Germany's economy is booming thanks to a rapid recovery of global exports. But Europe isn't out of the woods yet. Few know exactly what nasty surprises might be lurking on bank balance sheets across the Continent -- and stress tests might not be enough to reveal them, Spiegel Online reported.
A high-profile stress test of German banks could mean even more stress for an industry that currently needs mutual trust and tranquility more than anything. It could bring a renewed sense of insecurity to the financial markets, which already act with hypersensitivity to every fresh news report.
The insecurity can easily be seen in the rapid yo-yoing of the markets in recent weeks. Risk premiums for Greek and Spanish government bonds are rising, even though euro-zone countries have committed themselves to securing the financing of ailing member states. Stock markets often vacillate within hours from depression to optimism and back again. Every bit of not entirely positive news from the US or China is seen as an indication that the world economy could suffer another relapse and the surprisingly rapid recovery won't last.
Since the beginning of this year alone, the price of gold has risen by 13 percent. Gold is always in high demand when confidence in economies and currencies flags. The precious metal is seen as a safe haven in times of uncertainty.
Positive news has it rough in such times -- it's hardly even noticed and quickly forgotten. And yet there is good news. It comes from companies and from the labor market, and it tells of astonishing growth rates, full order books and new jobs -- particularly in Germany.
The pundits have been caught off guard by how quickly the German economy is finding its feet again. Only a few months ago, they were predicting that Germany's export-driven economy would lag behind other countries for years.
Indeed, as long as the financial markets refuse to shed their anxiety, the foundation of the new recovery remains fragile. Renewed turbulence is virtually guaranteed. The banks still have enormous quantities of toxic assets on their books. Nobody knows when or to what extent these debts will have to be written off.
In some cases, these bad investments consist of junk bonds from the days before the crisis, including second-class US real estate loans called subprimes. In other cases, they include burdens that hardly anyone was aware of a year ago, like government bonds from Greece and other southern European countries, which were touted as a fairly sound investment at the time.
Analysts at the US investment bank Morgan Stanley say that Europe is caught in a "vicious cycle." Instead of using government funds to forcibly recapitalize all banks, as the US did, the euro countries opted for another approach. After the Lehman Brothers bankruptcy, many banks loaded up on cheap cash from the European Central Bank (ECB).
According to Morgan Stanley, they have been using this money since October 2008 to finance the purchase of government bonds worth €420 billion. During this spending spree, the banks targeted high-yielding bonds from shaky southern European countries, primarily Spain, Greece and Portugal. They then deposited these bonds with the ECB as security for more loans from the central bank.
At the outset these lucrative deals soothed nerves on the markets, but they have now turned out to be time bombs. Nobody knows exactly how these bonds are weighted on the balance sheets -- and even less can be said about what they will actually be worth in the end. Read more.
