How Europe could be the credit crunch's next victim
By
Associate Editor
David Stevenson
Oct 03, 2008
France: not quite so smug now
"Laissez-faire is finished", declared the French President last week, "the idea that markets were always right was mad."
No holding back there! But within days of M. Sarkozy trying to hammer yet another nail into the coffin of the 'Anglo-Saxon' unfettered capitalism that many pundits are blaming for the biggest financial crisis since 1929, look what's just crawled out of the woodwork.
It turns out that not only have European banks also been punting around in piles of toxic debt, they've actually taken bigger overall bets than the Americans. So with global property prices crashing, Europe's financial firms are now starting to look even shakier than those in the US.
That's bad news if you're looking to borrow some euros. And as I'll explain in a moment, even the EU itself could come under threat.
The French President may be a fan of classic 'dirigisme' – where the government tells you what to do – but it looks like his country's financial institutions haven't been listening. They've been doing quite a lot of dabbling in dodgy debt. Indeed, lenders around Europe have literally 'bet the bank' with borrowed money.
European banks hold 73% as much exposure to toxic US housing debt as American banks do themselves, according to IMF figures. Then they have ever-mounting bad debts from the British, Dutch, French, Scandinavian, Spanish and East European property markets, where prices have inflated even more than in the States. What's more, they've 'leveraged up' much more too, says Citigroup, with an average ratio of total assets to capital as high as 35 times compared with under 20 for the major US banks.
BNP Paribas has by itself bumped up its balance sheet to being bigger than France's annual national output, while Credit Agricole and Societe Generale between them account for another 150%. Across the border, Santander's assets are 132% of Spanish gross domestic product (GDP). And in Switzerland, the combined UBS and Credit Suisse balance sheets have ballooned to more than 750% of the country's entire GDP.
"It turns out that European regulators have allowed even greater use of 'off-books' chicanery than the Americans", says Ambrose Evans Pritchard in The Telegraph. Now the wheels are starting to fall off the wagon. Within two days of German finance minister Peer Steinbrück pronouncing the financial crisis an "American problem", i.e. Anglo-Saxon greed and inept regulation that would cost the United States its 'superpower status', he was eating humble pie.
By Monday, Mr Steinbrück had to put together a €35bn (£28bn) loan in Germany's biggest-ever bank bail-out to save Hypo Real Estate, and was admitting that Europe was "staring into the abyss". Not bad for a 48-hour U-turn. Even Alistair Darling would be hard pressed to beat that. Meanwhile Belgium, with a little help from its friends in Holland and France, was forced to nationalise Fortis, followed on Tuesday by bailing out Dexia.
Then the Irish government joined the party. It reckoned the Republic's banks were looking so iffy that it needed to offer a blanket guarantee of the deposits and debts of its six largest lenders. Even allowing for the Paulson 'bad bank' plan, this was the biggest bit of State bank underwriting since the early 1990s Scandinavian rescues. Unsurprisingly, Ireland's EU comrades say the scheme's not fair.
Sarko's now running scared, too, claiming "the European financial sector is on trial: we have to support our banks". And the French floated the idea of a €300bn European equivalent of the Paulson plan, though this has got knocked on the head by the Germans.
Bankers are certainly panicking, sending short-term interest rates soaring, as my colleague John Stepek describes in today's Money Morning. "The interbank market has collapsed", says Hans Redeker at BNP Paribas, "we're now seeing a domino effect as the credit multiplier goes into reverse and forces banks to cut back lending to clients".
Very bad news for eurozone borrowers. And as Europe now heads for an even steeper downturn than America, even the European Central Bank's anti-inflation hawks "finally seem to be acknowledging the reality that the region's growth prospects have deteriorated markedly", says Capital Economics.
It's all set to spotlight the ever–growing strains in the EU coalition. Bond spreads - the most closely watched eurozone stress barometer - between Italian 10-year debt and German Bunds has widened to a post-EMU high of 0.85%. "The European Commission's top economists warned the politicians in the 1990s that the euro might not survive a crisis", says Evans-Pritchard, "traders are starting to 'price in' an appreciable risk that the EU will break apart."
European leaders are due to meet up in Paris tomorrow for an emergency summit. But that won't stop the credit crisis – and before it's out, its biggest victim could be the EU (in its current form at least) itself.
Published in Economics
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by
David Stevenson
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