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What the Schuldschein?

What's to say Germany isn't guilty of foolhardy risk-taking too?

Risky business. Photo: Shutterstock

Risky business. Photo: Shutterstock

Nothing gets the conversation started at weddings and other social events as much as talking finance, aside from maths or physics.

Oddly enough, my wedding reception explanation of what a Schuldschein was not the crowd-pleaser I expected it to be. Let me try again here.

In my last article, I fumed about bitcoin and cryptocurrencies in general. I stopped short of calling any drop in value a bubble, as I do not think it is. Even if it is a bubble, it is unlikely to lead to a full scale recession, since the value of cryptocurrencies is (hopefully) not intrinsically linked to the cogs of the financial industry.

It might be reflective of some of the spoils and risk-seeking behaviour, but if it becomes worthless, most of the other industries can continue moving on - at least at the time of writing.

Movements in cryptocurrencies and their rollercoaster ride is fuelled by the demand of high returns, similar to the intense increase in property prices in Malta or the purchasing of Venezuelan bonds on behalf of savings of some elderly in Malta.

Both seemed to have a similar link – people are willing to invest without enough questioning of risk of what they are buying into.

Such a careless approach is not limited to non-traditional finance. We’ve seen movies based on the financial world – it’s usually someone in a fancy suit/dress in London or New York betting money willy-nilly in financial markets. This is a view mostly corroborated in continental Europe, that the Anglo-Saxon way of doing things causes major recessions.

However continental Europe is not immune to such risk-taking. There are significant non-performing loans in Italy, but maybe they were Anglo-Saxonised?

Most Greek debt was owned by German institutions in 2009-11 (reports state anywhere between €20 to €40 billion worth of debt) meant that bailing out Greece was mostly about bailing out German financial institutions (and many French ones too).

Schuldschein is a form of loan privately placed through German banks. It has been traditionally used to raise funds for mid-sized, family-owned German companies. Its main advantage is that it requires less paperwork (no need for a rating, cheap, and less publicity) than bonds for those who need the funds and a higher rate of return for those providing the finance.

These have become quite international from both ends: the seeking and providing of finance. For example, Carillion raised more than €100 million of funds in Schuldschein, with some of the funds being raised from Taiwan.

Similarly Steinhoff, a South African retailer, raised about three fourths of a billion - that's €750 million - a fourth of which placed with Chinese investors.

I intentionally chose two companies that are now in dire straits. Carillion, the second biggest construction company in the UK with significant government tenders (including many NHS), raised the funds via a Schuldschein during a time when they were in crisis. The doubt at this stage is whether Schuldschein is being abused by international corporations with something to hide and financed blindly by international components, just like CDOs in the early part of this century.

Money for nothing.

Dominic Cortis waits for Mondays to see whether he maybe has got something to say.

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