Sparks Fly

December 1, 2013

German Elections

The Christian Democratic Union/Christian Social Union (CDU/CSU) of Chancellor Angela Merkel achieved their best result since1990, with nearly 42% of the vote and nearly 50% of the seats in German elections this September.

Their coalition partners  Free Democrats(FDP) failed to get over 5% of the vote and are denied Bundestag seats.  Merkel’s party reached a tentative coalition agreement with the main opposition party the Social Democrats (SPD) to form a grand coalition this 27/11/13 signing a wide ranging 185 page document.

http://www.bbc.co.uk/news/world-europe-25116115

Falling Loan to Deposit ratios

Falling Loan to Deposit ratios

It’s not good news for Ireland. The document opposes a  “debt union” in Europe. “No new taxes and no new debts.” It’s clear Germany will oppose any retrospective bailout of Irish banks through the ESM or by other means. It’s also clear why Ireland’s bailout tow rope has been cut and we are about to head into stormy, choppy seas without a backstop as we rejoin open bond markets in a few weeks time.

In Ireland local deflation of the economy means falling standards in healthcare and education with rising taxes and falling salaries  diminishing our ability to pay off international creditors and kick-start the economy. Emigration provides relief for both tax bodies and the unemployed with unemployment levels hovering around 13%. The debt burden of the Irish economy is unsustainable in the medium to long-term.

The outlook worsens when global recovery from the financial crisis is slowly adding to the medium to long-term effects of the crisis in Ireland. Growth at 3% pitched by supporters of bailout and NAMA  now look at revised downward growth rates of far less than 1%.

Things are getting worse in Europe. The deafening propaganda from europhiles in Ireland fills the air. This weekend The Irish Times carried a free poster and pro EU supplement grandiose in its admiration over the  EMU project. But the project is failing Ireland.

Exit from the bailout is described  in glowing terms as Ireland return to sovereignty. Nothing could be further from the truth. Saddled with a debt burden Ireland’s 126% debt to GDP sinkhole has Ireland wrapped in debt chains.

In an ill omen move for EMU Ukraine has decided to pull the plug on closer trade ties with Europe leading to eventual full membership. Such a deal with the European Union would have cost it dearly. 25% of its trade is to the east. Extra cost for gas, its budget deficit on the brink of disaster would have ensnared the country in a Cyprus or Greek decline in no time. The Ukrainians decided not to join the EMU league of debt.

Instead Ukraine is interested in joining a new competitor for the EMU in the formation of a Eurasian Union.

http://rt.com/business/ukraine-eu-trade-agreement-088/

“Russia, Belarus, and Kazakhstan met in Minsk on October 24 to discuss the formation of a Eurasian Union in 2015, a political and economic alliance which will incorporate other Commonwealth of Independent States (CIS) like Armenia, Tajikistan, and Kyrgyzstan.”

The queue to join the euro is getting smaller and smaller: http://en.wikipedia.org/wiki/Czech_Republic_and_the_euro

“On 29 May 2013 Miroslav Singer, the Governor of the Czech National Bank (the Czech Republic’s central bank) stated that in his professional opinion the Czech Republic will not adopt the euro before 2019.”

The Czechs continually kick that euro can further down the road. Last June Iceland decided to pull the plug on its bid to join the EU.

We should join Switzerland and Ukraine in saying ‘No’ to Europe. Switzerland is a member of EFTA ( European Free Trade Agreement ). It does well. The Swiss are not on tap to contribute to bailouts of fellow members of the EMU.

Its time for Europe to unchain its domino league of debt freeing the citizens of Ireland, Greece, Portugal and Spain to default and recover.

Ireland’s financial sector, its farming sector, its so-called political elite do well out of Europe.

Their will is to bleed citizens in order to preserve bonuses, pensions and unearned salaries in a cloud nine cuckoo land awaiting  redemption from legacy bank debt. They are waiting for Godot who never comes.

Europe’s austerity programme brings with it slow asphyxiation of its debtor economies.

Clearly the hoped for ideals of unity in diversity have long since been abandoned by the EU. What we have instead is Europe led by Germany’s Angela Merkel with satellite states reminiscent of the soviet era USSR as the chains tighten.

The difference between the inner core and outer core countries first envisioned as a leveling of the pitch to allow countries like Ireland and Greece to catch up with their European partners has been an abysmal failure.

The cheap money that flowed into these countries was siphoned off politically in a mixture of incompetence and corruption. Ireland is in a worse state now financially than it was when it first entered the EU in 1999.

Its time to declare the experiment with the EU over. The old failed experiment has been replaced with a new one. It’s a new experiment dominated by the will of debt extractor troika members to bleed Ireland dry while leading Ireland into a dismal future of compliance and serf like obedience to bailiffs. Its a signal that the EU debt union has failed.

Ireland’s Banking Sector

Much of Europe’s problems stem from its banking sector. UK, German, Spanish and Irish bank bailouts to name a few have cost an arm and a leg.  The UK has struggled:

 http://www.ft.com/cms/s/0/d589a130-21e6-11e3-bb64-00144feab7de.html#axzz2mDpJvnFu

“….£130bn it spent bailing out Lloyds, Royal Bank of Scotland, Northern Rock and Bradford & Bingley during the financial crisis”

In the US much of the TARP bailout has already been repaid prompting the question US financial crisis was a short-term liquidity crisis for some banks and not an across the board  solvency crisis as in Irish banks.

A major part of the US financial crisis was exported to Europe.

It’s rising slowly to the surface. New stress tests in 2014 should highlight it.

The response of governments to protect their financial markets, creditors, bondholders has been through austerity and bailouts across the EMU. Small banking institutions across Europe reveal the process of amalgamation into banks that are too big to succeed TBTS.

Debt writedown, burden-sharing between financial institutions and citizens has been at the expense of citizens.

Greece has been a classic example of European response. Greek debt-to-GDP levels will only fall to 129% by 2020 and could remain as high as 160% while financing needs exceed its ability to repay. Greece remains a debt sump that under present conditions with its unviable economy is a scare crow totem highlighting the failure of the European project.

Current bailouts as in Ireland’s case merrily kick the can down the road. They sacrifice and mug the local economy to the point of destruction, to pay back creditors at all costs. Saddled with unpayable debts to creditors, austerity pillages the local population leeching away their assets while their obligations to creditors become even more onerous and destructive as time passes.

Three quarters of the Irish population find it difficult to get by from month to month as they struggle under debt burdens and cutbacks. Further growth is already swallowed into debt burdens with a long line of creditors ready to pounce before any advantage accrues to the Irish economy.

Greece has been bailed out with financing targeting the repayment of Greek creditors with very little debt write down. But the Greek population has been forced into deeper recession as a result. Inward deflation of their economy cannot occur further without unacceptable human suffering. Its likely Greek will enter into a massive default.

Current retrenchment in the European banking sector is preparation for inevitable default by Greece.

In Ireland the top 1% benefit most from bailout with austerity measures guarding the status quo in high paying professions such as medicine, law and the higher grades of the public service.

In Ireland Public anger systemic across bailout countries has turned against the banks. Some hope for the setting up of new banks run on more transparent and public lines.

Public Banks

The model of public banking has been proposed as an alternative to  private banking.

This blog has previously noted the excellent success of the BND Bank of North Dakota whose profits are returned to the local community. Its management model is built on transparency and open information to the public it serves. Run on civil service lines, costs are held low; salaries are not ludicrously inflated as in banking in the private sector with profits creamed on bonuses and salary perks and other shadowy dividends and payoffs.

The axiom ‘pay peanuts and you get monkeys’ is not true for BND. It’s a lesson for Ireland where monkeys were paid a lot more than peanuts and where this continues to be the norm.

However, we should not be blinded by the success of BND in the US. Proponents of the Public banking model in Ireland before importing this model should look at problems with the PB template that have occurred both in Germany and in Spain.

Before stating that the Public Banking should be a categorical imperative we demand all banks follow by looking at the virtuously ethical, rational and objective way BND has been run as an institution, we should examine an ethical distinction between ‘what ought to be’ and ‘what is’.

Fortunately, in Europe we have data to show how the implementation of the PB model has actually turned out in practice. So we can examine ‘what ought to be’ comparing it to ‘what is’.

For European Public Banks the evidence is not terribly convincing that the PB model is without blemish as an alternative in Europe.

In fact, there is evidence to show that the model is being abandoned in favour of a more rigorously inspected private model.

Such banks in Germany are run on the Landesbanken/Sparkassan model.

Ireland’s banks, private banks and  Irish Credit Unions should consider themselves lucky not to be run on the lines of the Public Sparkassen savings bank model in Germany.

Neither Landesbanken or Sparkassan have escaped the financial crisis as the following series of links show. Neither has the experience of Ireland with German banks in the private sector hitherto been a good omen for the future.

However the PB sector has perhaps been even more mauled by  paper derivative exposure than the German private sector:

http://www.zerohedge.com/news/2013-04-29/728-trillion-presenting-bank-biggest-derivative-exposure-world-hint-not-jpmorgan

Municipal Calamity… http://www.imf.org/external/pubs/ft/fandd/2010/06/dodd.htm

Landesbank sues

…..”German bank sues Wells Fargo alleging $1.5 billion securities fraud….” http://www.bizjournals.com/sanfrancisco/news/2012/10/02/wells-fargo-wachovia-litigation.html

Consider this: http://bit.ly/hCfKvS http://bit.ly/hqJAHm

Corporation Tax and Jurisdictional arbitrage

“German banks set up subsidiaries in Ireland. These subsidiaries were often registered as completely Irish companies. Back in Germany the German regulator (BaFin) had strict and enforced rules. Very good rules for the most part. Far, far better than Britain or Ireland.

But these good rules, properly enforced meant German banks could not do many of the most lucrative and in hind sight reckless kinds of deals.”

http://www.politics.ie/forum/economy/35656-bloomberg-depfa-ifsc-caused-hypo-collapse.html

“”Hypo Real Estate, run by Chief Executive Officer Georg Funke, 53, since it was spun off from HVB Group in 2003, was forced to seek the lifeline after its Dublin-based Depfa Bank Plc unit, which lends to governments, failed to get short-term funding amid the credit crunch “”

http://www.independent.ie/irish-news/us-equity-firms-in-pole-position-as-race-for-ifscbased-depfa-hots-up-29651475.html

http://en.wikipedia.org/wiki/Depfa_Bank Landesbank contravenes rules re operating abroad:

http://www.ft.com/cms/s/0/4e806538-7300-11d8-81c6-000e2511c801.html#axzz2lwW53UkC

http://articles.chicagotribune.com/2012-03-30/news/sns-rt-goldmansachslandesbank-update-1l2e8euap1-20120330_1_tcw-cdos-appeals-court implosion that caused a $37 million loss for German state-owned Landesbank Baden-Wurttemberg.

“A three-judge panel on Friday did not make an immediate ruling on a trial judge’s decision last September to dismiss the German bank’s lawsuit claiming fraud against Goldman and TCW, an investment advisor.”

Landesbanken are part of the public bank sector in Germany providing wholesale banking services and investment products to the public savings banks Sparkassan. The public banking sector is the third tier in German banking comprised of private banks eg Deutsche bank; cooperative banks like the Volksbanken and an array of public banks under “German Savings Banks Association, DSGV, “coordinates, promotes and harmonises the interests of Sparkassen”.

“The Landesbanken are mostly owned by the regional savings banks through its regional association and the respective federal state.[5] After several mergers and acquisitions, there are seven Landesbanken-Groups left: BayernLB, Norddeutsche Landesbank (Nord/LB), HSH NordbankLandesbank Baden-Württemberg (LBBW), Landesbank Berlin (LBB), Landesbank Hessen-Thuringen – Girozentrale (Helaba), WestLB.[5] Bremer Landesbank Kreditanstalt Oldenburg – Girozentrale belongs with a share of 92,5% to the Nord/LB-Group. The rest is owned by the federal state of Bremen.”sparkasse1

“Based on OECD studies, the German public banking system had a share of 40% of total banking assets in Germany.[8] “The total assets of the Sparkassen amount to about EUR1 trillion. The 431 savings banks operate a network of over 15.600 branches and offices and employ over 250.000 people.[18] Savings banks are universal banks and provide the whole spectrum of banking services for private and commercial medium-sized customers.[4]50 million customers maintain business activities with savings banks.[19] Although independent and regionally spread, the savings banks act as one unit under the brand Sparkasse with the famous logo and the well known red colour.”

http://en.wikipedia.org/wiki/German_public_bank http://www.economist.com/node/6888836

Landesbanken provide wholesale banking services to the Sparkasse group. All is not well with how they operate.

The German PB sector will come under deep scrutiny in 2014. Many of its banks are on sale. Consolidation and absorption by the private sector for some banks is on the cards.

We can do without a DSGV in Ireland operating to make sure Irish people pay back their odious debt to German banks.

“Bidding for Berliner Bank, valued at around €400m, is seen by many as a dress rehearsal for the sale of Bankgesellschaft Berlin next year. The bidders include banks known to be interested in expanding their retail businesses in Germany, such as Deutsche Bank, Commerzbank, HVB (which is owned by UniCredit of Italy), Citigroup, France’s Société Générale, MBS and the Berliner Volksbank, a co-operative. Berliner Bank has 60 branches and around 300,000 of the capital’s better-off citizens, about 9% of the market.”

“—— Until last July the public banks had a state guarantee, allowing them to borrow and lend more cheaply than their competitors. Many of them are still implicitly guaranteed by their municipal owners. The three-pillar system has obstructed consolidation in an overbanked country and has stifled competition. Some Landesbanken andSparkassen have merged and even taken over private banks. But takeovers in the other direction are not possible: the savings banks are protected by local laws. Berlin may provide the first exception.”

Neither has PB in Germany  been immune from losses in the property sector:

“…The prize in this particular battle is the Berliner Sparkasse, which has over 40% of the capital city’s retail market. The savings bank is owned by Landesbank Berlin. This in turn belongs to Bankgesellschaft Berlin, a group that was hit by a property scandal in 2001. Its majority owner, the Land of Berlin, had to bail it out to the tune of €1.8 billion ($2.3 billion) and provide further guarantees of more than ten times that amount. The European Commission approved this state aid on condition that Bankgesellschaft Berlin be sold after the clean-up.”sparkass2

To what extent political and state interference and private sectional interest operates in the affairs of these banks is impossible to say.

“These Savings Banks are not state banks but are essentially credit institutions operating under public law. Their responsible public bodies (but not owners) are the local municipalities. Savings Banks are not a consolidated group; each Savings Bank is an independent credit institution and is highly autonomous. They, however, come under an umbrella organisation, the Deutscher Sparkassen–und Giroverband (DSGV) that, although it can only exercise control by consent, is able to ensure effective and efficient operation with very low risk.”

That ought to be the case, but what is the case is that PB’s have not gone unscathed by problems in the banking sector.

Sparkasse may be lauded by proponents of the Public banking model in Germany, however, they have been in big trouble for some time.

http://www.reuters.com/article/2013/09/17/us-banking-germany-landesbanken-idUSBRE98G06720130917

“When they hit problems, Landesbanken could have turned to a Joint Liability Scheme run by the Deutsche Sparkassen und Giroverband (DSGV), the umbrella group which includes the savings banks and Landesbanken and argues for consolidation.

But taking bailouts from the DSGV would have allowed it to change Landesbanken’s management and merge institutions. Instead, the states footed the bill for the bailouts themselves. “There has been some restructuring, balance sheets have been reduced, the number of institutions has been reduced, but we think it’s not quite enough,” said the OECD’s Fuentes.

“We think there could be more consolidation to keep decreasing the risk of influence of individual states in the management of these banks.””

We in Ireland though a banking inquiry has yet to reveal it to be so, suspect the political interference in the running of IBRC formerly Anglo,  drove it into the ground.

State Influence

Landesbanken have suffered from state influence across a regionally autonomous national state political structure in Germany. Arguably the term autonomous is a lock and key ‘keep away’ message hiding secrets we may discover revealed in stress tests in 2014.

“CIVIL SERVICE” CULTURE Long-beset by the problems of politically motivated lenders, and cultivating a work culture several employees describe as “civil service like” with a clear-out at 5 p.m., Landesbanken did not begin to build serious problems until 2001. The trigger, several experts say, was a surprise agreement between Germany and Brussels to end a sovereign guarantee on bonds sold by Landesbanken by 2005. The Landesbanken’s response was to sell as much debt as they could before the curtain fell.

They piled into international lending and high-yielding bonds, sponsoring 8.4 percent of the global supply of asset backed commercial paper (ABCP) by 2006, according to a major 2012 study on Landesbanken by four German academics.

The Landesbanken expansion ended in bailout. In 2008, German states began the first of five bailouts totalling 70 billion euros, including the rescue of and eventual shutting of WestLB, which lost heavily on bets on the U.S. subprime market. Others stayed afloat, avoiding deep restructuring.

Next year’s European stress tests will be a seminal moment. “Some people suspect these banks will need to take further state aid or at least further substantial writedowns on their portfolios,” said Robert Montague, senior investment analyst at ECM Asset Management.” “Merging HSH with another Landesbank would “make a lot of sense, but there are a lot of political issues and it is unlikely that they will do it,” a source familiar with J.C. Flowers’ position told Reuters.”

” The 2012 study on Landesbanken lending said that between 2001 and 2005 they loaned money to riskier German companies than other banks, and charged lower rates. Some of these loans are medium term facilities, still on the banks’ books. “They (Landesbanken) have lots of risky loans on their balance sheets, sometimes it can be very difficult to see,” said Joerg Rocholl, the president of the European School of Management and Technology (ESMT) in Berlin and one of the authors of the 2012 study on Landesbanken lending.

Another area of concern is “..if they are zombie banks, if they invest continually in bad companies,” Rocholl added, a concern heightened by their public-spirited ownership.”

“While Germany has weathered the eurozone’s economic headwinds well, 2013’s first half results showed the five remaining Landesbanken had a combined 260 billion euros of international exposure at the end of last year.”

The Landesbanken/sparkassan PB banking model in Germany has been blighted by state interference, cover-ups, blind obedience to sectoral interests and a lack of transparency that is endemic in this sector.

Bank stress tests due in Germany in 2014 will reveal more.

Sparkasse for Ireland and Irish Credit Unions?

Smash and Grab in the Irish CU sector should avoid importing the PB Sparkasse/Landesbanken model for Irish Credit Unions.

If the Sparkasse/Landesbanken model were followed by Irish credit unions its conceivable problems in this sector would be far worse than presently faced in this sector by CU’s such as Newbridge.

Their assets could have been lost not in bad property investments but in useless financial paper speculation. Perhaps this does not augur well for Newbridge Credit Union currently being taken over by Permanent TSB.

PTSB may go the same way as some Landesbanken as PTSB is an Irish zombie bank subject of bailout.

Irish Credit unions are in trouble as they fail to meet their 10% reserve requirements: the question is, are harsh and unrealistic credit reserve requirements imposed in the current financial environment, not only unrealistic.

Are they designed to sabotage the CU’s and grab their deposits to inflate the deposit base of troubled banks adding to further concerns re duopoly in Irish banking?

It would appear the ICB Irish Central Bank is intent on looting this sector.

In the burning of IBRC (Formerly Anglo Irish) CU’s “together carrying a loss of approximately €15m following Irish Government’s decision to liquidate Irish Banking Resolution Corporation (IBRC), formerly Anglo-Irish Bank.”

No relief was given to this broadly well managed sector providing excellent service to Irish communities.

Marian Harkin MEP has complained to Europe rightfully indignant at the purging of this sector by the state.

http://www.marianharkin.com/my-work/credit-unions/#.UpuiTsTZVNt

The state is enforcing stringent regulations on this sector stifling growth leading to extinction through amalgamation and closure.

Irish CU’s are subject to the following set of requirements outlined in these documents.

Central Bank Requirements and Guidance documents:

http://www.centralbank.ie/regulation/industry-sectors/credit-unions/Pages/guidance.aspx

http://www.marianharkin.com/my-work/credit-unions/#.UoIP6fnZVNs

http://www.centralbank.ie/regulation/industry-sectors/credit-unions/Documents/Regulatory%20Reserve%20Ratio%20-%20August%202009.pdf

Onerous conditions combined with huge expense involving IT software products, training in IT, management training and staff training costs, data collection requirements now burden a largely voluntary sector.

One option provided by government should be support to allow for competitive research and improvements while protecting the core activities of CU’s.

Members can contribute to an insurance scheme with profits supported by government providing free upgrade services to help this voluntary sector.

The private sector with its audit and advisory practices can amount to a private sector looting of Credit Union Boards.

Getting rid of credit unions?

According to Greg Allen there is an agenda to get rid of Credit Unions:

http://www.accountingnet.ie/business_finance/Want_to_avoid_credit_union_risk_Get_rid_of_credit_unions_printer.php

Central Bank Guidance notes: http://www.centralbank.ie/regulation/industry-sectors/credit-unions/Documents/2013-08-28%20v2%20Table%20with%20Location%20of%20Requirements%20Circulars%20Guidance%20Notes.pdf

There appears to be one rule for banks and another Credit Unions: capitalisation rules for banks are eased while rules for CU’s are ruinously enforced:

http://www.nytimes.com/2013/01/07/business/global/07iht-banks07.html?_r=0

“A group of top regulators and central bankers on Sunday gave banks around the world more time to meet new rules aimed at preventing financial crises, saying they wanted to avoid the possibility of damaging the economic recovery.”

Perhaps CU’s should look to a public banking model such as the BND Bank of North Dakota supported by Irish government to save and enhance the CU sector, develop it to the point of providing Landesbanken wholesale banking services, but can this model avoid the experience of German Landesbanken?

The Irish government instead is wedded to the private banking sector in Ireland.

End

Postscript:

A future for world banking

It may no longer be science fiction to imagine a world of the future, a world of consolidation and hegemony without diversification,  a unity without diversity, a world of  banks amalgamated into one single bank; currency paper or metal currency gone, replaced by a central computer.

…Biomed computer chips implanted into you at birth, where a returned wink means your transaction has gone through to the gazillion debt sump.

This may mean you are OK with computer central, or NOt.

End

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