by Martin Hesse
translated from the German by Paul Cohen
August 13, 2012
The article originally appeared
in German in issue 33/2012 (August 13, 2012) of DER SPIEGEL.
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
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.
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
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
He begins with an anecdote.
"Dear Otmar, congratulations on an
That's what the late Nobel Prize-winning
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 leader of Germany's opposition center-left Social Democrats (SPD),
Sigmar Gabriel, is urging the Euro countries to share liability for
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.
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
"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
"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
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
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
For the past three years, Vorndran has been
preparing his clients for major changes in the composition of the monetary
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
"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
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
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
Yet there's growing skepticism about the Euro,
not least because, in contrast to America and Asia, Europe is headed for a
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
"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...