is to create some sort of “debt forgiveness” scheme. One where people with negative equity would somehow not be held responsible for the chunk of money owed above the value of their house. People could not and should not be forced to pay their mortgages in full.

That’s where I disagree. Compare the first argument to the second;

  1. I am a bondholder and I buy quantities of bonds in a risky market hoping on a high return. The market goes the other way and I now have to face the truth that I am losing money.
  2. I have bought a house on a mortgage, as the value of my house increased I re-mortgaged it counting on the value to go up and up. Now reality has struck and the value of my house has plummeted (to a realistic value) and the amount of money that I owe is more than the property is worth. Or even better; I have bought a string of properties, all on a mortgage, have rented them out and was counting on the rent to pay the mortgage. I now have no tenants or tenants at a greatly reduced rent and owe more on the properties than that they are worth.

In McWilliams argument the party in the 1st argument should be forced to face the flip-side of their actions while the party in the 2nd argument should not be made to face the results of my risk and should get a huge chunk of my debt written off.

Not exactly fair in my opinion……