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That Sinking Feeling

LABORERS
Are German banks headed for the scrapheap too?
  • Why it matters

    Why it matters

    The European Central Bank will soon take responsibility for German banks and is stress testing them to assess vulnerabilities. Huge loans to struggling shipping firms put many at risk.

  • Facts

    Facts

    • Three banks, HSH Nordbank, Nord LB and Commerzbank, are sitting on €50 billion of ship financing.
    • Ships built today are selling for 30 percent less than those built before the 2008 financial crisis.
    • German taxpayers will be liable if the banks default on their debts.
  • Audio

    Audio

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At the beginning of this year, the weather in Australia was so bad that very little coal could be loaded onto ships for export. A few weeks later, the crisis in Ukraine almost brought shipments through Crimea to a standstill. And while China remains a strong importer, it isn’t importing as much iron ore and crude oil as expected.

All of this is bad news, especially for Oliver Faak. But as head of the ship finance business for Nord LB, a state-backed bank in Hannover, northern Germany, Mr. Faak is used to bad news. The shipping sector has been in crisis for more than six years, with a number of ships generating so little revenue that their owners can’t even pay the interest on their loans.

This is unlikely to change in the foreseeable future. Nord LB expects the market to remain weak until the end of 2015, followed by a slight recovery at best.

Banks have held on to their shipping sector loans for years, betting on a recovery in the market. That strategy could now take its toll. The European Central Bank is due to take over supervision of Germany’s largest banks from the national regulator later this year, and in order to identify overstretched banks, it has undertaken a round of stress tests.

As part of this, the ECB is taking an especially critical view of shipping sector loans. Banks found to have vulnerabilities in the sector are at serious risk of failing the tests, putting their survival in jeopardy. The test results are due to be released later this month.

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