Euro Zone 2008 ; dark blue : de jure ; pale blue : de facto (Photo credit: Wikipedia)
It may not look like the Euro Crisis and the World Shipping Crisis have much in common, yet they do and here is how. The key element that links them is the lending behavior of the German banks!
From the beginning of the Euro crisis - it started in early 2010 when Greece officially asked Brussels for a bailout -, I've been wondering what caused Germany to drag its feet. If only Ms. Merkel had moved fast enough to meet Greek demands, Greece would have been saved within the year and the Euro Crisis would never have happened.
Why did Ms. Merkel not move? Very odd, if you consider how often she claims she's a European at heart and that "more Europe" is needed to solve the crisis.
Not so odd if you consider the lending history of German banks and how they've granted easy credit left and right, at home to political pals, to the Greeks to finance the Olympic Games and more, to Southern Europe in general, to Ireland...and, yes, to the shipping industry!
Starting in 2008 everybody in deficit! Graph shows government surplus/deficit of Portugal, Italy, Ireland, Greece, United Kingdom, Spain (PIIGGS) against the Eurozone 2000-2010 and the United States. Data from Eurostat. (Photo credit: Wikipedia)
Instead of pooling the debt which would have been the quick, rational and elegant way out of the Euro crisis, Merkel pushed through entirely different policies, i.e. bailouts coupled with austerity measures and fiscal pact agreements with Eurozone members, all of them politically and institutionally complex, hence time-consuming. Yet, when it comes to finalizing what she has set out to do and put the needed Eurozone institutions on a solid basis, suddenly it's no go.
The last tassel is Euro bank supervision, but Germany will have none of it. Or will have it with all sorts of limitations, all aimed at protecting German banks from oversight. Why is Germany so eager to shield its banks?
At first, it looked like the German Central Bank, the Bundesbank, was eager to protect the state-owned Landesbanks that have suffered losses with the 2008 crisis and are reeling from accusations of corruption. Indeed, there is strong evidence of an unhealthy relationship between local politicians and the regional-level banks. Landesbank rescues have placed a heavy burden on German state governments (more deficits!) and this has had repercussions on the whole German banking system. A consolidation of German landesbanks that was expected to happen is now unlikely, suggesting that the situation is stalled and that the move towards a healthier system that would stimulate productive competition between the public and private sector, is still far off in the future.
But in Germany, private sector banking is also suffering! Not only did the German banks expose themselves to the Greek and other Southern European debt, they also recklessly engaged in easy loans to the shipping industry. Loans resulted in a huge overflow of needless investment in the ship container market, currently causing some 300 big container ships to sit idle in ports around the world, waiting for customers!
The story of this shipping crisis only recently came out in the New York Times (see article below or the report here). According to Moody's, Germany’s 10 largest banks have 98 billion euros, or $128 billion, in outstanding credit or other risks related to the global shipping industry. That's about as much as the German banks' exposure to Greece when the debt crisis broke out (they are now down to €5.5 billion) !
All through the Euro crisis, the German Banks have been Germany's Achilles' heel. Though Germany is the locomotive of Europe, its banking system is in trouble. Small wonder Germany resists any proposal to set up bank supervision across the Eurozone! Or, for that matter, any proposal to pool or mutualize the Euro debt...If only Germans would listen to their own Peter Bofinger! I am completely convinced that Germany would be the greatest loser in a Euro breakup and that instead of bailouts we should have gone for Bofinger's proposed "redemption fund" - but that story is for another blog post.
Now that the Eurozone recession is projected to last well into 2013, setting up a credible system for supervising the 6,000 banks in the Eurozone has become a major building block in the institutional structures needed to solve the Euro crisis. Mario Draghi, the European Central Bank chief, is doing his best to allay German fears that the ECB might control them in some way, suggesting that the supervision of Landesbanks could be done at regional (and not European) level.
Mario Draghi at G-7 meeting at the Istanbul Congress Center (Photo credit: Wikipedia)
That looks like Draghi is addressing concerns over the last crisis - the landesbanks - and eschewing the present one - the world shipping crisis. No doubt, German politicians prefer to talk about the former rather than the latter, especially now that Ms. Merkel has launched her political campaign for re-election. The last thing she needs is to come out looking like the paladin of the 10 biggest German banks - but by helping to slowdown the establishment of a Euro bank supervisor, she is satisfying everyone's interests, including those of the German One Percent!
The One Percent however has wonderful ways to zig zag around traps and change the outcome of the game. While the big German banks are hurting from the shipping crisis, and ship funds have obviously lost their appeal, there is one (small) part of the world's One Percent that is having a ball game: because of the crisis, ships that cost hundreds of millions of dollars to build are now selling at the cost of scrap metal.
Guess who's busy buying up ships at bargain prices? Healthier shipping companies, of course, and among them (according to NYT) Costamare, a Greek company! I love that. Greek shipping magnates are real savvy types: their home country, in spite of the government debt fracas, is a tax haven for them, and continues to be in spite of all the talk about recovering taxes, which of course, leaves them with the funds to still act as major agents in the world shipping industry!
No question about it, the Greeks are clever! Small wonder the Germans are so angry and after them. I tell you, in spite of what politicians say to their electorate, austerity and fiscal pacts have little to do with preserving Northern European taxpayers from wasting their funds to bail out Southern European countries and Greece in particular. The real game is played elsewhere, behind the scene and at the One Percent level...
Please share your views. I know not everyone likes to argue in terms of the One Percent, but what do you think about this juicy bit of news, Greek shipowners buying up ships at rock bottom prices?
UPDATE 1-Merkel warns on euro crisis complacency, targets
Euro Crisis Feeds Corruption as Greece Slides in Rankings - Bloomberg
The Next Crisis for German Banks - Shipping
Euro Crisis Aside, a Banner Year for German Stocks
Draghi seeks to allay German concerns on banking union
Lone German Keynesian Advocates Pooling Euro Debt - Bloomberg