Monday, September 30, 2013

BBC News - Markets hit by political crises in US and Italy

Financial markets have been hit by the prospect of a US government shutdown and a crisis for Italy's government.
Capitol Hill
The US federal government could start to shut down on Tuesday
Italy's stock market has fallen almost 2%, while shares in London, Frankfurt and Paris have dropped by about 1%.
The US needs to agree a new spending bill before the financial year ends at midnight on Monday. But political divisions have resulted in a stalemate.
In Italy, Prime Minister Enrico Letta is to hold a confidence vote on Wednesday.
US deadlock
There are worries over the economic impact of a shutdown of the US government.
If the government does shut down on 1 October, as many as a third of its 2.1 million employees are expected to stop work - with no guarantee of back pay once the deadlock is resolved.
National parks and Washington's Smithsonian museums would close, pension and veterans' benefit cheques would be delayed, and visa and passport applications would be stymied.
Programmes deemed essential, such as air traffic control and food inspections, would continue.
Republicans are targeting President Barack Obama's healthcare law, popularly known as Obamacare.
Early on Sunday, the Republican-run House of Representatives passed an amended version of the Senate spending bill that removed funding for the healthcare law.
US Senate Majority leader Harry Reid has vowed that his Democrat-led chamber will reject the Republican bill.
"Tomorrow, the Senate will do exactly what we said we would do and reject these measures," said Adam Jentleson, a spokesman for Senate Majority Leader Harry Reid.
"At that point, Republicans will be faced with the same choice they have always faced: put the Senate's clean funding bill on the floor and let it pass with bipartisan votes, or force a Republican government shutdown."
Speaking for the president, White House spokesman Jay Carney said: "Any member of the Republican Party who votes for this bill is voting for a shutdown." The president, he said, would also veto the Republican bill.
Uncertain Italy
Meanwhile Italy's financial markets were also hit by a deepening political crisis there.
Italian shares are down almost 2% and the euro fell to the lowest level since June against the Swiss Franc.
Italy's 10-year bond yield - an indication of how much the government has to pay to borrow money - rose as high as 4.66%, the highest level in more than three months.
Prime Minister Enrico Letta plans to hold a confidence vote on Wednesday, to seek the backing of Italy's parliament.
He was forced to make that move after five ministers from Silvio Berlusconi's party stepped down at the weekend.
But those ministers have now given mixed signals as to whether they are actually leaving the government.
The crisis follows weeks of worsening ties between Mr Berlusconi's party and Mr Letta's grouping.
Mr Berlusconi's People of Freedom (PDL) objects to a planned increase in sales tax, which is part of a wider government policy to reduce big public debts.
The government has also been struggling with a deteriorating economy.
It is forecast to shrink by 1.4% this year according to the national statistics agency.
The agency also estimates that unemployment will reach a record high of 12.3% next year.
'Fear of the unknown'
Earlier on Monday, Worries over the US shutdown had hit Asian shares.
Japan's Nikkei 225 index closed 2% lower, Hong Kong's Hang Seng was down 1.5%, Australia's ASX fell 1.7%, while South Korea's Kospi shed 0.7%
"It is the fear of the unknown," said David Kuo of financial website the Motley Fool. "No one knows what is really going to happen and markets don't like uncertainty."
"There is likely to be some reduction in US government spending, but we don't know what areas are going to be affected.
"Until that is resolved, we are likely to see volatility in the markets," he added.

Thursday, September 26, 2013

BBC News - US to hit debt ceiling by 17 October, says Treasury Secretary Lew

The US will hit its debt ceiling by 17 October, leaving the government with half the money needed to pay its bills, the Treasury Secretary has warned.
Jack LewMr Lew warned that failure to reach a deal would be "catastrophic" for the US economy
Jack Lew said that unless the US is allowed to extend its borrowing limit, the country will be left with about $30bn to meet its commitments.
"Net expenditures on certain days can be as high as $60bn," he said.
The US government and Republicans are at stalemate over extending the credit limit needed to avoid default.
President Barack Obama and the Democrats have said they will not negotiate with Republicans over their demand that the government agrees budget cuts in return for backing a rise in the borrowing limit.
Mr Lew's comments underline how close Washington is to running out of money. Failure to reach a deal would be "catastrophic" for the US economy, he said in a letter to House Speaker John Boehner.
"Treasury now estimates that extraordinary measures will be exhausted no later than October 17. We estimate that, at that point, Treasury would have only approximately $30bn to meet our country's commitments.
"If we have insufficient cash on hand, it would be impossible for the United States of America to meet all of its obligations for the first time in our history," Mr Lew said.
He urged Congress to "act immediately" and increase the borrowing ceiling, which has been limited at $16.7 trillion since May.
In return for supporting a rise in the ceiling, Republicans are pushing for a series of measures, including a delay by a year in the introduction of the Affordable Care Act, which would increase benefits under Mr Obama's Medicare health programme.
'Not an option'
A spokesman for Mr Boehner said Mr Lew's letter was a reminder of the need for an agreement to raise the ceiling while at the same time cutting US debt.
But he added: "And it should remind President Obama that refusing to negotiate with Congress on solutions just isn't an option."
Washington faced a similar impasse over its debt ceiling in 2011. Republicans and the Democrats only reached a compromise on the day the government's ability to borrow money was due to run out.
In his letter, Mr Lew reminded Congress that the 2011 battle "caused significant harm to the economy".
That fight was resolved just hours before the country could have defaulted on its debt, but nevertheless led to ratings agency Standard & Poor's downgrading the US for the first time ever.
The 2011 compromise included a series of automatic budget cuts known as the "sequester" which came into affect earlier this year.

Tuesday, September 24, 2013

Bloomberg News - Airlines Face Carbon Verdict on $708 Billion Industry

Alessia Pierdomenico/Bloomberg
A worldwide market-based tool will help the aviation industry meet its 2020 target of carbon-neutral growth.
Nations from the U.S. to Russia and the European Union are set for a final showdown over the first-ever global commitment to designing an emissions-reduction market tool for the $708 billion airline industry.
Negotiators from more than 190 countries in the United Nations’ International Civil Aviation Organization will decide at a Montreal meeting starting today whether to back a pledge on a market-based measure for the sector, which is responsible for about 2 percent of greenhouse gases globally. Details of the program, a precedent for a single industry worldwide would be decided in 2016 and the market would start by 2020.
In exchange, the EU would narrow down the scope of the world’s biggest emissions-trading system, limiting carbon curbs on carriers to its own airspace and cutting compliance costs for airlines including Delta Air Lines Inc. and OAO Aeroflot. That would help avoid tensions with non-EU nations and a trade war with China, where Airbus SAS said orders for its jetliners remain in limbo as part of a government campaign against the EU’s unilateral emissions measure.
“If approved, it’ll be the first signal for airlines and investors that industry accepts the need for market solutions,” said Bill Hemmings, manager at the Transport and Environment lobby in Brussels. “Whether a global deal can be effective in reducing emissions depends entirely on the details yet to be worked out. The deal on the table is far from ideal; the question is to make sure it doesn’t get worse.”

Russia, China

Support for the draft ICAO agreement “should not be taken for granted” as some countries are seeking to weaken the deal, according to a note sent by the EU’s regulatory arm to governments. A potential debate about linking the continuation of the EU carbon program in its own airspace with exemptions for some developing nations, a solution sought by the African states, could “unravel the package and significantly affect the chances of getting agreement,” the EU said in the document obtained by Bloomberg News.
The draft resolution is a good basis for discussion, according to a State Department official, who asked not to be identified, quoting policy. The U.S. government and the airline industry have strongly supported ICAO efforts to develop a market-based measure and until such a measure is agreed, countries and regions should refrain from regulating emissions beyond their own airspace, the official said.
Countries including Brazil, Russia, India, China, Cuba and Saudi Arabia are against national or regional carbon markets before a global deal is enacted, according to the EU note.

Barack Obama

It is crucial for Europe to win ICAO approval for the continuation of the bloc’s carbon program in its own airspace. The EU decided in 2008 that airlines flying to and from European airports be included in its carbon market from 2012 after aviation emissions in the region doubled over two decades. That triggered protests from the U.S., where President Barack Obama signed a bill shielding carriers from the EU measure, to Russia, which said last year it considered limits on European flights over Siberia as part of possible retaliatory measures.
To facilitate international talks and avoid trade conflicts, the European Commission in November proposed to defer curbs on foreign flights, which were originally subject to EU emission rules at their entire length. The amendment, known as the “Stop the Clock” proposal, entered into force in April 2013.

Global Warming

The European Parliament, whose consent will be needed to modify the bloc’s emissions law, is unlikely to agree if the draft ICAO deal is weakened, according to Peter Liese, a German member of the assembly.
“I am optimistic about the outcome of the talks,” Liese told reporters in Brussels today. “The alternatives are unconditional surrender or unconditional trade war.”
The EU cap-and-trade program is the cornerstone of the region’s plan to cut greenhouse gases that scientists blame for global warming. It imposes pollution limits on about 12,000 manufacturers and power companies, leading to a cap in 2020 that will be 21 percent below 2005 discharges.
The annual limit for the aviation industry began at 97 percent of average discharges from 2004 to 2006, falling to 95 percent in 2013. Airlines were given emission permits making up 85 percent of the industry cap for free. EU emission permits for delivery in 2013 declined 0.2 percent to 5.42 euros ($7.31) a metric ton at 4:24 p.m. on London’s ICE Futures Europe exchange.

2020 Target

International aviation forms a significant proportion of the EU carbon market’s demand over the next seven years and its removal will be a “fundamentally bearish development,” according toKonrad Hanschmidt, a London-based analyst at Bloomberg New Energy Finance.
“This has already been mostly priced in over the past year, as the political opposition to the ETS inclusion has been so overwhelming from outside the EU,” he said by e-mail. “The EU’s strategy has however sped up the negotiation of an international market mechanism for aviation which would be a better long-term outcome.”
United Continental Holdings Inc., the world’s largest airline, has been lowering its emissions by replacing older aircraft with more efficient jets such as the Boeing Co. 787 Dreamliner, Mary Ryan, a spokeswoman for the Chicago-based company, said in an e-mail. Airlines also need governments to invest in and improve aviation infrastructure in the U.S. and abroad, while also supporting the advancement of lower-carbon fuels, according to Ryan.


“If those government efforts are happening and we’re not meeting the target, we support having a single global mechanism at ICAO for aviation emissions to meet that target until technology and infrastructure improvements catch up,” she said.
A worldwide market-based tool will help the aviation industry meet its 2020 target of carbon-neutral growth, according to the International Air Transport Association. The airline industry’s estimated revenue will be $708 billion this year with an operating profit of $22.4 billion, giving a margin of just 3.2 percent, according to IATA, whose members include Deutsche Lufthansa AGand Singapore Airlines Ltd.
Without a global accord the industry risks the proliferation of regional programs, which could lead to “a whole lot of overlapping, duplicating, sometimes conflicting schemes,” IATA Chief Executive Officer Tony Tyler said.
“There is a degree of optimism a deal can be reached,” Tyler told reporters on a conference call. “Everybody is aware this is a historic opportunity to take a big step forward.”
The commission, the 28-nation EU bloc’s regulatory arm, plans to put forward a proposal to limit the scope of its emissions law for airlines in the first half of October should ICAO back the deal, two people with knowledge of the matter said earlier this month. Any amendment to the EU legislation on that matter would require approval by the region’s governments and the European Parliament.
“There are some bits and pieces in the text that made everybody unhappy,” Jos Delbeke, director general for climate at the commission, told a conference in Brussels on Sept. 4. “So it may be not far away from an ideal compromise.”
By Ewa Krukowska

Thursday, September 19, 2013

BBC News - Global markets rise on surprise Fed decision

Federal Reserve Chairman Ben Bernanke said: "Asset purchases are not on a preset course"
European stock markets have followed Asia's by rising after the US central bank unexpectedly said it would not begin scaling back its massive economic stimulus programme.
London's FTSE 100 index rose 1.4%, Paris's Cac gained 1.1%, and Frankfurt's Dax was up 1.2%.
The Federal Reserve said it would not scale back its bond-buying programme until the US economy had improved further.
The bank also cut its growth forecast.
The Fed now estimates that the US economy will grow by between 2.0% and 2.3% this year. That compares to a previous estimate made in June of between 2.3% and 2.6%.
Markets rose on the news because it means the cheap money resulting from the US stimulus plan will continue.
Gold rose 4% - its biggest one-day jump in four years - following the Fed's decision, and was trading at $1,366 per ounce on Thursday morning.
Gold mining stocks rose sharply, with Randgold Resources up 9.4% and Fresnillo up 6.4%.
In Asia, Japan's Nikkei 225 closed up 1.5% and Hong Kong's Hang Seng ended 1.7% higher.
Australia's ASX 200 rose 1.2% to a five-year high after the announcement.
In the US, the three main stock indexes closed at record highs on Wednesday.
'Elevated' unemployment
Many investors had speculated that the Federal Reserve would begin reducing its monthly bond-buying plan this month.

Start Quote

Against this backdrop - a true game-changer - it is no longer appropriate to hold a strategically bearish view on global emerging markets”
Societe Generale
But in a statement released after its two-day policy meeting, the Fed said there was no fixed timetable for it to begin scaling back - or "tapering" - its stimulus.
The central bank said it was taking a more cautious stance because of an "elevated" unemployment rate and concerns about the US economic recovery.
Its stimulus programme was designed to keep interest rates low, and thereby money cheap in order to encourage borrowing and investment.
Emerging markets were galvanised by the Fed's decision not to start scaling back its stimulus programme.
Investors had sought out higher returns in shares and other assets in faster-growing economies such as Brazil, India and Indonesia.
These had seen strong growth as a result of the Fed's attempts to boost the US economy, but conversely had fallen back sharply at the prospect of a return to higher borrowing costs in the US.
However, following the Fed's latest announcement, India's main share index rose 3%, Indonesia's climbed 4.7% and Turkey's stock market was up by 6%.
Investment bank Societe Generale said in a research note to clients that the outlook for emerging markets had greatly improved.
"The Fed signalling has now changed our perspective on the market in a radical way," the bank said.
"Against this backdrop - a true game-changer - it is no longer appropriate to hold a strategically bearish view on global emerging markets."
Reports that Janet Yellen was the front runner to take over from Ben Bernanke as head of the US Fed added to the view that a tightening in US monetary policy would not happen soon, as she is considered to see the risks of poor economic growth as bigger than that of rising inflation.
Murat Toprak, emerging FX strategist at HSBC said: "We can assume this rally is going to last for some time, probably at least a few weeks.
"There is a reassessment by the market of monetary policy changes going forward."

Wednesday, September 18, 2013

Bloomberg News - Stevens to Bear Abbott Stimulus Burden in Slowing Australia

RBA Governor Glenn Stevens Patrick Hamilton/Bloomberg
Glenn Stevens, governor of the Reserve Bank of Australia, yesterday said 2.25 percentage points of reductions to a record low 2.5 percent are already providing “a substantial degree of policy stimulus.”
Australia today saw the swearing in of its 28th prime minister, with Tony Abbott pledging to rein in spending even as the growth outlook weakens -- stepping up challenges for Glenn Stevens, who begins his final term as central bank governor with the cash rate at a record low.
The divergence of monetary and fiscal policy in the world’s 12th largest economy raises the risk of tension between Abbott, 55, and Stevens, 55, who was reappointed by the previous administration. The Reserve Bank of Australia has to contend with the danger of distorting asset prices from any extension of a policy easing cycle already two years long.
“Stevens is trying to steer a path between avoiding asset bubbles, particularly in the real estate sector, and keeping the Australian dollar from going too high,” said Martin Whetton, an interest-rate strategist at Nomura Holdings Inc. in Sydney. “He’s also reaching a point where on perceived wisdom, he’s very close to the terminal rate of policy.”
Stevens yesterday said 2.25 percentage points of reductions to a record low 2.5 percent are already providing “a substantial degree of policy stimulus.” Abbott has pledged to terminate 12,000 civil service positions and is targeting a budget surplus of 1 percent of gross domestic product in a decade.
The governor proved hawkish in his first term at the helm of the RBA, raising the benchmark to a 13-year high in March 2008 even as credit markets began seizing. After reducing borrowing costs to a half-century low in 2009 as much of the developed world entered recession, he began raising again later that year as government stimulus kept Australia growing and sparked a surge in home prices.

Policy Lag

The RBA’s easing since November 2011 -- designed to offset the drag from declining mining investment and dampen the currency’s strength -- is “most evident in the housing market,” Stevens said yesterday in minutes of the RBA board’s Sept. 3 meeting, where the cash rate was kept unchanged just four days ahead of the election.
“We’re in one of the higher-than-average periods at the moment” for house prices, RBA Assistant Governor Malcolm Edey told a forum in Sydney today. “But we shouldn’t be rushing to reach for the bubble terminology every time the rate of increase in house prices is higher than average because by definition that’s 50 percent of the time, and you’re just going to be unrealistically alarmist by making that call every time that happens.”
Abbott and Stevens will have a new Treasury bureaucrat to work with next year. Martin Parkinson, secretary to the department since March 2011, will stand down in the middle of 2014, Abbott’s office said in an emailed statement. The secretary to the Treasury sits on the RBA’s nine-person board.

Budget Emergency

Abbott’s coalition warned before the Sept. 7 election that Australia faces a budget emergency. Treasury said in its pre-election outlook released Aug. 13 that the federal deficit will widen to A$30.1 billion ($28.2 billion) this fiscal year that ends June 30, 2014, and is no longer projected to return to balance in 2015-16.
“There is a very serious deterioration in our budgetary situation,” Abbott told reporters in Canberra two days ago in his first press conference since winning office. “Nevertheless, I want to stress that we will bring the budget back into surplus as quickly as we responsibly can, consistent with the election commitments that we’ve given.”
That task will be complicated as the coalition aims to meet its pledges to abolish Labor’s carbon and mining levies and lower the business-tax rate while funding a A$5.5 billion per year maternity-leave program. To help make savings, Abbott also plans to lower subsidies for automakers, cancel handouts to parents of school children and slash foreign aid.

Further Stimulus

With Abbott politically wedded to spending restraint, it will likely fall on Stevens to provide further stimulus in the event growth declines sharply and threatens recession.
“I don’t see Abbott committing to stimulus,” said Alvin Pontoh, a Singapore-based strategist at TD Securities. “So it will be up to the RBA to keep monetary policy loose for the foreseeable future to help the economy negotiate the transition from mining.”
Stevens and the new government will discuss monetary policy in the near future. After the past two elections, the government and central bank signed a statement on the conduct of monetary policy. Australia’s central bank makes rates decisions independently from the government.

Aussie Rebound

The central bank loosened policy to help rebalance growth from mining regions in the north and west as investment wanes toward services and manufacturers in the south and east. The RBA’s efforts had been aided by a decline in the currency between April and August. The Aussie has rebounded 5 percent this month as concerns eased about the impact of Federal Reservetapering of bond purchases that had devalued the U.S. dollar.
“The recent lift in the Australian dollar over the past few weeks puts the RBA in a Catch-22 scenario,” said Janu Chan, an economist at St. George Bank Ltd. in Sydney. “In part, the Australian dollar has lifted due to rising expectations the RBA is done cutting rates. However, a high Australian dollar will keep the door open for another rate cut, because a stronger currency tightens financial conditions.”
The prospect of the coalition’s election victory boosted confidence that had remained subdued for much of the Labor government’s time in office.

Greater Confidence

Household sentiment jumped 4.7 percent this month to 110.6, the highest level since December 2010, a private survey showed Sept. 11. Consumer confidence had averaged 101.5 points under the almost six years of Labor rule.
Business confidence surged to 6 from minus 3 in August, a separate private report released a day earlier showed, as confidence increased in all industries. It averaged 0.5 point under Labor.
“You wouldn’t believe the nature of the change in the conversations we’ve had with companies over the last two weeks, over how confidence is coming back,” Dion Hershan, head of Australian equities at Goldman Sachs Asset Management Ltd., told reporters today at a Melbourne briefing. “That’s not to say it’s all going to be smooth sailing, but I think you can draw a clear link between stronger business confidence, business capex outside of the resources sector and employment outside the resources sector.”

Home Prices

Lower rates have spurred the property market in Sydney, Australia’s biggest city, where house and apartment prices climbed 7.4 percent in the eight months to Aug. 31, compared with a national average of 5.1 percent, according to the RP Data-Rismark Home Value Index. More than 85 percent of the homes that went to auction in the city sold successfully in the first weekend in September, the highest rate since 2008, according to Australia & New Zealand Banking Group Ltd. (ANZ)
“The east coast of Australia seems to be gathering a lot of momentum at the moment,” said John McGrath, chief executive officer of McGrath Estate Agents, who forecast in a Sept. 13 interview that prices could rise by between 5 percent and 10 percent in Sydney in the next year.
Still, traders are pricing in about a 30 percent chance the RBA will lower borrowing costs by a quarter percentage point to a fresh record low of 2.25 percent by year-end, according tointerest-rate swaps data compiled by Bloomberg.
“This is going to be a challenging political economy for the governor,” said Peter Jolly, Sydney-based head of market research for National Australia Bank Ltd. “If you take interest rates to super-low levels and keep them there for a long time, you can have big and unhelpful impacts on asset prices like housing.”
By Michael Heath 

Tuesday, September 17, 2013

Reuters News - The Landesbanken: Inside Germany's trillion euro banking blind spot

HAMBURG | Tue Sep 17, 2013 3:13am EDT
(Reuters) - Many Germans feel that whoever wins Sunday's election, they should not fund any more bailouts of fellow European countries, whose errantbanks are a particular bugbear for Berlin.
But a cornerstone of Germany's own banking system, which has already received state bailouts, is facing fresh challenges, increasing the need for reforms which will be very hard for any new government to deliver.
Founded in the 19th century to promote regional development, the publicly-owned Landesbanken play a hallowed role as low cost lenders to local projects and the 'Mittelstand', the small and midsized firms central to the eurozone's most resilient economy.
With combined assets of a trillion euros, they account for 12 percent of the country's total banking assets, and 3 percent of Europe's as measured by the European Central Bank (ECB).
The eurozone's steps towards banking union have triggered the toughest stress tests banks have ever faced and new global regulations impose higher capital demands particularly difficult for low-margin banks like the Landesbanken to achieve.
At the same time, their core business is threatened by increasing competition from international banks like France's BNP Paribas, which want a bigger part of the action in Europe's economic powerhouse.
Experts from the Organisation for Economic Cooperation and Development (OECD), ratings agencies and German academia say the best Landesbanken solution is restructuring to leave as few as two players with well-defined businesses.
The prospect appears remote, undermining Berlin's reputation as the driver of European banking reform.
None of the five main Landesbanken - Hanover's Nord LB, Munich's Bayern LB, Stuttgart's LBBW, Hamburg and Kiel based HSH Nordbank and Frankfurt's Helaba - said they thought industry consolidation likely when asked by Reuters for this article.
As Gunter Dunkel, head of Nord LB and president of the Association of German Public Banks put it in comments to Frankfurter Allgemeine Zeitung: "I offer you a bet: neither in my working life or yours will someone take the immense economic and political risks of such a merger."
The risks stem from the Landesbanken's tradition of serving the savings banks and local authorities that own them.
For the municipality-owned savings banks, they provide wholesale banking services and investment products to sell on to customers. For the Laender, they support local businesses and regional projects, accounting for 15 percent of all German corporate lending.
Officials in the German administration say Landesbanken are not a source of major concern; where once their woes were a talking point at European finance ministers meetings, a source familiar with their discussions told Reuters the Landesbanken had not arisen recently.
Their top line numbers are comparatively strong, with capital ratios above the international average and four of the five biggest showing higher profits in the first half of 2013.
But experts say the figures belie a more complex reality. Return on equity - a key measure of a bank's profitability - is lower for the Landesbanken than international peers.
More international competition could make margins even slimmer, as banks like Barclays and BNP look to Germany for growth that is lacking elsewhere in the eurozone.
Earlier this year, BNP Paribas's corporate bank lowered its client threshold from companies with 500 million euros of annual sales to those with 250 million euros, putting them further into the Landesbanken's core market
BNP's sweet spot - and an area attractive to other foreign banks - is exporters with cross-border banking needs.
"It's the largest economy by far in Europe, and the country with the highest share of exports in terms of GDP," the head of BNP's German corporate and investment bank business, Torsten Murke, said.
Fitch Ratings analyst Christian van Beek noted the Landesbanken's public ownership means they do not need the high double-digit returns sought by other banks, so they can do lower margin business.
But low earnings power carries risks. In its 2012 Economic Survey of Germany, the OECD noted Landesbanken "remain vulnerable due to their low capitalisation and profitability and will be especially affected by the regulatory increases in capital requirements".
One of its major sources of strategic investment is drying up. Several sources in savings banks, including Michael Auge, spokesman for Helaba's 69 percent owner the Savings banks and Giro Association Hesse and Thuringia, told Reuters they would not invest further in the Landesbanken.
Long-beset by the problems of politically motivated lenders, and cultivating a work culture several employees describe as "civil service like" with a clear-out at 5 p.m., Landesbanken did not begin to build serious problems until 2001.
The trigger, several experts say, was a surprise agreement between Germany and Brussels to end a sovereign guarantee on bonds sold by Landesbanken by 2005. The Landesbanken's response was to sell as much debt as they could before the curtain fell.
They piled into international lending and high-yielding bonds, sponsoring 8.4 percent of the global supply of asset backed commercial paper (ABCP) by 2006, according to a major 2012 study on Landesbanken by four German academics.
The Landesbanken expansion ended in bailout. In 2008, German states began the first of five bailouts totalling 70 billion euros, including the rescue of and eventual shutting of WestLB, which lost heavily on bets on the U.S. subprime market.
Others stayed afloat, avoiding deep restructuring.
Next year's European stress tests will be a seminal moment.
"Some people suspect these banks will need to take further state aid or at least further substantial writedowns on their portfolios," said Robert Montague, senior investment analyst at ECM Asset Management.
HSH has admitted it is likely to need to set aside extra money to deal with loan losses after the tests, but said it does not expect to need further state support either to deal with the cost of regulation or the tests' outcome.
Nord LB noted it had completed an extensive capital conversion and boosting programme in 2012. "Our earnings potential will enable us to bolster our capital further. We will meet the regulatory and market challenges coming up," it said.
LBBW said it would not comment on "possible consequences of tests, regulations, market conditions which are still unknown". "We think that LBBW is prepared to satisfy the higher future capital requirements," the bank added.
Helaba and Bayern LB were not immediately able to comment on the effect of the stress tests, and whether they could need state aid.
A senior official at the German finance ministry said Berlin had pushed for the tests to be rigorous, regardless of the potential consequences for its own banks. "It's necessary to bring the (European) banking sector back to health," he added.
This will force all banks to be more transparent.
The 2012 study on Landesbanken lending said that between 2001 and 2005 they loaned money to riskier German companies than other banks, and charged lower rates. Some of these loans are medium term facilities, still on the banks' books.
"They (Landesbanken) have lots of risky loans on their balance sheets, sometimes it can be very difficult to see," said Joerg Rocholl, the president of the European School of Management and Technology (ESMT) in Berlin and one of the authors of the 2012 study on Landesbanken lending.
Another area of concern is "if they are zombie banks, if they invest continually in bad companies," Rocholl added, a concern heightened by their public-spirited ownership.
Curth Flatow, a Berlin-based managing partner of real estate advisory firm FAP, said there were write-downs of between 15 and 50 percent in the German real estate loans market this year, mainly by international lenders and banks being wound down.
"I haven't seen a deal yet where Landesbank have made a huge write down," he added.
Not taking write-downs protects banks' short term earnings, but risks storing up losses for later.
While Germany has weathered the eurozone's economic headwinds well, 2013's first half results showed the five remaining Landesbanken had a combined 260 billion euros of international exposure at the end of last year.
Despite a pullback from international lending, data from Thomson Reuters' Deal Scan shows they have been lead arrangers for more than 30 international syndicated deals in the first half of 2013, spanning Israel, Korea and Bermuda.
A more fundamental Landesbanken concern is the viability of their business models. A former ratings agency analyst describes their old business model as "funding arbitrage" - borrow at cheap rates under the guarantee of AAA Germany, lend at slightly higher rates, and pocket the difference.
In post-guarantee world, that no longer works.
"There is a problem with the business model of Landesbanken in general, they often compete with private banks and it's not obvious what public service function they provide, why they should be publicly-owned banks," said Andres Fuentes, a senior economist with the OECD who is working on the 2014 Economic Survey of Germany.
His concerns are echoed by ratings agencies and analyst Montague, who said investors doubt Landesbanken's purpose in life. "They need to restructure," he added.
Announcing their results for the first half of 2013, the chief executives of HSH, Helaba, Nord LB, LBBW and Bayern LB all said their business models were sustainable and their efforts to cut costs and restructure were paying off, albeit against a difficult backdrop.
Several experts point to the differences between banks. The southern banks, LBBW, Bayern LB and Helaba are broadly seen as healthier than their northern rivals.
The biggest concern is HSH, a shipping lender being reviewed by the European Commission's state aid team over its request to increase a state asset guarantee from 7 billion euros back to its original 10 billion euros. [ID:nL5N0H6460] A public service role will not save it, or any other EU bank, from scrutiny.
"All business activities are judged on their own merits in terms of viability and profitability," a European Union official told Reuters, not speaking specifically about HSH.
"There is no room to accept, for example, subsidised interest rates or the like on the grounds that such rates might be beneficial for the regional businesses."
Sources in the Landesbanken sector insist the sector has not stood still as their crises unfolded.
When they hit problems, Landesbanken could have turned to a Joint Liability Scheme run by the Deutsche Sparkassen und Giroverband (DSGV), the umbrella group which includes the savings banks and Landesbanken and argues for consolidation.
But taking bailouts from the DSGV would have allowed it to change Landesbanken's management and merge institutions. Instead, the states footed the bill for the bailouts themselves.
"There has been some restructuring, balance sheets have been reduced, the number of institutions has been reduced, but we think it's not quite enough," said the OECD's Fuentes.
"We think there could be more consolidation to keep decreasing the risk of influence of individual states in the management of these banks."
DSGV president Georg Fahrenschon said told Reuters that was unlikely: "I do not see a trend of more changes at the moment."
Moodys' analyst Katharina Barten, Fitch's van Beek and ESMT's Rocholl all advocate consolidation, and Fuentes also argues for privatisation, with unprivatised Landesbanken taking the savings banks' business left by their privatised peers.
Privatisation has been attempted before. U.S. investor J.C. Flowers spent 1.25 billion euros on 26.6 percent of HSH in 2006, anticipating a stock market flotation. Instead, HSH was forced to seek a bailout, and J.C. Flowers' stake fell to 9.3 percent.
Merging HSH with another Landesbank would "make a lot of sense, but there are a lot of political issues and it is unlikely that they will do it," a source familiar with J.C. Flowers' position told Reuters.
Lower Saxony, the majority owner of NordLB, reiterated that it does not want a merger with HSH: "That's not an issue," Stephan Weil, the governor of Lower Saxony, told Reuters.
Auge, of Helaba's main savings bank owner, takes a similar perspective. "Maybe there's a need," he said. "But I think there is no chance for further consolidation in the Landesbanken."

(Additional reporting by Andreas Kroener, Alexander Huebner, Sakari Suoninen and Arno Schutze in Frankfurt, Jan Schwartz in Hamburg, Annika Breidthardt and Michelle Martin in Berlin and Sinead Cruise in London; editing by Philippa Fletcher)