CRASH 2: Contagion is a two-way street

Deutsche Bank’s huge exposure to Las Vegas debt shows that bad debt goes way beyond the PIIGS

With more than one eye on history, most of the major players in Crash 2 are busy making pronouncements and interventions which, they hope, will excuse all their idiocies later. This ranges all the way from Papandreou (“Nobody could say we didn’t try”) through to Osborne (“The eurozone spoilt my perfect plan for recovery“).

I’m fairly certain that Obama’s “you’re scaring the world” bollocks comes under the same heading, and I’m double-dog sure that this is a large part of Geithner’s game.

Tim Geithner is a bright bloke. If you look at his background and educational achievements, he may look like Eliot Ness after a blow-dry that went wrong, but in fact he is something of an intellectual. What he adds to this – which presumably explains why he’s done well – is a certain amount of street-wisdom. He has made two very dramatic entrances onto the stage set of EuroDisney, but both have contained ideas that were idiotic while sounding exciting. The ‘bazooka’, for example, was devoid of shells and someone to fire it. And on both occasions, he has ‘warned’ the eurozone to find the money, but not offered any. He’s a sort of anti-Marshall Plan, is Tim.

Going into 2012 with both a slump and an obscene debt on his hands, Barack Obama could very easily whip up an anti-Europe mood (he has form in this area) and blame 100% of his problems on the Greeks and the eurocrats. If you read the US financial press, what’s instantly noticeable is that nobody talks about the current crisis as a historical game-changer. It’s ‘an anaemic recovery’, or ‘a jobless recovery’ and other such twaddle. So the President would be on a very sound wicket.

The only things in the way of this ready-made interpretation are facts. Because at least one big eurozone bank is about to catch something nasty that started in the USA.

It emerged yesterday that Deutsche Bank’s exposure to “casino banking” in Las Vegas has reached $4.9bn – very close to its exposure to the eurozone Clubmeds. ($5.1bn)

The bank is one of the biggest creditors to the US gambling capital. It has a $3.9bn credit facility with the 3,000-room Cosmopolitan casino – a wholly owned subsidiary which Deutsche built when the developer defaulted on loans from the bank. It also holds $1bn of debt, and 25 per cent of the equity, in Station Casinos, which owns several casinos in the Las Vegas area

Unemployment in Vegas is the highest in the US, a result of the busted construction sector. It is, effectively, Spain in Arizona – and Deutsche is in there for a shedload of money.

Deutsche declined to comment on the extent of its credit exposure in Las Vegas, and if you look at the bank’s assets, one situation like this isn’t a major problem for them. My point is that the obsessive focus on southern Europe in recent months has taken too many eyes off the ball of bad investments beyond the region. For over a year now I have been banging on about RBS’s toxic exposure in eastern Europe: now at last some of this is coming to light, and the Bank of England is already gearing up for another bailout.

All the assumptions of the eurozone’s bankers are based on contagion from the PIIGs alone. But although the US is trying to draw a veil over this, contagion is a two-way street.