“Detroit goes bust, but Europe foots the bill,” sums up the Italian daily Il Sole 24 Ore now that several big European banks have been left holding big chunks of bad debt after the US city of Detroit filed for bankruptcy on July 18.
The French financial daily Les Echos explains that several European banks, including Swiss bank UBS, the nationalised Franco-Belgian lender Dexia and the nationalised German bank Hypo Real Estate, hold unguaranteed debt from Detroit, even though Motor City in Michigan has long been deemed a municipality at risk.
[They] apparently underwrote the equivalent of $1bn (€758m) in ‘certificates of participation’, which are now liable to lose all their value. That underwriting promised to be lucrative […] since Detroit would have had to pay $627.2m in [total] interest over 20 years to the group of European banks led by UBS.
But how did the Old World banks get entangled in this meltdown? The fault lies in the “disease” of “shadow finance”, believes Il Sole. For the Italian business daily –
The dismantlement of shadow finance was supposed […] to be a strategy coordinated between at least two major traditional economic zones – the US and Europe – to keep systemic effects from being unpredictable and ambiguous. The exact opposite of what is now coming to pass, since these zones, as well as the individual [member] countries, tend to go it alone in matters of regulatory reform.