The Corner

Welcome Back, Angela

With Angela Merkel back from her vacation, Der Spiegel (and, on a different topic, that of Mr. Putin’s Russia, check out the cover of the latest DSODT too: you can see it on the left of the screen) has a story on how ‘investors’ are preparing for the euro’s collapse. Investors are very capable of getting things wrong, but that so many feel this way is not going to make the task of stabilizing the single currency any easier.

Most interesting, perhaps, is this, and it doesn’t actually involve investors (in the usual sense of the word) :

Banks are particularly worried. “Banks and companies are starting to finance their operations locally,” says Thomas Mayer who until recently was the chief economist at Deutsche Bank, which, along with other financial institutions, has been reducing its risks in crisis-ridden countries for months now. The flow of money across borders has dried up because the banks are afraid of suffering losses.

According to the ECB, cross-border lending among euro-zone banks is steadily declining, especially since the summer of 2011. In June, these interbank transactions reached their lowest level since the outbreak of the financial crisis in 2007. In addition to scaling back their loans to companies and financial institutions in other European countries, banks are even severing connections to their own subsidiaries abroad. Germany’s Commerzbank and Deutsche Bank apparently prefer to see their branches in Spain and Italy tap into ECB funds, rather than finance them themselves. At the same time, these banks are parking excess capital reserves at the central bank. They are preparing themselves for the eventuality that southern European countries will reintroduce their national currencies and drastically devalue them.

“Even the watchdogs don’t like to see banks take cross-border risks, although in an absurd way this runs contrary to the concept of the monetary union,” says Mayer.

Since the height of the financial crisis in 2008, the EU Commission has been pressuring European banks to reduce their business, primarily abroad, in a bid to strengthen their capital base. Furthermore, the watchdogs have introduced strict limitations on the flow of money within financial institutions. Regulators require that banks in each country independently finance themselves. For instance, Germany’s Federal Financial Supervisory Authority (BaFin) insists that HypoVereinsbank keeps its money in Germany. When the parent bank, Unicredit in Milan, asks for an excessive amount of money to be transferred from the German subsidiary to Italy, BaFin intervenes.

Unicredit is an ideal example of how banks are turning back the clocks in Europe: The bank, which always prided itself as a truly pan-European institution, now grants many liberties to its regional subsidiaries, while benefiting less from the actual advantages of a European bank. High-ranking bank managers admit that, if push came to shove, this would make it possible to quickly sell off individual parts of the financial group.

In effect, the bankers are sketching predetermined breaking points on the European map. “Since private capital is no longer flowing, the central bankers are stepping into the breach,” explains Mayer. The economist goes on to explain that the risk of a breakup has been transferred to taxpayers. “Over the long term, the monetary union can’t be maintained without private investors,” he argues, “because it would only be artificially kept alive.”

The fear of a collapse is not limited to banks. Early last week, Shell startled the markets. “There’s been a shift in our willingness to take credit risk in Europe,” said CFO Simon Henry…

The Brussels chorus should note that none of the above are examples of “speculation” (although, as the writer of the article explains elsewhere, there is that too). Indeed some of these moves are being driven by regulatory pressure within the euro zone.

What next? It remains impossible to tell, but, at the very least, the first small cracks are appearing in the safety glass.

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