Saving the Euro: Europe should stop fighting the inevitable. No more debt for debt-laden countries to save the banks.

During the last weeks Europe reminds me more and more of the former Iraqi Minister of Information, Mohammed Saeed al-Sahaf.

Picture courtesy of www.welovetheiraqiinformationminister.com

A lot of people will remember the funny and unworldly press conferences of this loyal and eloquent servant of Saddam Hussein. In his daily questioning by the representatives of the world press, he denied furiously every undeniable fact about this war:

·     “No, Iraq is not losing the war”

·     “No, these are not tanks of the allied forces that you can see behind my back”

·     “Every statement over an allied victory is greatly exaggerated”

The crazy thing was: he believed every word he said himself! Does that ring a bell?

In Europe we had respectively the Greek debt crisis, the Irish debt and banking crisis and off late the Portuguese debt crisis. The ratings of 30 Spanish banks, the so called “caja’s”, have been lowered by Moody’, while only the three strongest banks remained untouched. And Moody’s is not exactly an institute accused of front running during the early days of the crisis.

In the mean time institutional investors and hedge funds are aiming their guns at Belgium, Italy and the whole of Eastern Europe. Finland, The Netherlands and even Germany get sick and tired of their own strategy of saving every country in the Euro-zone in order to save the big German, French, Dutch and English banks.

And what do the representatives of the Euro-countries say, translated to normal English?

·         No, we are not losing the war against the institutional bondholders and hedge funds.

·         No, it is not the implosion of the eurozone’s €440bn bail-out fund that you can see behind our backs.

·         Every statement over a default of the Euro zone is greatly exaggerated.

This, of course, is just a joke about the Euro-zone assuming the ostrich position, but the facts are too obvious.

The ‘Financieel Dagblad’ in the Netherlands (www.fd.nl) summarizes it very concisely in an article on the Eurocrisis:´A diplomat from Brussels put the finger on the weak spot: “The doom scenario of this EU summit is that there will finally be an agreement on a total amount of aid for the bail-out fund and subsequently Portugal and Ireland need to ask for help already next week“ ´. 

And that is exactly what is going to happen.

But what did Mohammed Saeed al-Sahaf – sorry, my mistake – Angela Merkel state at the end of the ‘succesful’ Eurotop on Friday March, 26?

“The job is done. Europe passed through the ordeal. Of course, we will remain busy with our homework for a long time. We still need many years to recover from the sins from the past”. Summarizing…: it is time to look ahead and to forget the whole Euro crisis.

Louis van Gaal, one of the best football (soccer) trainer/coaches in the world said once to a crowd of flabbergasted journalists: “Am I so smart? Or are you so stupid”. And I couldn’t have said it better about the Euro crisis and European politics.

And now it is the Sunday after the Friday before and what is happening?

In the paper version of Irish newspaper “The Sunday Business Post”  there was news about the financial position of the Irish banks. Here are some pertinent snips, published by news.yahoo.com:

Stress tests on Ireland's four main lenders will reveal a capital hole of around 20 billion euros ($28.2 billion), The Sunday Business Post reported, without citing any sources. 

 Ireland's central bank will on Thursday publish the results of new stress tests on Bank of Ireland, Allied Irish Banks, Irish Life & Permanent and EBS Building Society.The central bank has declined to comment in advance of the results, agreed as part of an EU-IMF bailout designed to resolve Ireland's banking crisis. 

 The Sunday Business Post said the tests, which measure the strength of the banks' capital cushion under adverse macroeconomic scenarios, will show potential loan losses of somewhere between 18 billion euros and 23 billion.A Reuters survey of analysts on Friday showed they expected around 25 billion euros out of the 35 billion set aside for the banks under the EU-IMF deal would be required as a result of the stress tests. 

 A decision by the European Central Bank (ECB) to provide medium-term funding for Ireland's banks, revealed to Reuters on Saturday by a euro zone central banking source, has helped to cut the potential capital hole. Without the ECB move, Ireland's banks would have had to sell some of their loan books quickly into a depressed market, triggering further capital losses.

My prediction: this €20 bln for Ireland will only be enough for a few months and then they come back to the bail-out fund. At that time they have to stand in line behind:

·         Greece

·         Portugal

·         Italy

·         Spain

·         Belgium

·         France(?)

The Financieel Dagblad printed a two page article in the form of a what-if scenario: what if Germany and The Netherlands get so fed up with bailing out other countries that they would leave the Euro?

In general, I don´t like what-if scenario´s, as they often miss the point by lightyears. But in this case this is not such a wild guess, as Finland is getting fed up with bailing-out other countries and the Dutch voters also.

And today Angela Merkel´s CDU party got beaten in the elections in Baden-Württemberg. Is this the writing on the wall for her?? We should never underestimate the thick skin of a politician, but I guess that Angela Merkel is warned, right now.

Can we please stop this bail-out madness? Can we please stop filling one financial pothole with another? Can we stop making financially healthy countries sick and sick countries even more sick?

The only solution is taking haircuts on sovereign bonds of these sick countries. And every day this solution is postponed, is a day that the Euro becomes more and more a sitting duck; until the final shot is fired.

Getting rich with Commercial Real Estate (CRE) Pt III? No, we can’t!!

After ING Bank and SNS Bank, the ABN AMRO is the third large Dutch bank to ring the alarm bell concerning their CRE portfolio. As I explained on March 24, there are some people that still make huge amounts of money with CRE. For them the party is not over yet. But the large banks in The Netherlands are not among them anymore.

The ABN AMRO executed an investigation and the results were - mildly speaking -  ‘disturbing’. Here is a large summary of the article in  Financieel Dagblad (Dutch financial newspaper – link in Dutch), extended with a radio comment.

The number of vacant commercial and  office buildings in The Netherlands will only increase the coming years. Influenced by the “new working” trend, the need for office space will drop by 10%. 

[New working is working at home instead of at the office, using modern communication tools, like computers, smartphones and mobile internet. The countrywide coverage of broadband (mobile) internet enables people to stay at home and do their normal day job – EL] 

At this moment already 14% of the office buildings in The Netherlands is abandoned. This is stated by a report of ABN AMRO. The bank fears that in 2015 this number will be about 25%. 

Also a diminishing civil service is one of the causes. “These factors have a sturdy negative impact on the appraisal of Commercial Real Estate (CRE). Especially in the eyes of the large banks”, according to Erik Steinmaier, manager of Research at the CRE branch of ABN AMRO. 

The increasingly serious vacancy of CRE is a millstone for financial companies and pension funds. Steinmaier estimates that banks financed in average 60% of the office buildings. This would mean that banks have for about €30 bln in CRE loans on their balance sheet. A lot of these office building are currently appraised at a too high value. 

It is unclear how much has to be written off in the bleak scenario of ABN AMRO. Since 2007 the value of investments of institutional investors in CRE has diminished by 15%. And according to Steinmaier the financial crisis in CRE hits silently like an assassin. “The worst has yet to come”.  

Consultancy firm Twynstra Gudde that assisted in writing the ABN AMRO report states that one third of the large users of office space is planning to fit up flexible working spaces. Working at home should eventually lead to a decrease in demand for office space of 3 mln sqr meter (32.2 mln sqr feet), according to ABN AMRO. 

The government, using about 21% of total office space in The Netherlands, will have cutbacks up to 2.75% of the civil service labor force. Civil service currently uses 6 mln sqr meter (64.4 mln sqr feet) of office space. Especially The Hague, The Netherland’s own Washington, is hit disproportionately by these cutbacks. Vacancy of CRE in The Hague could hit the 30% mark.[…]

BNR Radio in The Netherlands broadcasted an interview with Maarten van Poelgeest, alderman of the city of Amsterdam, who states (summarized):

In some areas of Amsterdam the vacancy of CRE hits the 40% mark.Of this about 60% is structural vacancy. These office buildings need a different purpose of usage, as they will probably never be rented anymore. The local government needs to change the zoning schemes for these office buildings and should turn them into homes for students or tennants that have no access to public housing, as their income is too high. A lot depends on the owner of the building, i.e. the large banks, big realtors and pension funds. They should take their losses on CRE.

Maarten van Poelgeest, alderman of Amsterdam has a very sharp view on this matter: These buildings will probably never be rented anymore, so the owners should take their losses. Unfortunately, there lies exactly the problem. One quote from the article: “Steinmaier estimates that banks financed in average 60% of the office buildings. This would mean that banks have for about €30 bln in CRE loans on their balance sheet. A lot of these office building are currently appraised at a too high value”.

There you have it: 60% of these buildings are owned by the banks. Probably 80% of this 60% is owned by the usual suspects: ABN AMRO, ING Bank, Rabobank and SNS Bank. This means that these banks are on the hook for at least €24 bln in Dutch CRE. If they need to write-off about 33% of the current value, this will cause substantial changes on their balance sheets. And €8 bln is a rather optimistic guess, as the banks would have to do large investments into their vacant CRE to change its purpose from business to housing.

And this is exactly the reason that probably nothing is going to happen: the banks don’t want to do the necessary write-offs and investments in their CRE. They don’t want to put their balance sheets in jeopardy. With the increased capital demands of Basel III dangling above their heads, the banks don’t want to take losses on their equity. Write-offs on assets are therefore ‘not done’. The tactics concerning their CRE will be:

-         Extend and pretend

-         Delay and pray.

I hope you remember this when you see the ‘shiny’ annual results of f.i. ING bank and hear of their €3 bln profit. There is more to their balance than meets the eye.

And the future for CRE itself? Even as we speak, building companies are busy surrendering new real estate on top of the heap. Ordered in an overly optimistic time and probably built for future vacancy. Just like in a bubble.…

From my home town Almere, I show you some pictures of new CRE that will be surrendered very shortly by the building companies.

World Trade Center Almere. Picture courtesy of www.vastgoedjournaal.nl

The Landdrost Building. Picture courtesy of www.almere.nl

Carlton Building. Picture courtesy of www.sasbv.nl

And Almere is only a relatively small city of about 190,000 inhabitants, compared to Amsterdam and Rotterdam. This is to show you that the madness in CRE is still not over yet.

Getting rich with Commercial Real Estate (CRE) Pt III? No, we can’t!!