All in the timing …. seems quiet but it isn’t. Bond markets are in turmoil and there is no depth in capital investing in these markets thereby creating volatility, funds are instead being pushed into stock markets around the world. Watch the European Bond markets for volatility in the coming months, as investors try and ‘flee’ the Euro.
I stated in a post on 23 April 2015, “Yes, The Nut Cruncher” which was a follow up to my post “Depression is Coming” that an Austrian Government default would lead the way again, a la’ 1931 introduction to the Great Depression.
This was due to banks going guts up, one being Heta, the ‘bad bank’ of Hypo Alpe-Adria bank which is being liquidated, the debt of €1.5 billion guaranteed by the Austrian State of Carinthia.
Carinthia, a small State has no money, so technically it would fall on the Austrian Government …well that is what I thought would happen. It will no doubt happen, but not quite the way I expected.
What has transpired is that Austrian Government has stated that they will not cover any shortfall in monies, then we have the European Central Bank (ECB) stepping in and stating that Bondholders should accept a 50% reduction in bond value.
Okay a 50% haircut for Bondholders, but still a lot of money. I doubt the State of Carinthia will meet its guarantee, so the Bondholders must await the conclusion of the wind up of the Bank and the legal action in process.
At this point any liquidation takes a long time, does not happen overnight and the Banks assets must be realized and all costs deducted. What must be borne in mind though is that the liquidators act on behalf of the creditors, not the State of Carinthia nor the Austrian Government, it would not surprise me if a partial distribution is made, then the liquidator proceeds with legal action, against both these parties to recover any shortfall.
Now, provision for this loss by the Bondholders ‘has to be made’ under accounting guidelines, as this is will be a capital loss, those Bondholders, those being public companies, just lost half their bond value.
Normally a provision has to be made, thereby telling shareholders the complete story including the potential capital loss and the loss of current and future earnings. The bad debt is then written off at the close of the liquidation…well let’s just say it should be made then, as the crystallized loss is a known factor for accounting and tax purposes. Any future recoveries classified as income.
Now the saying ‘all things being equal’ should be scrapped from my vocabulary for the simple reason that this saga of Hypo is not equal, not adding up. This may be due to a number of factors..but this I do know for certain….
1. The Association of German Banks, or BdB, which is run by the banks, said its board agreed to acquire the lender Duesseldorfer Hypothekenbank AG to avoid spooking a key debt market. That works every time …. just depends on how many more Banks are feeling the strain.
2. German regulators are assessing the fallout to other Banks, as Germany is hit the hardest, because they snapped up the company’s debt, assuming it to be guaranteed by an Austrian region. It should be noted that nothing is ‘assumed’ in finance, so it was ‘guaranteed’ by the State of Carinthia.
3. Kommunalkredit and Raiffeisen (Austria) have large multi currency loan exposure as Heta has and they are guaranteed by the Austrian Government on the bonds that they have issued. Lending principally in foreign real estate.
4. Rating Agencies are now reviewing Banks audited accounts and ‘all’ Banks with exposure to Heta will be downgraded with similar comments to these ‘Austrian authorities to resolve Heta Asset Resolution AG (Heta), which includes a 15-month moratorium on Heta’s debt payments, could indicate a decrease in the Austrian state’s propensity to provide support for wind-down banks.’ What an understatement…
5. Deutsche Pfandbriefbank, a German Bank (naturally) has booked a doubtful debt from Heta of €79 million.
6. Commerzbank, (German) has to make a provision and I have not ascertained the full amount as yet. There will be a large number of these Banks coming forth shortly for the simple reason that €1.5 billion is a lot of AAA Bond issues.
7. Gleaning Banks Q1 reports all Banks are principally lending in real estate with significant margin pressure (i.e. rate set is not as profitable as it should be under normal conditions, due to competition and or borrowing costs.
So my assumption, based on history, that the next Sovereign Bond Market collapse will originate from Austria still holds up.
My reasoning is simple, after ten (10) years of extremely low interest rates and an anticipated increase in interest rates, by the US Federal Reserve, shall have a dramatic effect on interest rates and currencies globally.
Further an increase in interest rates, in a recessionary/deflationary environment (as evidenced by historical Quantitative Easing .. see below *..)will stretch all borrowers capacity to maintain their loans (and a dramatic reduction will be required in the inherent security value of the real estate).
This in conjunction with the depreciation in the currencies and the marked effect on foreign exchange losses; as was the case with Heta; will throw all Banks into turmoil.
Austria cannot afford another Heta, simple fact of the matter is that Austria is struggling with its own debt load now, third party guarantees not taken into consideration. When it blows it will not be a pretty picture.
Current situation of Hypo Alpe-Adria bank, when it was still owned by the small Austrian state of Carinthia, was a cesspool of corruption. It involved bankers, politicians, and powerbrokers in Austria and the Balkans. It was the perfect union of money and power. Investigators found 160 instances of suspected fraud, amounting to €1.6 billion, of which €890 million occurred in Austria, €250 million in Croatia, €164 million in Bosnia and Herzegovina, among others. Six of the bank’s former executives have been convicted of crimes.
Edit(*) ?.Quantitative Easing initiated by Japan, UK, and US causes inflation and deflation, deflation on different asset classes. Consumables increase in price whilst hard assets decrease in price. Minsky equation on money supply, brought about by Joe Public deleveraging.