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Greek Default Specter Leaves Germans Facing Bad-Bank Bill

Protestors march against government cuts in Athens on Sept. 20, 2011. Photographer: Kostas Tsironis/Bloomberg
Protestors march against government cuts in Athens on Sept. 20, 2011. Photographer: Kostas Tsironis/Bloomberg

Sept. 20 (Bloomberg) -- Germany’s bad banks, backed by the state to prevent the collapse of Hypo Real Estate Holding AG and WestLB AG during the credit crisis, would be the hardest hit in the event of a Greek default, leaving taxpayers to shoulder the bill a second time.

Hypo’s FMS Wertmanagement, with 8.76 billion euros ($12 billion) in Greek sovereign investments and loans, and WestLB’s Erste Abwicklungsanstalt, with 1.21 billion euros, bear more than half of German banks’ Greek debt, according to data compiled from company reports and statements. By contrast, Deutsche Bank AG and Commerzbank AG, Germany’s two biggest lenders, hold a combined 3.35 billion euros.

The specter of a Greek insolvency was raised this month by members of Chancellor Angela Merkel’s coalition, when Economy Minister Philipp Roesler said there can be no “taboos” when considering action “to stabilize the euro in the short term.” The German government is considering a “Plan B” to help shield banks and insurers from losses if Greece defaults, three coalition officials said on Sept. 9.

“A Greek haircut or default will especially hit both state-owned bad banks,” said Klaus Fleischer, a professor for banking and finance at the University of Applied Sciences in Munich. “Their bills are ultimately being paid by the German taxpayer. Private lenders have an advantage because their exposure is comparatively small.”

Greek Bonds

Under Germany’s financial stability act, bad banks were created to take over bad loans and risky assets to help shield lenders from losses that threatened their solvency. The bad bank, which is backed by the government, winds down the non-strategic assets while the lender focuses on its central operating business.

Greek 10-year bonds are trading about 60 percent below face value. By comparison, financial companies including Deutsche Bank, Commerzbank and Allianz SE agreed in July to write down the value of their Greek securities by an average 21 percent as part of a bond exchange and debt buyback program for the debt-stricken country. Some of the companies have made additional markdowns on their holdings.

As the biggest contributor to bailouts of Greece, Ireland and Portugal, Germany is trying to shield its own financial institutions from fallout from the sovereign debt crisis.

On Sept. 14, Germany joined France in signaling support for Greece with Merkel and French President Nicolas Sarkozy saying they’re “convinced” Greece will stay in the euro area.

Default Chance

Merkel’s coalition is showing a less united front, with Roesler’s comments prompting the chancellor to warn against allowing a Greek default because of the risk of contagion for other euro-area countries and recommend that “everybody should weigh their words very carefully,” in a radio interview.

Investors see a 94 percent chance Greece will default on its debt in the next five years, according to CMA, which compiles prices quoted by dealers in the privately negotiated credit-swaps market.

The Greek government will hold another call with its main creditors today after a “productive” round of talks aimed at staving off default. Finance Minister Evangelos Venizelos held “substantive” discussions with European Union and International Monetary Fund officials about securing a sixth installment of rescue funds, the Athens-based finance ministry said in an e-mailed statement after a teleconference last night.

‘Severe’ Repercussions

Greece’s woes have contributed to a decline in the euro in recent days. The euro approached a 10-year low against the yen after Standard & Poor’s cut Italy’s credit rating one step, adding to concern Europe’s debt crisis will raise borrowing costs for the region’s largest economies.

Separately, the Washington-based IMF today cut its forecast for global economic growth and predicted “severe” repercussions if Europe fails to contain the risks or if U.S. policy makers reach an impasse over a fiscal plan.

Moves to protect the banks are being discussed as Germany’s lower house, the Bundestag, prepares to vote Sept. 29 on amendments to the European Financial Stability Facility as part of a revised Greece rescue program laid out on July 21.

“With the EFSF we’re trying to build a fire break,” Michael Meister, the parliamentary finance spokesman for Merkel’s Christian Democratic Union, said in Berlin on Sept. 15. “If we don’t succeed in extinguishing the fire, then we must seek to protect those neighboring states. We’re working on that building site too. We are pursuing a double strategy.”

Bailed Out

Hypo Real Estate, state-owned since being bailed out by the German government during the financial crisis, moved about 176 billion euros in assets to FMS on Sept. 30, 2010. FMS, owned by Germany’s Federal Agency for Financial Market Stabilization, has the task of winding down the assets over a period of 10 years and of minimizing losses tied to the sale of the securities.

Hypo Real Estate said today that the European Commission ordered the German lender to privatize its pbb Deutsche Pfandbriefbank unit by the end of 2015 and its Depfa division by the end of 2014, ensuring “as much of the support provided by the German state as possible” is returned.

The EAA, created in December 2009 to stabilize WestLB and the financial market, is winding down WestLB’s risky assets and non-strategic businesses with a total volume of approximately 85 billion euros as of June 2009.

‘Plan B’

“It’s right to have a Plan B, especially as the market is increasingly convinced that it will be needed,” said Michael Seufert, a banking analyst at NordLB in Hannover. “The banks will prepare themselves as well, developing cushions for absorbing writedowns if they need them because the chance of a haircut is getting bigger.”

Germany’s biggest lenders and insurers had total risks related to the Greek government of about 17.5 billion euros at the end of June, according to data compiled by Bloomberg. The individual bank figures may vary slightly because of a mixture of sovereign debt, loans, writedowns and accounting differences.

According to consolidated banking statistics from the Bank for International Settlements, German banks’ “foreign claims and other potential exposures on an ultimate risk basis” vis-a-vis Greece, including both public and private sector, totaled $23.8 billion at the end of March. That included $14.1 billion to the public sector.

French lenders top the list of Greek creditors with $56.9 billion in exposure to private and public debt, according to Basel-based BIS. This includes $13.4 billion in government claims.

More to Lose

Credit Agricole SA and Societe Generale SA had their long-term credit ratings cut one level by Moody’s Investors Service on Sept. 14. BNP Paribas SA, the largest French bank, had its Aa2 long-term rating kept on review for a possible cut.

Unlike Germany, French lenders haven’t set up bad banks to hold their Greek investments. France has more to lose in a Greek default because most risks are held by its private lenders and markets are already concerned about them, Professor Fleischer said.

Commerzbank, Germany’s second-biggest bank that was bailed out by the government in 2008, has reduced its Greek holdings to 2.2 billion euros while Deutsche Bank has 1.15 billion euros, according to company reports.

Commerzbank has paid back most of the more than 18 billion euros it received in state aid, though the German government still owns a 25 percent stake.

“A Greek default on its own would be manageable for Germany’s listed banks,” said Olaf Kayser, an analyst at Landesbank Baden-Wuerttemberg, who forecasts a haircut of about 60 percent in such a scenario. “It’ll be painful for the banks if Greece’s troubles spill over in the euro area.”

Germany’s banking industry is “very stable” after lenders raised capital levels, Michael Kemmer, general manager of the BdB Association of German Banks, said in an interview on Aug. 10. German banks’ capital ratios have increased to about 12.3 percent from 9.4 percent in October 2008, the Bundesbank said in May.

Following is a table showing the sovereign risk related to Greece of selected German banks and insurers. The data is based on company filings, some of which include bond holdings as well as the value of loans. Figures are in euros.

                      at June 30, 2011
FMS Wertmanagement    8.76 billion *
Commerzbank           2.2 billion
EAA                   1.21 billion *
Deutsche Bank         1.15 billion
Munich Re             811 million
DZ Bank               793 million
Allianz               782 million
WGZ Bank              533 million
KfW Group             250 million
LB Berlin             230 million *
NordLB                217 million
LBBW                  131 million
HSH Nordbank          108 million
BayernLB              101 million
Dekabank              100 million *
Helaba                86 million *
Hannover Re           Zero
Hypo Real Estate      Zero

TOTAL                 17.46 billion

* Nominal figure

To contact the reporters on this story: Aaron Kirchfeld in Frankfurt at; Nicholas Comfort in Frankfurt at; Oliver Suess in Munich at

To contact the editors responsible for this story: Frank Connelly at; Edward Evans at

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