Who Will Bail out the German Banks?

By Shlomo Maital       

             Allianz

 As Europe’s biggest, wealthiest and most influential nation, Germany has played a dominant role in bailing out failed European banks and failed European governments in Greece, Spain, Portugal, Cyprus and Ireland.   Germany and its leader Angela Merkel have frequently and sternly lectured the deadbeat southern European nations for overspending and over-borrowing,  neglecting to mention that it was largely the German banks who did the lending.    

   Now it turns out that the German banks themselves are endangering Europe.  According to Jack Ewing, in the Global New York Times, “where in Europe is one of the worst banking systems, with bad management, corruption, loans to political insiders that cost taxpayers billions of euros?  Not Italy, Greece or Spain, but – Germany…  the German banks invested in almost every bad asset they encountered —  American subprime mortgages to Greek Govt. bonds”.  According to the EU,  $860 b. were spent in bailing out German banks from 2008 through Sept. 2012.   Only the UK spent more taxpayer money on bank bailouts.  Even Spain and Italy spent less.

    Ewing reports that German banks lend 50 euros for every euro in capital they hold.  This is considered excessive leverage.   Perhaps the German government has been reluctant to bail out Greece, Portugal or Ireland, because it needed (and will need in future) to bail out its own banks. 

     Germany’s banks are enormous. According to the Global Fortune 500,  the largest German banks are Allianz ($130 b. in revenues, in 2012), Deutsche Bank ($87.5 b.),  Landesbank Baden Wurttemburg ($53 b.) (the Landesbanks are controlled by politicians), and Oz Bank ($34 b.).    Their saving grace has been the strong German economy, and its huge export surplus, which kept their balance sheets strong because few loans had to be written off.  But all agree that German banks need radical reform, and many still carry toxic assets on their books. 

     If I were the Prime Minister of Greece, Portugal or Spain,   I would offer to advise the German government on fiscal reform, austerity and bank reform.  All that “friendly advice” by Germany, to Greece and Cyprus,  should first be applied at home.

     Physician, heal thyself.