Deleveraging and the creation of the Eurozone Keiretsu

Many Eurozone banks are going through huge deleveraging: they are selling their portfolios of loans to hedge funds, reducing and cutting revolvers to corporations, and shortening the overall maturity of their exposures. Faced with higher capital requirements as they experience melting equity values, and unable to raise funds from the US money market, European banks are left with no options but downsizing and help from the European Central Bank.

The banks’ deleveraging is paralyzing the European economy. Even healthy borrowers can’t be certain they’ll have the loans and lines of credit necessary for their regular operations. Many are going capital light: cancelling investments, shrinking working capital and selling non-core assets. Banks’ deleveraging has fostered a downward spiral amplified by institutional and retail investors dumping the stocks and bonds of banks and bank dependent borrowers. This is particularly nasty for the Eurozone, given the role banks have traditionally played in funding European firms.

New forms of intermediation are being developed. The most vigorous are via internal capital markets. Holding companies are tightening their grip over funds available at their subsidiaries—even when these are exchange listed companies—and are playing a much more prominent role in the allocation of funds.

A few large corporations are going beyond that and creating their own banks to make up for the vacuum created by the banks disappearing from the funding scene. Having a bank allows these corporations direct access to funds from the ECB, and enables them to store their excess liquidity in-house, instead of in deposits at outside banks that may be vulnerable to runs. The European aerospace firm EADS is considering doing just that. EADS’ bank could be the financial center of a large network of entities with business relations with the corporation, each with access to funds and able to deposit funds with EADS bank. If one counts EADS’ suppliers and major customers, as well as the suppliers of EADS’ suppliers and all their employees combined, that could be a very large bank indeed.

Out of necessity, the European Keiretsu is born!

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