credit contagion infects European banks
By Kai Sandvig, Business Editor
Posted September 4, 2007
As the U.S. credit contagion continues to roil markets
worldwide, the torment and torture continues to filter from
European security markets down into individual German banks.
Sub-prime mortgages, culpable as the nascent zero-patient of the
crisis, have begun to infect other loans, mortgages and even
stocks. Central banks have provided monetary support to smaller
banks during the crisis, especially in Europe.
Senior Economist with Moody's Corp. in London, spoke with The
European Weekly Online regarding the U.S. housing crisis and its
influence on European security markets. Cairns believes there
will be a reassessment in what securities European investors
seek for investment. However, the long-term relationship will
not be affected between European investors and U.S. securities.
majority of U.S. securities remain attractive to European
investors Cairns said.
In July, the
European Central Bank (ECB) allotted around 78 million euro
($106 million) for depressed banks that needed a remedy; two
examples include Deutsche IndustrieKreditBank (IKB) and Sachsen
Landesbank (SLB), both German government-backed banks. Since
then, the ECB has played the obligatory role in providing
emergency funds to banks in the euro zone that had exposure to
the U.S. sub-prime market.
finding out in the aftermath, Cairns said about the crisis.
metaphors, authorities and experts commenting on the crisis
allude to a sickness in worldwide markets, like a disease
spreading throughout a population. What begins in one market of
the population may spread to otherareas. Sub-prime loans and
U.S. households falling behind in their mortgage payments, some
defaulting on these loans, have begun to infect European banks
and markets. Cairns referred to this as a broader connection.
Cairns, IKB is the one that set off a lot of the losses on the
DAX causing a capital flight from local investments into safer
assets. IKB, like SLB played an integral role in supplying money
to fund short-term debt, particularly in the U.S. The real
horror for these banks arose when investors lost their passion
to fuel these liquidity funds, thus moving to higher ground and
safer assets. These safer assets remain quarantined away from
debt securities, mainly in bonds.
in a brief by Cairns highlight the losses of German banks, which
correlate to similar losses at U.S. mortgage brokers. However,
German banks are not on the brink of filing for bankruptcy or
being bailed out by wealthy parents, such as Bank of America's (BAC)
timely infusion of $2 billion (1.46 billion euro) into
Countrywide Financial Corp. (CFC) coffers. According to his
statistics, IKB and other German banks took serious losses
within hours of opening trade earlier last week. Specifically,
IKB lost 16 percent of its stock value in this time frame. In
light of IKB and other banks sending the DAX into a tailspin,
Cairns noted the global default rate among speculative-grade
companies in June 2007 was 1.4 percent, the lowest since March
will cost German investors, that is certain, though this
exposure will not bring down the house, Cairns wrote in his
Kai Sandvig can be
reached at email@example.com
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