Ever since it was dramatically rescued in 2009, Germany’s HSH Nordbank has been giving its state creditors seemingly endless amount of sleepless nights.
Now, six years after it was first bailed out by the two German states that are its primary shareholders – Hamburg and Schleswig Holstein – the bank is once again on the brink of collapse and asking the two states to keep it afloat.
Another state bailout for HSH Nordbank would come at a particularly awkward time. The recent collapse of Austrian bank Hypo Alpe Adria, and the Austrian government’s refusal to pay the bank’s outstanding debts, has called into question the value of state guarantees such as the ones that HSH Nordbank has relied on heavily since 2009.
The bank was once the world’s largest ship financier, but a collapse in the world’s container-shipping industry, which like the housing market had blown up into a bubble in the run-up to the 2008 crisis, hit it harder than anyone else.
The bill has already been high. In 2009, the states bailed the bank out with a €3 billion ($3.26 billion) capital injection and offered another €10 billion in state guarantees to stop the bank collapsing.
Now, Handelsblatt has learned that the finance house will have to make heavier use than expected of the state guarantees to keep it alive for the next decade.
The question for the two states that have to foot the bill is whether they are putting their money into a bottomless pit.
Sources on the bank’s non-executive supervisory board have said HSH Nordbank will need to convert about €400 million in state guarantees into actual funds to keep it afloat.
In total, the bank will now be calling on an additional €2 billion in funds from the states for the years 2019 and 2025 to offset further losses from its failed shipping portfolio.
News that the bank will now have to ask its state owners for more money could be politically explosive. The question for the two states that have to foot the bill, Hamburg and Schleswig Holstein, is whether they are putting their money into a bottomless pit that has no future.
The new bailout also comes at a shaky time for the wider banking industry in Germany, which is feeling the effects of Hypo Alpe Adria’s decline.
The Austrian bank’s collapse, and a refusal by the state to pay off its debts, has already led to one casualty in Germany. The mortgage bank Düsseldorfer Hypothekenbank has had to be taken into the protection of the country’s banking association.
Other German financial firms are owed as much as €5.5 billion from the Austrian bank. HSH Nordbank is owed €220 million.
But HSH’s new bailout is unrelated to Hypo’s failure. Instead, it is largely the result of the weakening euro. Unlike European exporters that have been aided by the weakening currency, HSH Nordbank has €20 billion in failed shipping loans that are mostly denominated in dollars – and are guaranteed by the states of Hamburg and Schleswig Holstein. The stronger dollar therefore means the bank will have to write off the loans for a higher amount.
Troubles with the dollar are just one of HSH’s many battles to stay afloat. The shipping crisis itself is showing no end in sight. A new restructuring program at the bank will see another 500 jobs lost.
To top it all off, the state funds may yet be invalidated by the European Commission as an unfair competitive advantage.
HSH chief executive Constantin von Oesterreich has to convince Brussels that his bank has a sustainable business model – without the state funds he is now relying on.
The state aid helped the bank to scrape through the European Central Bank’s stress tests, which probed the health of Europe’s largest banks, at the end of last year. Since the states are also the bank’s owners, the ECB rated the state aid as capital that the bank could draw on in times of need.
The €10 billion in state guarantees act as a sort of convertible bond, which kicks in once the bank has absorbed a loss of more than €3.2 billion on its guaranteed portfolio.
HSH Nordbank estimates that this threshold will be reached for the first time in 2019. The bank has already said it will likely need about €1.6 billion of the state funds between 2019 and 2025. Now, the dollar’s strength will raise this amount by another €400 million, according to sources.
The new estimate is expected to be revealed on April 1, when the bank releases its annual results for 2014. “We have no new figures as of now,” said a spokesperson for the bank.
Any claim to the state guarantees remains an estimate for now – the needs could well rise even higher. It is clear the dollar is having an impact. The euro recently fell to its lowest level in 11 years, and could fall further. Deutsche Bank recently estimated the exchange rate could fall to 85 cents per euro by the end of 2017.
While the state guarantee may cost taxpayers dearly, it actually offers the bank some advantages. Regulators require the bank to set aside fewer reserves for loans that are backed by the state. The only problem is to insure the guaranteed portfolios against a rising dollar – this has been blocked by the European Commission.
That means the states will have to foot the bill for a rising dollar, and not the bank itself. But HSH doesn’t get away scot-free by any means. The European Commission has also determined that the bank should pay a fee for the state guarantees of 4 percent per year. On €10 billion in state guarantees, that amounts to €400 million a year.
Between 2009 and 2014, the bank has paid its owners €2.2 billion in exchange for the guarantees. The fee acts as a sort of buffer for the state’s taxpayers.
HSH Nordbank is hoping to get a break on the interest payments from Brussels, which is in the process of re-evaluating its position.
The danger is the EU Commission could still go the other way. It could rule that the state support is an illegal subsidy. Then the hard times for HSH will get much, much harder.
Frank M. Drost is Handelsblatt’s chief financial regulation correspondent. Christopher Cermak of the Handelsblatt Global Edition also contributed to this story. To contact the authors: firstname.lastname@example.org and email@example.com