Thread: German debts set to blow 'like a grenade'

German debts set to blow 'like a grenade'

Germany's financial regulator BaFin has warned that the toxic debts of the country's banks will blow up "like a grenade" unless they take advantage of the government's bad bank plans to prepare for the next phase of the crisis.

By Ambrose Evans-Pritchard
Published: 9:54PM BST 25 May 2009


German Chancellor Angela Merkel's bad bank plan has been heavily criticised Photo: EPA

Jochen Sanio, BaFin's president, said the danger is a series of "brutal" downgrades of mortgage securities by the rating agencies, which would eat into the depleted capital reserves of the banks and cause broader stress across the credit system. "We must make the banks immune against the changes in ratings," he said.

The markets will "kill" banks that try to go it alone without state protection, warning that banks have €200bn (£176bn) of bad debts on their books. "We are pretty sure that within a month or two our banks will feel the full force of the sharpest recession ever on their credit portfolios," he said, speaking after the release of BaFin's annual report last week.

An internal memo by the regulator's office suggested that likely write-offs may reach €816bn, twice the entire reserves of the country's financial institutions. This figure included a broader array of "problematic" assets. Hypo Real topped the secret list with €268bn in credit risk, followed by HSH Nordbank at €105bn, and Commerzbank at €101bn.

The International Monetary Fund (IMF) has called for a stress test for Europe's banks along the lines to the US Treasury's health screen, saying the region "urgently needs to weatherproof its institutions".

The IMF said European institutions have written down less than 20pc of projected losses of $900bn (£566bn) by 2010. Euro area banks will have to raise a further $375bn in fresh capital, compared with $275bn for US banks. The Tier one capital ratio is 7.3pc in Europe, and 10.4pc in the US.

The German bad bank plan has been heavily criticised as an attempt to brush the problems under the carpet until after the elections in September. It allows banks to spread losses over 20 years in an off-balance sheet vehicle – much like the "SIVs" that masked their extreme leverage in the first place – and risks repeating the Japanese error of letting "zombie" banks limp on rather than purging the system.

The recession has hit Europe much harder than expected. German GDP has contracted by 6.9pc over the last year, and the eurozone as a whole has shrunk 4.6pc, although there are signs that the economy may be through the worst.

Germany's IFO business confidence index rose to 84.2 in May, the highest since December, and German exports have started to rise again after a catastrophic fall of 16pc. But Carsten Brzeski from ING said it is too early to celebrate.

http://www.telegraph.co.uk/finance/fina ... enade.html

Originally Posted by AirborneSapper7

The International Monetary Fund (IMF) has called for a stress test for Europe's banks along the lines to the
US Treasury's health screen, saying the region "urgently needs to weatherproof its institutions".

When the doctor does a stress test on a patient, he attempts to (very nearly) cause a heart attack under controlled conditions, in an environment where treatment can begin immediately.

What does the IMF mean by "a stress test" for banks? Are they intentionally and systematically pulling the rug out from under weak banks to make them fail? Is the IMF attempting to cull out the "weak sisters" and shut them down, thereby strengthening those banks that remain? Why would a central bank make a bad financial situation worse by design? Isn't it bad enough that there is a worldwide financial disaster (except in China, OPEC, and the IMF)?

Or are these European financiers truly that malevolent?