Tags: volkswagen | vw | europe | banking crisis

Could Volkswagen Trigger a Euro Banking Crisis?

Could Volkswagen Trigger a Euro Banking Crisis?
(AP)

By Wednesday, 30 September 2015 11:18 AM Current | Bio | Archive

Volkswagen has egg all over its logo. Last week we learned the company was programming cars to cheat on emission tests.

Now the CEO is gone, the stock has lost a third of its value, and criminal investigations are underway.

The incident is a stunning example of corporate stupidity. Volkswagen may survive, but recovering its reputation will take years. The episode doesn’t reflect well on Germany, either.

The government there is a major Volkswagen shareholder. Questions abound on the degree to which officials might have “overlooked” the company’s rule breaking.

This matters because Germany is all about rules.

Consider some recent history. Just a couple of months ago, German Chancellor Angela Merkel and her finance minister, Wolfgang Schauble, lectured Greece for failing to keep its end of previous bailout deals. “If you can’t follow the rules, you deserve what you get,” was their message to Greece.

Oh, the irony.

Will Volkswagen get what it deserves? If so, it won’t be good for the continent’s economy.

In Germany alone, the company has almost 300,000 employees and 29 manufacturing plants. Numerous smaller companies form a Volkswagen-feeding ecosystem. Its exports are a big part of the German trade surplus.

That’s not all.

In the United States, we have “Too Big to Fail” banks. Volkswagen might have similar status in Germany if it were a bank… and actually, it is.

Volkswagen’s finance arm had assets of €164 billion at the end of June. Those assets consist of leases and loans for Volkswagen vehicles. The finance unit issues bonds and accepts bank deposits.

Look what just happened. The vehicles bought or leased with the loans serve as collateral for much of VW’s portfolio. Their resale value is now highly uncertain, at best.

Like any bank, VW borrows short-term money and then makes leveraged long-term loans.

It is very vulnerable to a “bank run.” It is also vulnerable if unhappy borrowers stop making payments.

Volkswagen is perilously close to a squeeze from both directions. Unhappy diesel car owners can rightly say the company sold or leased them a different car than it claimed at the time.

Fixing the software will not change that; it will just leave people stuck with a far less fuel-efficient vehicle than they thought they had.

How do you say “refund” in German?

Meanwhile, other banks and institutions who fund VW’s loan portfolio will have to choose in the coming months whether to roll over their loans. It will be no surprise if some lenders decide VW is too risky for their tastes. After all, a company that admitted deceiving its customers is a company that could easily have deceived its lenders, too.

That ratchets up the risk level on VW bonds. Lenders will demand higher interest rates, if they lend to VW at all.

Now, with that data in mind, let us consider a small item from the Reuters wire last week.

“The European Central Bank has suspended purchases of Asset Backed Securities backed by car loans from Volkswagen, a person familiar with the matter said on Friday.”

This is odd. The ECB is presently executing a huge quantitative easing program. They’re buying almost any bond available – except Volkswagen asset-backed bonds, it seems.

These bonds are simply giant bundles of car loans. In theory, they are quite safe as long as the folks who bought Volkswagens on credit keep making their payments.

Maybe there is an innocent explanation here, but it sure looks like the ECB’s trading desk expects the Volkswagen scandal to get worse before it gets better.

Every bonfire starts with a little spark. This might be one.

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PatrickWatson
Volkswagen has egg all over its logo. Last week we learned the company was programming cars to cheat on emission tests. Now the CEO is gone, the stock has lost a third of its value, and criminal investigations are underway.
volkswagen, vw, europe, banking crisis
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2015-18-30
Wednesday, 30 September 2015 11:18 AM
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