Would you prefer to deposit your money in a bakery or a bank? In Australia, the bank wins every time. In Europe, some people see their local baker as a better bet than the local bank.
Before imagining that such a situation could not occur, consider what’s on offer from Wiener Feinbacker’s chain of bakeries in Germany.
In any of its 350 shops you have a choice of fine German bread, or fine German bonds, issued by the bakery’s parent company and offering a 7% return for five-year deposits.
There is no better example today of the European financial crisis than Feinbacker’s bonds, a situation which has developed because most of the region’s banks are effectively bankrupt, or soon will be.
What’s happening is that businesses, such as Feinbacker’s are being forced to become their own bank, raising capital directly from customers, because there is virtually no hope of getting a loan from what is supposed to be Europe’s safest and best-run banking system.
Australia, where most people believe they are immune from events in Europe, caught a glimpse of the global confidence crisis in mid-November when its biggest company, BHP Billiton, was rated more highly as an investment risk than the Australian Government.
While the BHP Billiton bond issue slipped through without too many comments it is worth looking back to November 16 because it was a day which demonstrated how the European crisis is touching Australia, and it showed that investors have more faith in a company repaying its debts than a country.
What happened is that BHP Billiton set out to raise $US2 billion in fresh debt. It got swamped, “forced” to take in $US3 billion to keep investors happy.
Interest rates on that $US3 billion ranged from 1.125% for three-year bonds, up to 3.25% for 10 year bonds. The Australian Government is paying 4% on its 10-year bonds.
The next few days will tell whether the European banking crisis can be resolved without destroying the concept of a united Europe, or its experiment in issuing a common currency, the Euro, or whether a damaging break-up occurs and the continent reverts to its old borders and currencies.
Right now there does not appear to be much hope of an orderly restructuring such is the gap between the “strong medicine” approach of Germany, and the near-hopeless situation in which the southern states of Greece and Italy find themselves because austerity measures have destroyed any hope of economic growth. Britain too has fallen into an austerity trap with government spending cutback appearing to do more harm than good.
What was once a purely financial crisis has now become a political crisis which has exposed the fundamental design flaw in modern Europe – it is a region of the world no longer able to compete with low-cost Asia, and lacks the ability of a single-minded U.S. to solve its own problems.
Why this should effect Australia requires a basic understanding of how world trade has globalised over the past 30 years, especially in the way banks operate.
Trade finance, for example, the business of lending to companies which are buying and selling goods and services, is dominated by European banks with eight of the top 10 based in Europe. The two outsiders are Citigroup of the U.S. and China Development Bank.
Those top eight European banks control an estimated 41% of the global trade finance market with the French bank, BNP Paribas alone speaking for more than 10%.
Over the past year the European banks have found it virtually impossible to raise fresh capital because few investors trust them, or trust the governments to which they have made large loans – which are now worth a fraction of their face value, which is why the banks (as well as the governments) are effectively broke.
Earlier this year, the banks of Europe were raising more than $150 billion a month in fresh bonds, the lifeblood of what they then loaned to customers. Last month they could only attract $20 billion.
No money going into a bank, means no money coming out, which is why Feinbacker’s bakery is bypassing the banks and has become a vendor of its own bonds.
The bakery is, in effect, undertaking a form of “self-banking” – or perhaps that should be called “self-raising”, as it is to buy flour for baking purposes.
Making the situation even worse, and ensuring that new loans from banks will not be available for many years is a fresh set of financial laws which require banks to keep even more of their capital in reserve, allegedly to avoid another crisis, but in fact becoming part of the crisis.
The new reserve provisions are forcing banks to shrink their loan books with up to $3 trillion likely to disappear from balance sheets, or around 10% of the total banking pie.
Little wonder that successful companies such as Feinbacker’s are attracting more investor support than some German banks. People might not live by bread alone, but it’s a start.