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Germany will stress test its most troubled banking sector–by mid-month we’ll know how big the problem at the Landesbanks is

posted on July 1, 2010 at 9:23 am
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At least we’ll know how bad it is.

That’s my reaction to news that Germany will extend its bank stress test to its Landesbanks. These banks, owned by the country’s state governments, are thought to be the most exposed to risky debt and the most undercapitalized of the country’s banks.

The original plan to stress test only the country’s biggest banks would have left the financial markets wondering how big the black hole in the Landesbank sector might be. But yesterday, June 30, regulators meeting with the Landesbanks and other German banks announced an agreement to extend the test to 16 banks, including an additional seven Landesbanks, covering about half of the market.

The consensus belief—maybe “hope” is a more appropriate word—is that the Landesbanks won’t need more money than the German bank rescue fund has available.

Available funding right now totals $300 billion in loan guarantees and a bit over $60 billion in cash. The Landesbanks can also count on some help from German state governments.

If, when the results of the stress tests are revealed around the middle of this month, the extent of the problem is no more than the bank rescue fund can handle, then I think financial markets will breathe a sigh of relief. A huge worry about the banking sector in what is supposed to be the Euro Zone’s strongest economy will have gone away.

That makes the stress test results the next critical milestone in the euro debt crisis. From an original plan to test just 26 banks in all of the Euro Zone, the plan has expanded to include 100 banks representing about 50% of the market by assets in the major euro economies.

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6 comments

  • tanerb on 1 July 2010

    i think you are overstating the impact of European economies on US. They will recover quickly while we keep struggling here because of inner dynamics.

  • OJunker on 1 July 2010

    Sell Sell Sell!
    From yahoo finance:
    The U.S. economy is in shambles and Americans will continue to see high unemployment and lower living standards in the years to come, Howard Davidowitz tells Henry and Aaron in the accompanying clip.

    Davidowitz lays much of the blame for the economy’s woes at the feet of the Obama administration, which he calls “the worst of my lifetime.”

    Obama “Mr. Mass Destruction”

    Davidowitz says that the key to Obama’s success is his ability to sell his policies to the public. He can confidently read from a teleprompter and appear competent and in control, when in reality, “it’s one big bag of empty words,” Davidowitz says of Obama’s messages.

    Davidowitz contends that the President’s spending, including the health-care bill, is creating massive deficits that will take the U.S. years to dig itself out of. “He is Mr. Mass Destruction,” Davidowitz says of Obama. “I mean he is a human destroyer. This guy has spent his way into oblivion and we don’t have a budget. He is surrounded by a bunch of complete incompetents, led by himself. ”

    Housing Gloom

    As far as the actual economy goes, Davidowitz’s chief concern is the strained state of the housing market, from which the bad news continues to pour in. According to Davidowitz, Americans are facing an $8 trillion negative wealth effect from the bursting of the housing bubble.

    “We’re talking about some serious money here,” Davidowitz exclaims. “I mean this is a complete disaster and that’s why we are going to have a double dip. We’re guaranteed a double dip in housing.”

    Small Businesses and Unemployment

    Davidowitz says that the job market is also in ruins, noting for every new job there are six applicants. As a result of the intense competition for positions, employers can offer lower wages. Young people entering the work force today can expect to make less money in their lifetime than previous generations.

    Considering the majority of new jobs are created by small businesses, Davidowitz argues that new regulations governing loans to small businesses are only making matters worse — both for the entrepreneurs and the millions of people out of work.

    “We have this insane new regulation,” Davidowitz says. “Community banks will not even be able to fill out the forms. They’ll pack up and quit. They’re already underwater. Commercial real estate is still terrible.”

    The Future a Massive Struggle

    Asked whether he thought the U.S. would experience another Great Depression, Davidowitz said the coming years will look more like Japan today vs. the U.S. in the 1930s.

    People will be making and spending less money and the nation as a whole will be dealing with the consequences of the deficit, he says. “We are in a struggle, day by day it’s ugly. At the core, when we look at our debt, we are going to have to deal with it.”

    A few months ago, while other analysts claimed that the economy would continue to follow a V-shaped recovery path, Davidowitz seemed out of step by insisting the nation’s problems were still dire. Regardless of what you think of his message or style, Davidowitz’s doom and gloom outlook now appears much more credible

  • javos on 1 July 2010

    I’m not an Obama fan (didn’t vote for him, wouldn’t vote for him), but this stinkin’ stew was brewing while he was still a Chicago neighborhood organizer. And as I recall, the team Obama gathered around himself to manage the mess that “Junior” left him was cheered by Wall Street. So, you might check that horse you’re riding to see if it’s still breathing.

    Regarding German banks, I think the stress test results may be overshadowed by German politics, i.e., will Merkel survive?

  • suntzu1079 on 1 July 2010

    “Davidowitz lays much of the blame for the economy’s woes at the feet of the Obama administration, which he calls “the worst of my lifetime.””

    Laying the majority of the blame for the economy’s woes on one administration immediately discredits this goofball. I don’t support Obama’s economic policies either, and they almost certainly won’t help the situation going forward, but these problems were in place LONG before he took office. Why even post drivel like this? stick to stocks – if they go to zero we will have much bigger problems than not having money!

  • EdMcGon on 2 July 2010

    OJunker,
    About the only thing I’d blame the Obama administration for, is coming into office with an agenda and sticking to it, regardless of economic realities. The first rule of politics is the old James Carville line, “It’s the economy stupid!” If the economy fails, anything else a president accomplishes is thrown out the window.

  • rolfer1 on 2 July 2010

    Ed, really? By my read, Obama has abandoned most of the “change” agenda he promised… and, I’d also agree that the emphasis on health care reform was ill-timed. OTH, the financial crisis, bank bailouts and anemic job growth were inherited from Bush.

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