Creditanstalt Redux

May 11, 1931, the final credit event that put the last nail into the coffin of prosperity.  The bank that failed was that of the Rothschild family in Vienna.  The Great War took its toll on the economy and the Austro-Hungarian Empire and Monarchy as the losses from the war dissolved both.  And both empire and monarchy were into the Creditanstalt bank to the extreme.  The Rothschild family in Austria and Germany had backed bad bets.  The Austrian government only made matters worse by trying to make the bank assume liabilities that would lead to the decision to declare bankruptcy.  The depression that had stared in North America was manifesting itself in Europe with a vengeance.

Why should we care about old history?  The Hypo Group Alpe Adria is set to play Creditanstalt once again.  This banking group serves Italy, the Balkans, Austria, Germany, and Hungary.  In 2007 BayernLB bought 51% of the bank for 1.63 Euros.  In 2009 The various partners sold their shares to the Austrian government for one euro each and the bank was nationalized to prevent its default.  It was expected that 13 to 19 billion euros in loans will never be paid. In 2014 the government decided to split up the bank into several units.  HGAA would have a Balkan banking unit and an Italian business unit.  Heta Asset Resolution would take all the bad debt, the idea that the debt could take several years to wind down.  In 2015 the Financial Market Authority of Austria imposed a moratorium on all payments. A capital shortfall of over 7 billion euros was discovered.

Why is this important?  Because the finance ministry has noted that the creditors can be forced to contribute to the costs of winding down the Heta.  This is the bail-in option that the new European  legislation that Austria has adopted.  So the senior debt held by creditors will suffer haircuts like all the other creditors.  hat legislation essentially does away with the status of senior debt over junior or subordinate debt.  Well, this is only Austria, what does that have to do with the ecb and the rest of the EU?  Well, when one bank’s assets are another bank’s liabilities…

Meanwhile the idiocy continues in the EU.  Germany has been trumpeting that the system works.  It seems that Portugal will now pay off its loans from the IMF, the money is most likely needed to prop up the Ukraine.  By doing so, Portugal will need to borrow on the capital markets, mostly European.  See, the system works, those Greeks just have to follow us Germans like good little boys.  But don’t get too excited just yet.  Our Creditanstalt isn’t finished.  Consider Portugal’s government debt to the country’s GDP.  It is 124% of GDP, somewhat less than Greece.  But what about the commercial and personal debt?  Add it all up, government, commercial, and private debt and it all stands at 381% of GDP.  This is well above the total for Greece at 286%.  And you thought Greece was hard up.  And like Greece, all this debt is owed mostly to foreigners, so leaving the Euro and issuing new currency will not inflate the debt away (inflated currency makes paying debt far easier).  The only capital market is the ECB, so how do you get the money once you pay the IMF back?  The bankruptcy of both Greece and Portugal and the other PIIGS (actually it is now PIGS, Iceland is gone) has not been averted.  Like that old saying, when you owe the bank $3000 you have a problem.  When you owe the Bank $30 million, the bank has a problem.

Greece and Portugal aren’t manufacturing hubs, they don’t produce much manufactured goods.  Their unemployments is very high and both have aging populations.  Both populations are addicted to the socialist disease of welfare.  I will say it here again. welfare reduces its recipients to a state of learned helplessness over time.  We have three generations of welfare recipients in our own country.  The socialist mandate has been around much longer in Europe.  Both Greece and Portugal will have many problems leaving the Euro and printing their own currency.  The main reason is that neither country is self sufficient.  Both will have to import basic materials to build any manufacturing.  Both will need to import machine tools to make their own machinery and other equipment.  Both need to import foodstuffs, heating oil and other distillates, medical supplies, and so many more products.  And with the prospect of world wide depression coming, tourism will not be a saving grace.

But one does not need to reinvent the wheel.  Yes, both countries do have a few consumer goods for trade with other countries, that will provide some cash.  Both countries can guide their agriculture, assuming they leave the EU, back to a fuller spectrum of the production of foodstuffs.  Both grow citrus crops, grains, olives and olive oil, and many other basic foods.  Sheep and chickens provide more protein than beef.  And they can offer cheaper wage employment for manufacturers.  All of this will take a few years and it is conditional to kicking citizens off the welfare roles.  Streets need to be cleaned, garbage collected, buildings painted, and windows repaired.  Children need primary and secondary instruction, either public or private.  They don’t need the latest in computers and cell phones, they simply need to become proficient in reading and writing, doing a level of math that is useful.  Baby sitters are needed, simple clinics with semi-skilled nursing will do wonders.  The aged need to be looked after, made a part of the community.  So much of this used to be the province of organized religion.  Congregations looked after the young, the aged, the poor and even the indigenous.  Modern socialists declared war on religion and promised they would do the job themselves and better.  Yet that has not happened.  All that has been built by the modern socialist and welfare state is an ever growing bureaucracy that becomes more and more irresponsible to the people it claims to serve.  We started out by trying to create a government by the people, for the people, and of the people.  Now we seemed to have reverted into a government by the elite, for the elite, and of the elite.  Wasn’t that what monarchies were for?

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