THE CAVEATS OF THE FINANCIAL CRISIS IN 2008

Vienna, Town Hall, opened 1883 (architect: Friedrich von Schmidt)

In the US the crisis broke first. It is important to look at the economic background and the warning signals. Between 1995 and 2005 sociologists identified the baby boomer generation peak earning years, a massive group of people, which drove excessive demand in the US. The internet bubble in 2000 broke exactly in the middle of their peak earning years. Furthermore internet trading enabled the access of many more people to the stock market by making trading cheaper and easier.

 

Structural changes in the world of the 1990s influenced the economy of the US, such as the collapse of the Soviet Union, the rise of China and south-east Asia, low oil prices – in 1999 a barrel cost $21-, the terror attacks of September 11, 2001 and the collapse of Enron. The US was already in recession. Uncertainty leads to panic and panic leads to reaction, not pro-action. Reactions tend to focus on today, not on the future. That was the situation when Alan Greenspan, the chairman of the FED in those years reacted with a specific monetary policy. It was based on three assumptions: First, markets are fragile, second, markets infer signs from Greenspan’s behaviour and third, he saw himself as the promoter of free markets. After September 11 US citizens did not go on holidays, did not fly, bought DIY stuff, renovated their homes and stayed at home; they reverted to “cocooning”. Greenspan’s drop of the FED Funds Rate after the burst of the internet bubble to 1% in 2004 should have stimulated the US economy.…

THE GREAT DEPRESSION 1929 vs. THE FINANCIAL CRISIS 2008

Österreichische Postsparkasse, architect Otto Wagner, finished 1906

 

In both cases the crisis originated in the USA. But for the Great Depression starting in 1929 in the US, there would probably have been no rise of Hitler, no Roosevelt and the Soviet System would not have been regarded as a serious economic rival and alternative to capitalism. The US which had so far been a safe haven in a world of break downs and revolutions was the epicentre of the largest global economic earthquake until then.

 

Operations of a capitalist economy are never smooth, fluctuations are an integral part of it. A trade cycle of boom and slump was already characteristic of the 19th century capitalist economies. In the 1920s the Russian economist Kondratiev, who later became a victim of Stalin, discerned a pattern of economic development since the end of the 18th century through a series of “long waves” of 50-60 years. He concluded that the wave of world economy was due for its downturn. The last severe downturn had been in the 1870s. Minor trade cycles had been accepted by economists, but the world economy was expected to go on growing and advancing except for sudden short-lived slumps. Only the socialists (Marx) believed that cycles could put the capitalist system at risk. The history of the world economy since the Industrial Revolution had been characterised by accelerating technological progress, continuous economic growth and increasing “globalisation”, namely an elaborate worldwide division of labour. Even between 1929 and 1933 world economic growth did not cease completely, but slowed down. Yet the globalisation of the economy stopped advancing in the inter-war years.…

THE VIENNA STOCK EXCHANGE

The Vienna Stock Exchange. Architect: Theophil Hansen, 1874-1877

The Vienna Stock Exchange was founded in 1771 by Empress Maria Theresia as one of the first stock exchanges in the world. Gradually the Vienna Stock Exchange developed into the central capital market of the Habsburg Empire. Originally only government bonds and currencies were traded and the building was open to the public. On some days up to 2,000 people were present. In 1818 The Austrian central bank was the first public limited company that was quoted on the Vienna Stock Exchange. Due to the industrialisation and economic boom in the Habsburg Empire in the course of the 19th century the stock exchange gradually gained international reputation. Consequently a host of companies issued shares there. Due to the empire’s liberal economic policies in the second half of the 19th century unfortunately several unstable businesses were financed via a share issue there, which led to a wave of speculation that culminated in the stock exchange crash of 9th May 1873. In the course of this stock exchange break down nearly half of the public limited companies quoted there disappeared. The recovery took a long time and in the meantime trade was mainly in government bonds. That was the return of the big banks as the main financiers of enterprises. These banks also dominated the capital market and stock exchange trading. Trade on the Vienna Stock Exchange started to pick up once more so that new regulation was needed to. In 1875 the third Stock Exchange Law was passed that guaranteed the complete independence of the Vienna Stock Exchange. Finally in 1877 the new building for the Vienna Stock Exchange was opened, designed by one of the famous architects of the “Ringstrasse”, Theophil Hansen. During this time of consolidation rich financiers dominated the trade in shares there and the bond market was the “playground” of the “privatiers”, the well-to-do upper middle class. During the First World War the Vienna Stock Exchange was closed. At the end of 1919 the trading floors were opened to the public again and immediately experienced a boom which ended in a crash in March 1924. In the following years the shocks of the Great Depression of 1929 greatly hampered trading there. The bankruptcy of banks and the plunge of share prices affected the trade on the Vienna Stock Exchange and the number of visitors declined drastically. Interestingly enough, the New York Stock Exchange crash in October 1929, in fact, had no direct consequences for Vienna.…

A COMPARISON OF THE TRANSFORMATION OF BANKING AND INDUSTRIAL DEVELOPMENT IN CEE IN THE 1890s & THE 1990s

Trieste, maritime trading centre of the Habsburg Empire

Close ties of banks with the industry of the Austro-Hungarian Empire can be identified, yet a leading role of banks in the industrialisation process cannot be seen. On the contrary, Austrian banks were for years averse to industrial promotion in the 19th century. The caution which pervaded the banking circles in Austria and the Czech Lands was evident in the general lack of risk capital, and in the preference for participating in or granting extended credit to only the booming enterprises. The caution and the lack of entrepreneurial spirit of the banks can be seen from the fact that in the periods of economic expansion the banks lagged behind with their investments. So industrial development was not triggered by investments of banks, but was preceded by private investment or an expansion of government programmes such as railroads. This was not only true for Austrian and Czech, but also for Hungarian banks. Yet despite the fact that economic development was not bank-led in the Austro-Hungarian Monarchy, the banks did fulfil the important role of providing financial intermediation services. The widespread development of banking services, such as credit on current account, open book advances, and discount of bills, were the main contribution of banks to industrial development. They were very efficient in mobilising capital.…

THE EXPANSION OF AUSTRIAN BANKS INTO CEE AFTER 1989

 

Branch office of the Austrian S-Bausparkasse (Erste Bank) in Romania

Since the collapse of communism, foreign banks bought up roughly 80 per cent of all the banking business in the new Central European member countries of the European Union. The most successful banks were those that bought early. The markets were still relatively small, but growth rates were high, and so were profit margins. To many foreign financial experts it was a surprise who got in first. Germany was the region’s biggest trading partner, but German banks were busy at home with the shocks and costs of the unification of Germany. Somehow they left Eastern Europe to their small neighbour, Austria. Raiffeisen, a co-operative banking group, which had already expanded into Hungary before the coming down of the Iron Curtain in 1987, was in seven more countries by 1998. Even a little earlier, the banks making up Creditanstalt and Bank Austria, which merged in 1997 (BA-CA), first entered the market. BA-CA was bought by HVB of Germany in 2000, which was in turn bought by UniCredit of Italy in 2005. In both acquisitions the BA-CA’s business divisions in Central and Eastern Europe were the big prey the predators were after. The third Austrian bank to join in the rush was Erste Bank with its purchase of Ceska Sporitelna, a Czech bank, in 2000.…

AUSTRIAN BANKS AFTER 1945

Vienna, “Golden Quarter”

At the end of the Second World War and after the liberation by the Allied forces the main Austrian banks were nationalised. The assets of Austrian credit institutions including large claims on the Third Reich, loans to the German armed forces and to various official and semi-official institutions had become worthless. The losses incurred had eliminated the equity of many credit institutions. So in 1946 the Austrian government nationalised the three largest banks, the Creditanstalt-Bankverein, Österreichische Länderbank und Österreichisches Credit-Institut AG. The Reconstruction Act of 1955 enabled the banks to draw up balance sheets for the entire period up to the end of the 1954 business year. The banks had been able to offset the losses incurred on account of war and post-war events thanks to their own earning power. The Reconstruction Act was nevertheless most important for formal accounting purposes. It gave the banks the formal basis under trade and company law to make the provisions necessary for the fulfilment of their economic and socio-political tasks. The Act further stipulated that the banks should make annual reconstruction contributions to other areas of the Austrian credit system. In 1956/57 the two largest Austrian banks, Creditanstalt-Bankverein and Länderbank, were partly re-privatised by authorising the Minister of Finance to sell shares up to 40 per cent of their share capital.…

THE ROLE OF AUSTRIAN BANKS IN NAZI GERMANY’S EXPANSION TO CENTRAL, EASTERN & SOUTH-EASTERN EUROPE

Palais Ephrussi, Viennese Jewish banking Family (exiled): Edmund de Waal, “The Hare With Amber Eyes” describes the destiny of this banking family

The German state-owned VIAG (Vereinigte Industrieunternehmungen) and the Deutsche Bank gained control of the majority of shares of the Creditanstalt-Bankverein CA from the time of the “Anschluß” of Austria to the Nazi German “Third Reich” in 1938 onwards, originally by taking over the shares of the Austrian state. From the very beginning the German majority shareholders viewed the bank as an important tool for German penetration into South-Eastern Europe, not only because of the geographical position of Vienna, but also because the Viennese banks, many of which had merged with the Credit-Anstalt in the interwar years, had been very active in this area before 1918 and still had much experience in the region. Contrary to the image the CA wanted to create after 1945, the leadership of the CA, and especially its most important director, Josef Joham, viewed the German takeover of Austria as an opportunity to recover the position the CA had held in South-Eastern Europe before and to turn Vienna into the financial hub of the Nazis’ activities in Central Europe and the Balkans. In fact, the CA often took the initiative in expanding its banking activities in the German satellites and occupied territories. It constantly made reference to its historical role in the region and viewed its acquisitions as restitution and/or compensation for its losses and exclusion by the successor states after the collapse of the Austro-Hungarian Empire. The German control of Austria and the CA provided a welcome opportunity to restore the position Viennese banks had enjoyed during the Austro-Hungarian Empire. The close co-operation between the CA and the Deutsche Bank, namely between the two directors Josef Joham and Hermann Josef Abs, had already started before the “Anschluß”. As Joham had supported the old regime in Austria, but anticipated the “Anschluß” of March 1938, he sought protection for himself and the bank through the alliance with Abt and the Deutsche Bank. Yet first the German VIAG took over the majority of shares from the Austrian state and Deutsche Bank got hold of only 25 per cent of the shares of the CA, but in 1942 the Deutsche Bank finally acquired the majority of shares in the CA.…

THE CONSEQUENCES OF THE CREDIT-ANSTALT CRISIS FOR CEE

Österreichische Postsparkasse, architect: Otto Wagner, built 1904-1906

The Great Depression hit Hungary hard, stopping the slow recovery and leading to a dramatic decline. The crisis hit Hungary first through the collapse of the international agricultural market with a 60-70 per cent decline in agrarian prices. But the most severe blow was dealt by the break-down of the Credit-Anstalt and was followed by the international financial and banking crisis. Hungary was heavily indebted, but new credits stopped arriving and substantial portions of the short-term credits were withdrawn from Hungary. The Hungarian National Bank lost most of its gold and foreign exchange reserves and the banking system reached the edge of the abyss in 1931. Between 1931 and 1933 70 banks collapsed. By 1938 the number of banks had been reduced by more than 300 that had been operating in 1929. The effect of the shrinking banking sector was the decrease in its share of industry. Strict government measures were introduced after the financial collapse and the repayment crisis in 1931, the gold Standard was abolished and foreign exchange controls were introduced. After the trade agreement with Nazi Germany in February 1934 barter trade became dominant and a clearing system was introduced to replace hard currency payments in foreign trade. State interventions, economic nationalism, high protection and the policy of self-sufficiency became stronger. Hungary was isolated from the world market and became integrated into the German Nazi economic system.…

THE GREAT DEPRESSION: CREDIT-ANSTALT CRISIS 1931

Former Österreichische Creditanstalt building, architects Gotthilf and Neumann (built 1916-1921)

The Credit-Anstalt crisis played a crucial role in the dramatic economic developments of the 1930s in Europe as the collapse of the Credit-Anstalt affected the largest bank of Austria and at that time also the largest bank east of Germany. The collapse of the Credit-Anstalt in Vienna started the spread of the crisis in Europe and forced most countries off the Gold Standard within a few months. A feeling of financial distrust and insecurity spread from Vienna and led to runs on other banks in Hungary, Czechoslovakia, Romania, Poland and Germany. The collapse in May 1931 set off a chain reaction that led from the run on German banks to withdrawals in London and the devaluation of the pound to large-scale withdrawals from New York and another series of bank failures in the United States. So in brief the news of the crisis of the Credit-Anstalt, the most important bank in Central Europe, shook the whole economic structure of Europe and sent shock waves through the rest of the world.…

INTERNATIONAL CAPITAL FLOW, BANKS AND INDUSTRIAL ENTERPRISES IN CEE IN THE INTERWAR YEARS

Former Länderbank (Vienna), founded 1880, architect Otto Wagner (built 1882-1884)

Central and South-Eastern Europe became one of the most important world markets for capital exports after the First World War. Foreign investors not only invested in the defeated countries, such as Germany, Austria, Hungary and Bulgaria, but also in Poland and Czechoslovakia. From 1919 till 1923 international capital from Britain, France, the USA, Belgium, the Netherlands, Italy and Switzerland acquired substantial shares in the main Viennese banks. The Länderbank and the Anglo-Austrian Bank were turned into totally foreign-owned banks, based in Paris and London. A similar development of Western European capital participation took place in all the joint-stock banks of the successor states of the Austro-Hungarian Empire with the exception of the Zivnobanka in Prague. This bank increased its investment in South-Eastern Europe, often together with Western European financial groups. As the governments of the successor states were in urgent need of foreign investment, they promoted the internationalisation of the banking systems there. So the governments paved the way for the access of international capital to industrial enterprises via the participation in the equity of the big commercial banks. This followed the traditional investment pattern of the region and through the internationalisation of the banks the whole area moved closer to international markets.…