The French government has been forced to rescue a distressed domestic mortgage lender, the latest example of a European state stepping in to prop up a bank brought to its knees by the financial crisis.
It said it would seek approval from the European Commission for its bailout of Crédit Immobilier de France, which follows the €90bn joint rescue with the Belgian and Luxembourg governments of the collapsed lender Dexia, which is still under negotiation with Brussels.
CIF, which groups a network of 300 lending agencies, has been seeking a buyer for months, but its small deposit base and reliance on wholesale markets for the vast majority of its funding has deterred any serious interest. “Its business model is bust,” said the official.
Dexia SA (EBR:DEXB)
folded – again – a month ago:
The Commission has so far only temporarily approved €55bn of the €90bn state guarantees. One of its key concerns is over potential competition issues raised by the sale of Dexia’s French municipal finance unit to Caisse des Dépôts et Consignations, the French sovereign wealth fund, and Banque Postale, the banking arm of the French post office.
Dexia said on Wednesday it was in negotiations with three international investors, all understood to be non-European, for the sale of Dexia Asset Management, with a deal anticipated in the coming weeks. It gave no further details. DAM has a client base in 25 countries and has €80bn of assets under management.
The sale of DAM will be the last of six Dexia SA (EBR:DEXB) units hived off in a fire sale of assets over the past nine months, valued at a total of €8.7bn, not including the asset management arm.
This is the general picture all over Europe!
Mortgage banks and banks involved with financing housing and construction cannot finance their loans. As the books contain debt that isn’t being serviced these banks cannot offer depositors any interest. But it doesn’t stop here: As everybody knows that real estate prices have only the haziest similarity to the banks valuation of the collateral behind the loans – then depositors (and other lenders) naturally get a bit nervous as if they are ever going to see their money again.
The very well founded anxiety results in depositors fleeing to safe heavens like sovereign bonds – in some cases finding out that the lifeboats of the Titanic are not only to few (resulting in VERY low interest rates on the sovereign bonds); but also with severe holes in the bottom (does Greek sovereign bonds ring a bell?). The result is that the money won’t stop running until they find themselves a German.
It is the standard procedure on European holiday resorts that whenever there is a minor mishap – such as stepping on a shard of glass – the cry goes: “Get a German!” You invariably find them by their white socks in the sandals eating their self made sandwiches with their own cutlery and amble supply of serviettes. They always have a First-Aid kit at hand. I suppose it won’t be long before German cars will have cardiac resurrection kits instead of jumpstart cables – as standard.
Back to the money issue:
The problem in these bank run scenarios is to find where the depositors have run to? German sovereign bond is a fair bet, but CB deposits and other sovereign bonds are also common. Now these banks have to be bailed out or lend money as the consequences of calling home those loans will result in massive foreclosures and fire sale prices.
That necessarily needs government intervention, as the government is the only institution that can tax to cover the losses as they – over the years – surface. A resurgence of housing prices? You must be joking! In Spain there is 1½ dwellings pr. household of unemployed – the other countries are not much better off.
When thing are really bad the government will have to loan its own money from the Germans; but that assistance comes with strings attached:
- A revamped bank inspection.
- Persecution of tax evaders – ouch that one really hurt.
- Taxation of over-generous pension schemes.
- Government liability.
- Restructuring the failed bank – i.e. carving them up into mouth sized bit and selling them off.
The point being that the banks will not be allowed to draw down the businesses and the consumer base of the economy. There has been much talk of inflation as a result of quantative easing; but that won’t happen: The short version is that the QE is simply recycling of the deposits – having run into the CB’s and sovereign bonds – by lending them back to the now nationalised banks. The total amount of debts and losses remain the same.
The bank reforms will be done, as the countries with banking problems generally run with a deficit that requires constant financing. At some point the country can only borrow money at usury rates that will plunge them further into debt no matter what reforms are undertaken. That is in practice a denial of credit. To borrow at reasonable rates the debtor nations will have to ask for ECB loans which will be doled out concurrent with implementation of labour market reforms, cuts in social benefits and taxing of pensions.
Why does Germany do that? Because it is to their advantage:
1) Lending money out at 3% that they themselves have borrowed at 1-1½ % with same maturity is not a bad idea – provided they have recourse over delinquent countries.
2) Any dissatisfaction will make the Euro drop and that will help German exports – and the labour reforms, taxing and wage earner taxcuts will mean imports will be fairly priced.