Mystery about level of banks' exposure


GERMAN RISK:THE EXPOSURE of German banks in Ireland is €25 billion, the Bundesbank has said, just a quarter of original estimates.

Bundesbank vice-president Franz-Christoph Zeitler said yesterday that the rest of the €100 billion German banks have invested in Ireland covers loans held there “for legal reasons”.

Hours earlier his boss, Bundesbank president Axel Weber, said EU leaders could, if necessary, top up the €750 billion euro zone rescue fund.

“The true Ireland risk of [German financial] institutions lies around €25 billion,” said Mr Zeitler yesterday in Frankfurt.

He explained that much of the remaining €75 billion was so called “special purpose vehicles”. These are financial entities registered in Ireland for legal and tax reasons but which may, for example, be financing the construction of a shopping centre in Berlin.

“The money in these companies is in no way risk relating to Ireland, but rather risk of banks in other countries,” said Mr Zeitler.

Meanwhile, Mr Weber appeared to cast doubt on whether the temporary rescue fund created in May was adequate to cope with future market speculation.

On Wednesday, Mr Weber said, in the German embassy in Paris: “€750 billion should be enough to assure the markets. If not, it will have to be increased.”

Yesterday analysts castigated Mr Weber for his remark, saying he risked unnerving already jittery financial markets.

“It is far from certain whether the fund can be increased as easily as that, given governments may face domestic resistance to a top up request,” said Commerzbank analysts in a research note. “There is a danger markets will consider this statement premature, thus increasing market scepticism regarding the ability to act among those responsible.”

The Bundesbank remarks have returned attention to mystery surrounding the true level of German bank exposure in Ireland. Much-quoted figures from the Bank for International Settlements suggest a total of around €104 billion.

But Germany’s biggest banks, Commerzbank and Deutsche Bank, have each claimed their exposure in Ireland is minimal, about €100 million and €300 million respectively.

Analysts suggest the banks are not revealing all loans and that they may have used financial hedging strategies to minimise their exposure.

Analysts have been unable to produce figures of their own while Germany’s financial regulator, BaFin, knows the true exposure but is forbidden from revealing it.

Mr Zeitler admitted yesterday that the position of foreign financial institutions in general had “consistently gotten worse” in recent years.

“German banks have on their books risk position on structured real estate financing of around €100 billion,” he said, describing “80 per cent” as residential mortgage-backed securities.

Luxembourg’s prime minister, Jean-Claude Juncker, expressed concern in a newspaper interview yesterday that, in the current crisis, “Germany . . . is slowly losing sight of the European common good”.