Europe bails out banks - but what about the rest of us?

The European Union has been forced to put together a bailout plan in the aftermath of the Greek crisis - supposedly to help out irresponsible, high-spending governments. But most of the money looks likely to go to banks who have bought toxic assets and made dodgy loans. Meanwhile, taxpayers will not only have to fund the plan, they will also have see services cut by austerity packages.

Reuters

Greece needs to raise about 53bn euros this year. That would take its debts to 290bn euros, nearly 120 per cent of gross domestic product.

Most of Greece’s debts are owned by foreign creditors.

Which are the countries most exposed to Greece’s debt, via their banks and finance institutions?

The banks and their governments are keeping tight-lipped. But the Bank for International Settlements in Basel, a sort of central bank for the world’s central bankers, managed to obtain data it says are “American-sourced”. 

Here's what the figures show:

• France and Switzerland are most exposed, at 65bn euros each - about twice as much as Germany;
• Germany's exposure is 34bn euros;
• Portugal, Ireland, Greece and Spain, called the Pigs group of countries, have been hardest hit - together they owe hundreds of billions in euros, mainly to banks in Europe. 

The International Monetary Fund (IMF) is not releasing country-by-country data, but it expects total financial-sector write-offs to be higher in Europe than in the US for this year, at least.

Adrian Pingstone/Open access

 
That means European banks stand to lose more money than the ones in the US.

Europe’s banks loaded with more bad loans? Seems so, especially German ones.

EU Commissioner for Industry and Enterprise Günter Verheugen has been thundering against  German banks for their dodgy investments. He says they’re "world champions in risky banking transactions".

In April this year,  BaFin, the German financial regulator, leaked a list showing German banks had piled up dodgy assets of as much as  800 billion euros worldwide. Probably under pressure from higher up, BaFin quickly backtracked and denied the figures. But a single bank alone and one of the smaller ones at that, Munich-based Hypo Real Estate (HRE) has already pocketed support from German government worth more than 100 billion euros.

Only China has accumulated more surplus capital than Germany these past five years. German banks and financial companies have been buying toxic assets in the United States, ballooning real-estate in Spain and Irish hedge funds.

Some of the worst culprits are the country’s regional banks, the Landesbanken, all controlled by state governments. These make up about 40 per cent of the German banking market.

By some estimates, loans given by German banks are 52 times their net worth, compared with 12 in the US. German authorities have already shelled out public aid worth 9bn euros for the WestLB regional bank based in Dusseldorf. Another smallish state-run bank, the IKB also in Dusseldorf, pocketed more billions of taxpayer cash to cover losses from its investments in toxic US assets.

France’s Société Générale, the Banque Nationale de Paris (BNP) and Crédit Agricole are believed to have large exposures to Greece and the other Pigs.

But they are not revealing any of their secrets either. French banks have the biggest exposure to Greece among European lenders, according to the BIS. They account for 65bn euros of the 156.1 billion euros of total claims European banks have on Greece.

 
Ranked behind the German banks the French ones also have the second-largest claims on Portugal and Spain, and are the biggest holders of Italian debt, BIS figures show.

According to analysts at the Union Bank of Switzerland (UBS), the world banking system, again chiefly in Europe and the US, has handed the Pigs loans worth 2.3 trillion euros. The bulk of that exposure is located in the banks of France, Germany and the UK.

German and French banks together account for a little less than half the total claims.

Lately European Union leaders have chosen to release results of “stress tests” applied to their countries’ banks. Only 25 major banks are concerned -  the myriad smaller banks are not. So much for transparency!

Stronger surveillance over the banks’ doings was recently pledged at the G20 summit in Toronto. Wait for the results, but don’t expect much.

The European Union has a nearly trillion-euro bailout plan, officially to aid those mismanaging, overspending Greeks and Latins, although they are not alone in having big debts. 

But it looks as if it is actually intended to cover the losses of banks and finance companies that have been lending to them without thought for the morrow.

 
Ultimately it will be the eurozone taxpayers, to a large extent from the Pigs group, who’ll pay while also suffering tough austerity measures prescribed by both the EU and its ally in this instance, the IMF.

Austerity is likely to mean slow if not negative economic growth yielding less wealth to feed and educate people, and sustain healthcare while jeopardising investments to face the future. 

In imposing the restrictions, the EU has taken inspiration from the IMF, widely criticised for its debilitating strictures over the past decades. IMF current chair, Frenchman Dominique Strauss-Kahn, initially gave the impression that under his stewardship the world financial body would veer away from the Washington consensus - the ultra-free-market line, concocted with the help of the US treasury.

Last year Western leaders seemed to indicate that the Washington consensus is no more. It looks very much alive and kicking!