08/13/2012 13.08.2012
By Martin Hesse
Der Spiegel
Banks, companies and investors are preparing themselves
for a collapse of the euro. Cross-border bank lending is falling, asset
managers are shunning Europe and money is flowing into German real estate and
bonds. The euro remains stable against the dollar because America has debt
problems too. But unlike the euro, the dollar's structure isn't in doubt.
Otmar Issing is looks a bit tired. The former chief
economist at the European Central Bank (ECB) is sitting on a barstool in a room
adjoining the Frankfurt Stock Exchange. He resembles a father whose troubled
teenager has fallen in with the wrong crowd. Issing is just about to explain
again all the things that have gone wrong with the euro, and why the current,
as yet unsuccessful efforts to save the European common currency are cause for
grave concern.
He begins with an anecdote. "Dear Otmar,
congratulations on an impossible job." That's what the late Nobel
Prize-winning American economist Milton Friedman wrote to him when Issing
became a member of the ECB Executive Board. Right from the start, Friedman
didn't believe that the new currency would survive. Issing at the time saw the
euro as an "experiment" that was nevertheless worth fighting for.
Fourteen years later, Issing is still fighting long after
he's gone into retirement. But just next door on the stock exchange floor, and
in other financial centers around the world, apparently a great many people
believe that Friedman's prophecy will soon be fulfilled.
Banks, investors and companies are bracing themselves for
the possibility that the euro will break up -- and are thus increasing the
likelihood that precisely this will happen.
There is increasing anxiety, particularly because
politicians have not managed to solve the problems. Despite all their efforts,
the situation in Greece appears hopeless. Spain is in trouble and, to make
matters worse, Germany's Constitutional Court will decide in September whether
the European Stability Mechanism (ESM) is even compatible with the German
constitution.
There's a growing sense of resentment in both lending and
borrowing countries -- and in the nations that could soon join their ranks.
German politicians such as Bavarian Finance Minister Markus Söder of the
conservative Christian Social Union (CSU) are openly calling for Greece to be
thrown out of the euro zone. Meanwhile the the leader of Germany's opposition
center-left Social Democrats (SPD), Sigmar Gabriel, is urging the euro
countries to share liability for the debts.
On the financial markets, the political wrangling over the
right way to resolve the crisis has accomplished primarily one thing: it has
fueled fears of a collapse of the euro.
Cross-Border Bank Lending Down
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.
Breaking Points
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.
He said that the oil giant, which has cash reserves of over
$17 billion (€13.8 billion), would rather invest this money in US government
bonds or deposit it on US bank accounts than risk it in Europe. "Many
companies are now taking the route that US money market funds already took a
year ago: They are no longer so willing to park their reserves in European
banks," says Uwe Burkert, head of credit analysis at the Landesbank
Baden-Württemberg, a publicly-owned regional bank based in the southern German
state of Baden-Württemberg.
And the anonymous mass of investors, ranging from German
small investors to insurance companies and American hedge funds, is looking for
ways to protect themselves from the collapse of the currency -- or even to
benefit from it. This is reflected in the flows of capital between southern and
northern Europe, rapidly rising real estate prices in Germany and zero interest
rates for German sovereign bonds.
'Euro Experiment is Increasingly Viewed as a Failure'
One person who has long expected the euro to break up is
Philipp Vorndran, 50, chief strategist at Flossbach von Storch, a company that
deals in asset management. Vorndran's signature mustache may be somewhat out of
step with the times, but his views aren't. "On the financial markets, the
euro experiment is increasingly viewed as a failure," says the investment
strategist, who once studied under euro architect Issing and now shares his
skepticism. For the past three years, Vorndran has been preparing his clients
for major changes in the composition of the monetary union.
They are now primarily investing their money in tangible
assets such as real estate. The stock market rally of the past weeks can also
be explained by this flight of capital into real assets. After a long decline
in the number of private investors, the German Equities Institute (DAI) has
registered a significant rise in the number of shareholders in Germany.
Particularly large amounts of money have recently flowed
into German sovereign bonds, although with short maturity periods they now
generate no interest whatsoever. "The low interest rates for German
government bonds reflect the fear that the euro will break apart," says
interest-rate expert Burkert. Investors are searching for a safe haven.
"At the same time, they are speculating that these bonds would gain value
if the euro were actually to break apart."
The most radical option to protect oneself against a
collapse of the euro is to completely withdraw from the monetary zone. The
current trend doesn't yet amount to a large-scale capital flight from the euro
zone. In May, (the ECB does not publish more current figures) more direct
investments and securities investments actually flowed into Europe than out
again. Nonetheless, this fell far short of balancing out the capital outflows
during the troubled winter quarters, which amounted to over €140 billion.
The exchange rate of the euro only partially reflects the
concerns that investors harbor about the currency. So far, the losses have
remained within limits. But the explanation for this doesn't provide much
consolation: The main alternative, the US dollar, appears relatively
unappealing for major investors from Asia and other regions. "Everyone is
looking for the lesser of two evils," says a Frankfurt investment banker,
as he laconically sums up the situation. Yet there's growing skepticism about
the euro, not least because, in contrast to America and Asia, Europe is headed
for a recession. Mayer, the former economist at Deutsche Bank, says that he
expects the exchange rates to soon fall below 1.20 dollars.
"We notice that it's becoming increasingly difficult to
sell Asians and Americans on investments in Europe," says asset manager
Vorndran, although the US, Japan and the UK have massive debt problems and
"are all lying in the same hospital ward," as he puts it. "But
it's still better to invest in a weak currency than in one whose structure is
jeopardized."
Hedge Fund Gurus Give Euro Thumbs Down
Indeed, investors are increasingly speculating directly
against the euro. The amount of open financial betting against the common
currency -- known as short positioning -- has rapidly risen over the past 12
months. When ECB President Mario Draghi said three weeks ago that there was no
point in wagering against the euro, anti-euro warriors grew a bit more anxious.
One of these warriors is John Paulson. The hedge fund
manager once made billions by betting on a collapse of the American real estate
market. Not surprisingly, the financial world sat up and took notice when
Paulson, who is now widely despised in America as a crisis profiteer, announced
in the spring that he would bet on a collapse of the euro.
Paulson is not the only one. Investor legend George Soros, who no
longer personally manages his Quantum Funds, said in an interview in April that
-- if he were still active -- he would bet against the euro if Europe's
politicians failed to adopt a new course. The investor war against the common
currency is particularly delicate because it's additionally fueled by major
investors from the euro zone. German insurers and managers of large family
fortunes have reportedly invested with Paulson and other hedge funds.
"They're sawing at the limb that they're sitting on," says an
insider.
So far, the wager by the hedge funds has not paid off, and
Paulson recently suffered major losses.
But the deciding match still has to be played.
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