Germany holds 25% of global shipping loans as industry collapses.
When Commerzbank, Germany’s second largest bank, reported earnings on Thursday, it made another groan in direction of the collapsing maritime shipping industry. It raised its loan loss provisions to €900 million, as it said, “in timely response to the deterioration in the shipping markets.” It warned that its losses on shipping loans alone could reach €600 million in 2017 after having nearly doubled to €559 million last year.
At one point, Commerzbank had €18 billion in shipping loans. Over the years, as the shipping crisis worsened, it has whittled down its shipping loan portfolio to €5 billion.
But Commerzbank is neither alone nor the biggest player among German lenders. Before the Financial Crisis, German lenders went on a wild binge and became the world’s biggest issuers of shipping loans that ended up funding horrendous overcapacity of ships, just when global trade would face enormous challenges. Of the $400 billion in maritime loans issued by large banks, German banks hold nearly $100 billion.
Bankruptcies have cascaded through the shipping industry, starting with bulk carriers during the Financial Crisis then converging on container carriers. In August last year it sunk Hanjin, the sixth largest container carrier in the world. In Germany, these bankruptcies have created a financial bloodbath that has led to serial bank bailouts with much more pain to come.
German banks are also exposed to closed investment funds, called KG funds. They’ve been lovingly called “the dentist ship fund,” because these funds were offered to retail investors seeking low-risk returns over a long period. These funds bought ships and leased them to big shipping companies, like Hanjin. What could go wrong?
These funds now own ships that are rusting away off-shore somewhere, waiting for better days.
“For German shipowners, Hanjin is bad news as for them a large company falls away with which they can charter their ships,” Oliver Faak, global head ship and aircraft finance at Nord Landesbank, one of the banks steeped in this fiasco, told Reuters.
And it’s complicated. Commerzbank might end up getting more shipping loans despite its efforts the cut its exposure to them. They’re nearly everywhere in the German banking system: the bank is bidding to acquire Oldenburgische Landesbank from insurer Allianz. Alas, there are shipping loans on the balance sheet. Sources of the Handelsblatt said that this has become “an important sticking point” in the deal.
Last week, Deutsche Bank warned that its expected shipping loan losses nearly tripled from a year earlier, to €346 million. Last July, it emerged that it was trying to offload at least $1 billion of its $5 billion to $6 billion of loans tied to the shipping industry.
The largest player globally in the global shipping-loan fiasco is HSH Nordbank, with €23 billion in shipping loans as of last summer. Its two main owners are the German states of Hamburg and Schleswig-Holstein. It had already been bailed out in 2008, re-collapsed, and was re-bailed out, including with €10 billion in loan guarantees by the states.
EU regulators determined the most recent bailout to be illegal state aid and ordered the bank to be privatized by February 2018 or be liquidated. Now everything is up in the air.
The states of Hamburg and Schleswig-Holstein are trying to sell their 85% stake in HSH. Since no one will touch a collapsed bank with a ten-foot pole, it will have to be sanitized. So it created a “bad bank” which in 2016 took ownership of 253 container ships. These shipping loans will have to be sold at huge discounts, which will likely use up the €10 billion in state guarantees, HSH CEO Stefan Ermisch recently told staff in a memo.
Finance sources told Reuters last December that offers received for these loans so far amounted to 25 to 35 cents on the dollar (or euro).
HSH is currently being marketed to investors in Asia. Taxpayers in Hamburg and Schleswig-Holstein grapple with losses of up to €15 billion, or about €3,000 per person.
“It’s a catastrophe,” Rainer Kerstin, head of the taxpayer’s association in Schleswig-Holstein, told the Wall Street Journal.
This fiasco has been so deep and so complex that Andreas Dombret, member of the Executive Board of the Bundesbank, highlighted them in a speech in 2013 as a risk to overall financial stability in Germany.
He identified two causes: plunging freight rates and overbuilding of ships of ever larger sizes, driven by “cheaply available financial means” – a direct reference to pandemic easy-money policies.
He detailed the financial bloodbath in Germany: shipping-loan retail funds (the KG funds) that blew up and were shuttered, banks whose shipping portfolios suffered heavy hits, and an industry that was breaking down. The Bundesbank was looking at it from a “broader perspective,” he said, with an eye “on the stability of the entire financial system.”
Other banks tangled up in the shipping loan fiasco include Nord Landesbank (NordLB). In 2016, it said it was trying to cut its shipping exposure to €12 billion to €14 billion within three years, from €19 billion at the end of 2015. And to that effect, it sold a €1.5-billion portfolio of shipping loans to US private equity firm KKR and a sovereign wealth fund.
NordLB already got a bailout via state guarantees. Without those guarantees, its bad loan provisions would have more than tripled to almost €1 billion in the first nine months of 2016 due to bad shipping loans. After the guarantees absorbed some of the losses, the loan loss provisions still came to €520 million. Its subsidiary Bremer Landesbank, reeking with bad shipping loans, announced that it would slash one in five jobs.
Among other banks tangled up in this: DekaBank, which in the first two quarters set aside an “unexpectedly large amount,” as the Handelsblatt put it, for bad shipping loans issued before 2009; Helaba (Landesbank Hessen-Thüringen); KFW, and DVB Bank (“The leading specialist in international transport finance,” it says).
“The plight of shipping continues, because world trade has not developed as positively as hoped,” Burkhard Lemper, managing director of the Institute of Shipping Economics and Logistics at the University of Bremen, told the Handelsblatt:
“The year 2017 is also unlikely to provide reasons for euphoria, because shipping continues to suffer from large excess capacities,” he said Mr. Lemper. “The long crisis affects ship values for banks.” These values are derived from long-term revenue averages. “After eight years of crisis, more and more weak years are now reflected in the average values.” Because, he added, fire sales at low prices are also beginning to affect the market values banks need to calculate ship values.
The pain continues to spread. German banks, notoriously reluctant to allow sunshine to illuminate the muck on their balance sheets, continue to drag this out, dealing with it only when they have to, and only in the smallest possible increments. But there are more challenges facing the industry. Read… World’s Largest Container Carrier “Unexpectedly” Has Big Loss in Crushed Industry. Now Trade War with China Looms
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If there really was social justice in this world rigged by and for the Elite, the billionaires living in mansions who got huge low interest loans and spent it stupidly would have to bite the bullet, sell all they can, eat spam, buy a lawn mower and work for a living.
Dow 30K soon then?
that’s funny! both in a silly, cute ha ha “that’s funny!” way and then in that now ubiquitous gallows humor “…oh shit, he’s probably RIGHT” way.
Nothing will happen again and the ECB will buy the bad loans or print the money and give it to German banks.
Remember this story: Could Deutsche Bank’s £36TRILLION in risky derivatives lead to Lehman-style collapse?
Nothing happened, Deutsche bank derivatives portfolio did not cause a financial meltdown . Same thing here, nothing will happen because the ECB will work behind the scene to make sure nothing happen,
Fiat currency will do this, we need to control the governance of our currency, so it was written in the Constitution. It also holds true in all unions that establish a comman means of debt.
So printing money doesn’t lift all boats?
“it had been bailed out .. re-collapsed .. bailed out again”
Where in Gods name is the money coming from ?
It’s funny money isn’t it .
Germany & their surrounding financial colleagues .. the ding dongs chorus, are seriously cracked in the head. May they go so broke that the whole of the EU starves to death.
Old, deviant, imbeciles like Junker should be doing life in prison .. the man is a halfwit .. & he is the backbone of Mutti Merkel .. the most powerful woman in the world.
The EU Geriatric Degenerate Mutual Admiration Society will perform a round of musical chairs for us.
Give the halfwits a big hand folks.
A most staggering statics is that just 16 of the worlds largest ships can produce as much lung clogging sulfur pollution as all the world’s cars.
Where is the money coming from?
Most of these German banks are owned by the Lander or municipalities. As the main or, sometimes, sole shareholders when things go awry they have to eat the losses. Generally speaking this is done by either providing new taxpayer-backed fundings or by transferring a part of the bad assets on the public books. This is what HSH Nordbank did. They originally did so with the EU’s blessing, but as it always happens politicians and bureaucrats cannot be trusted. As the saying goes “A honest politician is a politician that, when bought, will stay bought”.
Another source of funding is the deeply opaque Bundersveband Deutscher Banken (Association of German Banks), or BDB for short. BDB is the union of private banks, both national and foreign, operating in Germany. Over its history it has long been led by Deutsche Bank-nominated presidents but last year, in the wake of the continous scandals hitting that megabank, leadership passed to a representive from one of Germany’s shady investment banks. Out of the frying pan…
Regardless, BDB has long operated on a principal similar to Zenginkyo (its Japanese counterpart) that no bank should go burst, but while the Japanese have long favored megamergers (often a convenient cover for acquisitions), BDB has been known to directly take over member banks when they are teetering on the brink of collapse.
I am personally convinced the EU’s radical change of attitude regarding HSH Nordbank is wholly politically motivated, and is one of the many signals the EU is ripping apart, not so much at the polling stations but at a deeper, non-elected level.
“by providing new taxpayer-backed funding”
This is assuming the potential taxpayer has a job .. unemployment is massive throughout the E.U. = no tax is being paid.
Therefore the coffers are empty.
That the government of the day has not squandered the taxpayer monies & even borrowed monies & the cupboard is packed with I.O.U.’s.
“or transferring part of the bad assets on the public books”
Isn’t that hiding the problem so that it can fester & blow up in every ones face tomorrow.
Technology brings with it unemployment & greed embraces technology to save on salary’s .. as a result not tax is being paid & the welfare outlays keeps growing.
Unless the nations government has a money tree plantation they are all going to hell is a 44 gallon drum.
The teaching of times tables need to be mandatory in schools .. this is where the system has failed ..
The banks keep lending the money, and the shippers keep using it to order more (bigger) ships, the shipyards keep cranking them out, the port operators keep borrowing to ‘improve’ their facilities, the shippers themselves keep rationalizing; they can recover their losses with volume. Nobody says ‘no’ because the gravy train will then stop running. ‘No’ comes from the outside, when events force everyone into liquidation.
Back in the day when a barrel of oil cost $7.50 (1998) Westerners could order socks and suspenders from China, oranges and tomatoes from Chile. Profitable cargoes included low-unit cost bulk commodities such as iron ore. At $52/barrel the suspenders are too expensive and people grow their own tomatoes. Commodities aren’t worth the cost to ship. Finance difficulties spiral outward: port operators (who have spent billion$ to accommodate the superships), railroads, trucking firms, distribution centers, retailers with the feedback to the exporters who hire the ships.
It costs as much to ‘idle’ a ship as to sail it: the crews are needed on board to keep machinery turning and prevent everything from corroding into junk. A shipper bleeds funds constantly including those who buy these ships out of liquidation. The excess capacity bought with such high hopes (delusions) will wind up being scrapped … the effect is the same as a trade war/increase in tariffs.
Let’s see what happens when those are added …
Well said Steve
now, what happens to the “cold storage” offshore drilling rigs?
and all those tankers laid up in the straits of mallaca?
Drilling platforms sensu stricto, meaning the machines used to drill oil wells, are generally designed from the ground up to be mobile due to the nature of offshore drilling. They range from the “barge rigs” used in shallow coastal waters to semisubmersible platforms designed to drill in waters over 5000ft deep.
Drilling rigs do just that: they drill wells. The majority of wells so drilled turn up to be uneconomical to operate, so the need for drilling rigs to be easily moved around.
Once an economical viable well is found, a production platform is put in place.
These can be of several types of production platforms but the trend these days is towards either structures than can be dismantled and moved around (truss and spar platforms) or FPSO’s, which are true engineering masterpieces designed to be easily moved around, often under their own power or with the assistance of a tugboat.
Drilling platforms can be easily mothballed, just like any other ship: just anchor them in a suitable location and keep onboard a skeleton crew to ensure they don’t rot away.
Most production platforms are simply too expensive to be mothballed: even with oil at “depressed” prices it’s just more convenient to keep them in operations. FPSO’s being easily moved around and designed to act as storage facilities, they can be simply moored near an oil terminal or a “chokepoint” such as the Straits of Hormuz and be used as floating storage facilities, the fate which is befalling on many ULCC’s, the largest supertankers.
These ULCC’s cannot clear the Panama and Suez canals and several cannot even clear the Malacca Straits, so they have limited utility in the present economic landscape. The sun is setting on the supergiants.
Tip of the iceberg.
TPTB have you exactly where they want you. You were warned for over a century, and warned severely, and now it is too late.
Good report. Thank you
Big Pharma is in the same position .. massive financial outlay’s & expansions in the pharmaceutical industry .. in the expectation of lucrative profits for all.
ALAS .. the population of planet earth is ever decreasing = a vanishing market place.
Too may pharmaceutical companies competing for an ever shrinking market.
Forced Vaccination will not work .. they are offloading their over supply of unsaleable vaccines into our children .. parents are not going to stand for it.
They are going to hell in a 4 gallon drum.
It seems to me that the Banks & Big Money Lenders have gone off half cocked & killed themselves as a result.
RE: But why did they binge-invest in the overcapacity of ships?
The phenomenon dates back to the invention of credit.
Short answer is that, regardless of their claims to the contrary, the “bankers” are human like the rest of us, and are not endowed with “super powers” of objectivity, rationality, and analysis, but do have their full share of greed, love of “easy money,” and tendency to “follow the herd,” which results in their full participation in the asset bubbles of the age, albeit in different capacities, i. e. as the lenders that enable asset bubble formation.
The big question is “how can this be prevented/limited?”
I suggest that the central banks have a very large amount of accountability as they have the data, the analytical tools, and the authority to prevent the formation and limit the inflation of asset bubbles by limiting bank lending into certain asset classes.
In this era of globalization, international capital flows, and “hot”/internet money, vastly more co-operation among the national central banks will be required, but the alternative is a series of asset bubbles which continually increase in size before imploding, putting the global economy and financial system in increasing danger of another “Great Depression.” In short, we now have the ability, but lack the political will to prevent/minimize asset bubble formation.
Could someone please explain how the loan of money created from nothing equals a loss for the individual bank other than on a balance sheet? Any repayment of the interest charged is profit and the foreclosure on and resale of any assets will be a profit against what it cost the bank to issue a loan of purely invented money? The only sector suffering any loss will be the unsecured creditors of the bankrupt entity, or those operating in the real economy. If a cascading effect takes place in the real economy the bankers still walk away with their ill gotten gains and foreclose of everyone and everything from nation states to shoe repairers. The only infringement on the bankers is in their ability to continue their ponzi scheme into the future and perhaps the people coming to the realization that money creation should be in their hands and not the bankers.