Are German banks in worse shape than the French?


by David Malone

This week S&P downgraded the giant French bank Credit Agricole (GCA). The reason given is GCA’s massive exposure to Greek debts.  Credit Agricole is sitting on a volcano of Greek debt and also owns Greece’s Emporiki bank which means it is therefore potentially on the hook for Emporiki’s insolvency as well. Not a surprise then that the French Bourse, the CAC, fell nearly a percentage point on the news.

More interesting, however, is the fact that the German DAX fell 1.25% at the same time on no direct German news. The fact is, of course, that for French banking exposure to Greek debt and default, you can read German as well. Anything the French can do the Germans can do better – as the song goes. The German banks are as badly exposed to Greek losses and default as the French.  So even if the rating agencies haven’t stuck the boot in to the German banks yet the markets aren’t waiting.

In fact, the German banks face a potentially more dangerous time. For not only are the German banks hugely exposed to Greek and Spanish debt but they are also looking very nervously indeed at possible defaults in America by US Municipalities.

German banks, particularly their Landesbanks are, I think, going to be found to be massively exposed to any defaults in US municipal bonds. The Muni bond market is looking very unwell indeed, though as yet nothing major has imploded. But if municipal funding woes, which are already dire, were to get worse, which they very well  might given how splendidly well the ‘recovery’ has gone so far, then all those who bought the ‘super safe’ Muni bonds would be spit roasted.

Now the bulk of Muni bonds are generally thought to be bought by US customers. But it is also true that European banks have been aggressive players in the Muni market.  Dexia bank based in Brussels and Paris was a very big player. So big, in fact, that the Fed felt obliged to save it from bankruptcy simply to protect the Muni market. It was felt at the time of the first bail outs, though we didn’t learn about it till later, that if Dexia had gone down it would have taken Muni market with it.

But Dexia was not on its own in the Muni market.  Our old friend UniCredit was also a big player and still is, as far as I know, via its huge US subsidiary Pioneer investments. So too was Ireland’s, now Germany’s, Depfa. And it is Depfa that brings me to the Landesbanks. Depfa’s market was to sell Pfandbrief bonds to the Landesbanks backed by municipal debts. Depfa lent to almost every municipality in Europe, from Barcelona to Manchester. I think it’s a fair bet that when Depfa pushed into Northern America it snapped up lending to US municipalities. So, this is why I am betting that we will find the Landesbanks massively exposed to any defaults in US Muni bonds.

This, combined with losses at banks like Commerz and Deutsche would be a nightmare scenario for Germany. I think this goes some way to explaining why the German market fell more than the French on news of Credit Agricole’s debt worries. It’s just a theory – from an outsider.

If I’m right about the MUNI connection then defaults among Maerica’s municipalities could also, I think, cripple Italy’s largest bank UniCredit as well, because of its Pioneer subsidiary. It will be interesting to see if Pioneer start to get nervous and if, in turn, the markets get nervous about UniCredit.



David Malone is the author of the book Debt Generation. You can read and listen to excerpts from his book here: