In extreme cases, up to 4500 billion euros Cost: Five major measures: expert explains how the banking system can be saved
Government debt, life insurance, bank balance sheets – bank expert Markus Krall shows in the book "The Draghi Crash" what drastic measures are needed to save Europe from the death of the financial system. Five measures are necessary – otherwise threatening costs up to 4500 billion euros.
The vast abuses in the banking sector hang like a sword of Damocles on Europe. "We are all trapped in the trap that the ECB has dug for itself and us with its Keynesian interest rate policy," warns Markus Krall. The imbalances in the credit sector are so huge that even a small turnaround in interest rates could lead to a crash.
The problem: the Eurozone countries do not have the resources to deal with the consequences this time around. In Germany 3000 billion euros of national wealth are at stake. Krall estimates the total amount of defaulted loans in the European banking system to be at least 1000 billion euros. And when interest rates rose, an unprecedented wave of bankruptcies threatened Europe's zombie companies. "That costs again up to 1500 billion euros," said the consultant.
Even a small interest rate reversal would not be payable
A sum that would go beyond any imagination even the possibilities of the financial system. The result: The taxpayers must probably again save the financial institutions from the sinking, so that the economic cycle does not go down the drain. And those responsible remained idle, it could cost the taxpayer perhaps even 4500 billion euros, fears Krall.
But even all the countries of the Eurozone together would not have enough small change in his pocket. In addition, the debtor states already have to refinance hundreds of billions of outstanding old debts each year. "Only the way out of the clearly illegal state financing by the ECB would remain," writes Krall.
However, this would not help much the people who built their old-age provision on life insurance. The credit and insurance industries would expect immense losses on investment securities with rising interest rates, warns the expert. The result: Up to 60 percent of all life insurance would be a case for the rescue company protector. Whether this system could endure is at least questionable. Consequently, a new crisis should be avoided by all means. But is that still possible at all?
VITA Markus Krall – the insider
The economist has been advising banks for many years and has developed their risk analysis systems. Most recently, he spoke at the Munich Security Conference on Banking Crash. The partner of the consulting firm Götzpartners and former McKinsey employees wrote the bestseller "The Draghi Crash."
Krall attaches great importance to the fact that he has repeatedly pointed out high-ranking politicians on the problems of the banks – and nothing happened  Necessary package of measures
- Restoring the creditworthiness of euro countries: Demanding assets, but reducing some of their debt
- Restoring banks' risk-bearing capacity through deregulation, cost reduction and recapitalization
- Stabilization of pension funds and life insurance
- Failed euro governance
- Return to a market-oriented interest rate policy
"The outcome of the drama depends crucially on how politicians are now reacting," says Krall, urging that the bank sector should no longer be postponed. In order for this mammoth task to succeed, Krall proposes a package of five major measures. FOCUS-MONEY has detailed all the measures contained therein.
Book tip: The Draghi Crash
by Markus Krall, 208 pages, Finanzbuch Verlag, ISBN-13: 978-3959720724 – buy here
Reducing sovereign debt in the euro zone
A new banking crisis would simply be unaffordable with today's debt levels, warns Krall. Overall, the countries of the euro zone are already in the black with around 88 percent of their annual economic output. Zero interest rate policy has not changed the huge debt problem, it only subsidizes the inability to reform or unwillingness of the deficit countries, Krall complains.
His proposal: A European debt and privatization trust company should clear all sovereign debt of the countries in the euro zone above the Maastricht Take over limit of 60 percent of gross national product. This trust company is to be organized privately. "The EU bureaucracy would by no means be able to do such a thing without creating a monster of inefficiency and corruption," Krall said.
The deficit states must privatize all available assets
With the assumption of liabilities but nothing is won yet. The debts must also be repaid. For this purpose, the affected countries should override all assets that can be privatized to the trust company.
In plain language: All remaining state-owned companies or parts of the infrastructure such as ports and motorways should fall into the fiduciary. Over a period of ten years, these are then sold and the debts are settled with the profits. "With this measure, the debt sustainability of the euro countries can be restored to the extent that a long-term repayment for each country with its own power with discipline is possible," says Krall.
End the rampant regulation in the banking system
Also the European Bank regulation Krall wants to fundamentally redevelop. Because despite a flood of new requirements, the system has not become a bit safer. On the contrary, the skyrocketing costs further jeopardized the stability of the banks. "In truth, the supervisors do not even have to interpret the staff to read the flood of data, which they force the banks to spend billions of dollars," said Krall.
His suggestion: The horrendous costs must be radically reduced become. Instead of constantly imposing new regulatory measures on banks, supervisors should focus on improving risk transparency. Even the abolition of guarantees for savers and buyers of bank bonds puts Krall on the table: "Then the markets will make sure through their pressure that risk transparency arises."
The Cutting costs in the financial sector radically
In order to remain competitive, the banks must earn more again, according to Krall. The problem: The low interest rates, the revenue in recent years have melted sensitive, and there are further losses. Therefore, to increase the profits, the costs should be lowered. And by 30 to 50 percent.
And where should the red pencil be applied? For this, Krall has the following suggestions: More automation and fewer branches should make the banks leaner and more efficient.
The employees of the banks would also have to swallow a bitter pill. In order to minimize the costs of the restructuring, Krall wants to severely restrict the protection against dismissal. "That's painful, but not as painful as collapsing banks," says Krall.
European banks need to be able to make profits again
Due to the low interest rates, banks are getting the loans they need from companies awarded, currently no significant revenue. But this way the system will not work in the long term. In order to sustainably increase yields, Krall therefore calls for two bundles of measures. On the one hand, interest rates on commercial lending business are to be gradually increased.
First of all, Krall calls for the abolition of penalties for short-term money parked with the ECB. On the other hand, the competitive pressure is to be reduced so far by regulations in the price setting that banks do not jeopardize the system with dumping prices for credits in the medium term.
Developing new and meaningful stress tests
Krall does not behave well in the bank's stress tests carried out so far by the ECB. "The calculation methods and models were not state-of-the-art, were partly proven to be wrong and therefore led to false results, as demonstrated by the examples of the Greek and Italian banks," says Krall.
Therefore, he calls for a new system. The stress tests should also be automated and would not have to cost 1.5 billion euros each time. "In any case, that can not be left to the institutions that have failed in series in this task," says Krall.
Life insurance and pension funds stabilize
For most savers in Germany existentially: What happens to the pension funds and life insurance? In order to keep the main pillar of private old-age provision in Germany from collapsing and millions of savers on the edge, Krall proposes two measures to cushion the impact of the correction.
On the one hand, insurance companies should be allowed to hedge their derivatives portfolios against interest rate risks. On the other hand, the portfolios should no longer have to be valued at current market prices, as long as bonds are not sold or held until maturity.
The aim is to prevent large insurance companies from failing to achieve their solvency targets through interim price losses. "However, these two measures are not a guarantee that these measures will restore life insurance funds that are already suffering a faltering spell," warns Krall.
Change the voting right in the ECB
Each euro member state sends a representative to the ECB Council – thus has a voice in the main body of monetary policy. This means that mini-states such as Malta, Cyprus and Luxembourg together have three times as much power as Germany. The big dilemma has already been described.
When the troubled countries and fiscal gullies join forces, they will always be able to block a tighter ECB monetary policy. Krall therefore calls for a reform of voting rights based on the weightings in the ECB. Anyone who has to answer for more debts, such as Germany, whose voice must also have more weight. "Without such a reform, the euro must be abolished, if we do not want to experience the crisis again and again until the complete impoverishment of the continent," notes Krall.
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Abolish Target 2 balances  Not only ex-Ifo President Hans-Werner Sinn has long warned of the gigantic risks of Target 2 balances, the loans that the national central banks give each other and which have been dramatically out of balance since the onset of the financial crisis.  A ticking time bomb, as some countries have made huge sums in a few countries like Germany. And their repayment is de facto excluded in a debt crash. Krall's suggestion: Target 2 balances must be collateralised with gold or similar assets. Or they have to be balanced every month. Incidentally, the latter is also practiced by the US Federal Reserve with its sub-banks.
Automatically punish violations of Maastricht rules
What are these famous stability criteria of the Maastricht Treaty for when no one complies? Alone against the debt ceiling has been violated 140 times in the euro zone. How often has this been sanctioned? Correct: never before.
That's why Krall suggests that an automatic punishment be applied to a violation. Without political influence. And so that the states really stick to the stability criteria, the penalties have to be really tough. In addition, the countries should lose their voting rights in the Governing Council. Then, as Krall is convinced, "the policy of organized monetary irresponsibility should be over very soon."
To really get the states back on track, there is only harshness. Anyone who constantly violates the treaties must fly out of the Euro-Community. "The only alternative to this repair is in my firm conviction the abolition or the collapse of the common currency", says the bank consultant.
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