Europe’s woes to stress German banks

Lombard Odier’s Stephanie Kretz has warned that Germany cannot save the euro on its own and is, in fact, increasingly heavily exposed to the problems of the Eurozone periphery countries.

Following a recent statement by Germany’s Angela Merkel that: “Germany is strong. Germany is the economic engine and anchor of stability in Europe…but Germany’s strength is not infinite,” Kretz said: “We could not agree more with the latter part. Germany cannot support the Eurozone by itself without an explosive increase in debt and trend growth falling as a consequence, or without bringing its banks dangerously close to the brink of collapse. When combined with their aggregated government debt, the assets of the top ten Eurozone countries’ Monetary Financial Institutions are 35 times the German tax base. Germany is simply too small to save the Eurozone.”

She added that Germany is putting vast sums into the Eurozone rescue system: “In April 2012, Germany’s total claims within the euro system were 25% of its GDP, eight times more than in 2007.” Germany is doing this, Kretz explained, because the Germany banking system is the most leveraged in Western Europe. “Germany, by lending money to the peripheral countries, is trying to prevent its fragile and leveraged banks from getting hit, effectively orchestrating a backdoor recapitalisation of its own banking system,” Kretz said. She added that this is a dangerous bet and if, or when, the GIIPS (Greece, Ireland, Italy, Portugal and Spain) default, Germany will suffer losses through its banking system and also through its commitments to Europe’s bailout funds. She concluded: “We would avoid all investment in German banks’ exposure. Waves of nationalisation, recapitalisation, and big dilution lie ahead. On the other hand, we expect the demand for bunds to remain strong. With a current account surplus and inflows of deposits out of the periphery, the flow of new debt should face no financing difficulties in the near future.”