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.08/13/2012 By Martin Hesse
Otmar Issing is looking 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.
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.
Translated from the German by Paul Cohen
- DER SPIEGEL: Investors Prepare for Euro Collapse (investmentwatchblog.com)
- Spiegel: Investors Prepare For Euro Collapse | ZeroHedge (underinformation.wordpress.com)
- Spanish Banks’ ECB Loans Rise as Rajoy Mulls Second Bailout Call – Bloomberg (bloomberg.com)
- Stop Fooling Yourself… NO Entity On Earth Can Stop This (zerohedge.com)
- Things Are Going To Collapse Again In Europe ( Bank of America and AMP) (ampgoldportfolio.com)
- Merkel Returns to Crisis as Leaders Squabble Over Bond Purchases (bloomberg.com)
- Hedge Funds Capitulate on European Shorts Fastest Since 2009 (bloomberg.com)
- The Market Oracle – DK Matai – European Bankers And Top Politicians Fear Collapse Of The Euro – 12 August 2012 (lucas2012infos.wordpress.com)
The U.S. Energy Information Administration said in a report that it estimates that U.S. natural gas pipeline companies added about 2,400 miles of new pipe to the grid as part of over 25 projects in 2011.
New pipeline projects entered service in parts of the U.S. natural gas grid that can be congested: California, Florida, and parts of the Northeast. Only a portion of this capacity serves incremental natural gas use; most of these projects facilitate better linkages across the existing natural gas grid, the EIA said.
By convention, the industry expresses annual capacity additions as the sum of the capacities of all the projects completed in that year. By this measure, the industry added 13.7 billion cubic feet per day (Bcf/d) of new capacity to the grid in 2011. The six largest projects put into service in 2011 added 1,553 miles and about 8.2 Bcf/d of new capacity to the system. Much of this new capacity is for transporting natural gas between states rather than within states. Golden Pass, Ruby Pipeline, FGT Phase VIII, Pascagoula Expansion, and Bison Pipeline projects added 6.1 Bcf/d, or about 80%, of new state-to-state capacity.
The EIA said that natural gas pipeline capacity additions in 2011 were well above the 10 Bcf/d levels typical from 2001-2006, roughly the same as additions in 2007 and 2010, but significantly below additions in 2008 and 2009. Capacity added in 2008 and 2009 reflected a mix of intrastate and interstate natural gas pipeline expansions, related mostly to shale production, liquefied natural gas (LNG) terminals, and storage facilities.
- USA: Golden Pass LNG Completes Phase 2 Commissioning, Receives FERC Approval
- USA: First Commissioning Cargo Arrives at Golden Pass LNG Terminal
- USA: Golden Pass LNG Commences Commercial Operations
- USA: Golden Pass LNG Terminal Announces 1st Cargo for Commissioning
- USA: Golden Pass LNG Plans Re-Exports
- USA: Golden Pass LNG Plans Re-Exports (mb50.wordpress.com)
- Macquarie Vies To Sell U.S. LNG To India (mb50.wordpress.com)
- USA: Discovery to Expand Pipeline System in Deepwater Gulf of Mexico (mb50.wordpress.com)
- CLNG: EIA Gas Export Study Reveals Only Part of Economic Picture (USA) (mb50.wordpress.com)
- Soc Gen Says China May Look for US LNG Deals in Future (mb50.wordpress.com)
- USA: Enbridge Examines Stingray Pipeline after Gas Leak Reported (mb50.wordpress.com)
Providence-based Deepwater announced its application to the federal Bureau of Ocean Energy Management last week for a longstanding plan for a 1,000-megawatt wind farm, but no other companies made public their proposals at the time.
The bureau released a list this week of companies interested in generating energy in waters east of Block Island and southwest of Martha’s Vineyard.
No information was provided on their applications or the scope of their projects.
The applicants include Energy Management Inc., the company behind the 130-turbine Cape Wind proposal in Nantucket Sound; Fishermen’s Energy, a company with plans for a wind farm off the New Jersey coast; and Neptune Wind, which announced in August a plan for a 500-megawatt wind farm in the area between Rhode Island and Massachusetts.
Also on the list are enXco, a San Diego, Calif.-based company that says it has developed 3,000 megawatts of wind power and 68 megawatts of solar power in the United States, Mexico and Canada; Iberdrola Renewables, the U.S. division of a Spanish company that describes itself as the second-largest developer of wind power in the United States, with 4,800 megawatts of onshore projects; Mainstream Renewable Power, a company that says it is developing 5,500 megawatts of offshore wind power in England, Scotland and Germany; and US Wind, which has also submitted applications to lease waters in another part of Massachusetts and off New Jersey.
The bureau will review the applications before deciding whether to lease areas for development.
By Alex Kuffner (projo)
- Deepwater Wind Submits Plans for Nation’s First Offshore Wind Farm (mb50.wordpress.com)
- Deepwater Wind is racing to build the first U.S. offshore wind farm (robbiz1978.blogspot.com)
- USA: LI-NYC Wind Farm Collaborative Plans to Build Wind Farm off Rockaways (mb50.wordpress.com)
- Offshore Update: Wind Power Momentum Builds (spectrum.ieee.org)