Holy Roman Empire - Chapter 451

Chapter 451: Chapter 24, Secret Passage to Chencang
 

The turbulence in the Austrian financial market was still within controllable limits. Everyone was clear that the Russian-Austrian Alliance had not yet shattered. Even if the Russians were defaulting on their debts, they would finally end up defaulting on their ally.

Now, as the Russian-Austrian negotiations had reached a deadlock, in some ways, this was considered good news. It was always better to have something to negotiate than nothing at all.

Before this, the Russians had already communicated with several countries to no avail. Many financial institutions had been duped to tears, and capitalists were forced to abandon ship.

Of these, the Paris and London financial markets were the most affected. Do not assume that just because you are enemies, there would be no loans. In the face of interest, capitalists do not care about cooperating with anyone.

The Russians secured loans by pledging the revenue from grain exports. Initially, no one was really worried about the Tsarist Government defaulting. As long as the Russians could sell their grain, they could collect money.

However, plans never keep pace with changes. With the loss of the Po Valley Granary, coupled with the civil war wreaking havoc on the Moscow area, the Russians no longer had much grain for export.

Hard labor requires hard labor, and the more you work, the more you have to eat, which in turn also increases the demand for grain.

From the outbreak of the Prusso-Russian war, the Russians stopped exporting agricultural products to England and France. They even imported grain from Austria for a time.

With the Russians out of the grain export market, their share was naturally taken over by others. The so-called revenue from grain export collateral had now become a joke.

Counting on the Russians to pay back the money by selling grain was less likely than the Russians having lost the market and needed help to open up new sales channels for a return to the market.

Otherwise, with no sales for their grain, how would they repay the debt?

Given the current situation, it would be impossible for the Russians to return to the international market within two or three years. Investors could not wait that long, so capitalists would have to play this game with the Russians.

By declaring bankruptcy directly, these losses were then shifted onto the general populace. Once these bonds hit rock bottom, they could also manipulate proxies to buy them back, waiting for a chance to pursue the Russian debt in the future.

Of course, the likelihood of successfully collecting debts was very slim. The individuals’ power compared to that of a country was a vast difference, and even consortiums were reluctant to confront a major power like the Russian Empire.

Without government intervention, these problems were difficult to solve. Just consider the terrible international relations between the two sides, and everyone knew it was hopeless.

Restricting Russian grain from entering seemed like a good plan. However, in the face of interests, capitalists had no scruples.

As long as the Russians were willing to lower the price, the grain capitalists within England and France would cooperate in bringing the grain in. Once on the market, who knows where this grain originally came from?

If it were not for the recent passing of the economic crisis, the current financial tumult in England and France could have been enough to detonate another economic crisis.

Telegraphs had brought people’s lives closer together, with the financial disturbances occurring in London and Paris quickly spreading to Vienna.

More extensive market fluctuations took place, and speculators could no longer hold their ground. They preferred to default rather than to honor the Russian bonds they held in advance.

If it had not been for security companies opening windows for default redemptions all around and Wealth Securities purchasing Russian bonds at low prices to calm the populace, Austria would have been abuzz as well.

Take Paris as an example, at least one hundred and eighty thousand people participated in protest marches against the Russian default.

Under normal circumstances, there were absolutely not this many people in Paris who had purchased Russian bonds, not even if family members were included.

What surprised Franz was that the same scene played out on the streets of New York. It seemed that Americans had also been tricked by the Russians.

It was proven once more, being allies with the Russians was risky. The US and Russia had not even had time to forge an alliance before the Americans were inadvertently ensnared.

The ones hit hardest weren’t securities companies, but the banks that undertook loans from the Tsarist Government. Russian bonds were among the hardest sovereign bonds to sell, and the sales volume had always been very touching.

Worldwide, managing to sell one or two billion Divine Shields was the limit. Even with pitfalls, it was hard to dupe everyone significantly.

Bank loans were different. The money loaned out might belong to the depositors, but it was also the bank’s own bad debt.

Indeed, the Tsarist Government had pledged a hodgepodge of tax revenues as collateral, and now the Russians had no intention of fulfilling their promises.

The Tsarist Government played the rascal, letting the creditors collect their taxes. No creditor was foolhardy enough to go to the Russian Empire to collect taxes on their own.

Let alone whether they could actually collect the taxes, even if they did manage to collect them, could they safely take it away?

Testing the impoverished Tsarist Government’s integrity was a suicidal act no one wanted to try.

In the face of high interests, banks could not resist the temptation. They always thought that since the Russians had joined the civilized world, they would adhere to the rules of the game.

They solely overlooked that once the Tsarist Government became desperately poor, they were capable of anything. Now they paid a terrible price for this assumption.

Securities companies could declare strategic bankruptcy, but banks couldn’t simply follow suit, right? The investment costs of both were not on the same scale, and the resulting social impact varied greatly.

In this era, securities companies didn’t have many customers; they generally started with the middle class and had yet to reach a point where financial products were aggressively sold in the streets.

Even if a securities company went bankrupt, it would affect at most a few hundred people. Having tens of thousands of customers meant that it was a large company.

Not everyone bought Russian bonds, and even if a company went bankrupt, the social threat caused was not significant.

Banks are different; they don’t hold depositors to such high standards. Their customer base is much larger, and declaring bankruptcy could easily lead to nefarious social impact, provoking government intervention.

Moreover, although this loss is not small, it didn’t reach a stage where it’s a matter of life and death. Establishing a bank is easy, but building credibility and attracting depositors is not—it should not be given up lightly.

Now is the last era of nobility, and the age belonging to capitalists has not fully arrived. Besides the United States, most countries are dominated by nobility.

Including England and France, where the nobility suppress the capitalists. Their advantage is not as pronounced as in Austria, Russia, Prussia, where the nobility completely control the government.

Faced with large non-performing loans, banks inevitably have to constrict credit for a while to fend off a potential bank run crisis.

For securities companies looking to raise funds, this is adding insult to injury.

Inside Wealthy Nation Bank, Philipote roared, “What? Two percent monthly interest, why don’t you just rob someone?”

They were not allies, not in the same boat. The banks Philipote held shares in were also caught in the Russian debt crisis and were too busy with self-preservation to have the capacity to save him.

Forced by circumstances, he came to Wealthy Nation Bank. The main reason was that Wealthy Nation Bank had never undertaken Russian loans, and it was also one of the four major banks in Austria, with strong capital.

The account manager Albert said unflinchingly, “I’m sorry, Mr. Philipote. This is a high-risk loan; we must add the cost of capital risk.”

At the words “high-risk loan,” Philipote came to a realization and hastily asked, “Does that also mean disbursement will be at ninety percent of the loan amount, with repayment of principal and interest each month, and even then a deduction of the first year’s principal and interest?”

The account manager Albert smiled and said, “Yes, Mr. Philipote. You seem quite knowledgeable about the banking industry. Have you visited other banks before?”

Although Philipote didn’t show it on his face, inside he was cursing already. He was, after all, a shareholder of a bank—how could he not know these deceptive practices?

It was just that when he first encountered these ploys, Philipote had been very pleased, since they were meant to trap others; but now that it had come to himself, the situation had changed.

Following a series of such ploys in practice, to be able to get sixty percent of the loan amount was a godsend.

If luck was bad, cutting it in half to only get fifty percent of the loan amount was also normal.

The actual funds in hand were reduced, yet the full amount of the debt and interest had to be repaid according to the agreement, not a penny less.

Without looking back, Philipote left through the main door. If he borrowed from this usurious lender, he might have to work off the debt for Wealthy Nation Bank in the future.

Rather than that, he would prefer to sell the bonds he held and liquidate them through Wealth Securities to weather the crisis.

Thinking this, Philipote felt even more dejected. It seemed that Wealth Securities was also a subsidiary of Wealthy Nation Bank—there was no avoiding it all.

As for going to other banks, that was but a dream. Philipote had already visited more than a dozen large banks, and their terms were all virtually the same.

When taking advantage of others’ misfortune, all banks showed the same face. It could not all be blamed on the banks; in the event of a potential bank run crisis, the risk coefficient for lending increased significantly, and naturally so did the interest.

As for the so-called few percentage points interest rate loans, they only existed in theory. In practice, aside from policy loans, such low-interest rates were hard for banks to accept.

With things having reached this point, the only option was to cut losses. Philipote’s funding gap wasn’t too large; as long as he sold the Russian debts he held, he could survive the current situation.

This way, although his losses were heavy, the risk was reduced. If he had relied on loans to weather the crisis, holding a large amount of bonds with uncertain value, should the Russian-Austrian negotiations fail, he would be bankrupt.

There were many others who made the same choice, basically all of those whose financial strength was not strong enough, compelled by a life or death crisis, had to cut losses.

In Belvedere Palace, staring at the ever-increasing Russian debts in his hands, Prime Minister Mirabelon was utterly distressed.

Yes, this was another of Franz’s schemes. Only it had developed somewhat unexpectedly into one of the four major banks of Austria.

In Prime Minister Mirabelon’s view, this was a high-risk investment; currently, the Vienna Government had no way to make the Russians fully honor the contract. Buying Russian debts now, the likelihood of short-term repayment was almost nil.

If it took ten or eight years, then they would’ve suffered a major loss. The time cost of capital also needed to be considered.

Franz consoled him, “Prime Minister, don’t worry. The Russians will redeem these bonds, just not through us.

We can buy them at a low price for now, and when we’ve hoarded enough, we’ll sell them back to the Russian Empire. Those Russian nobles won’t mind making a small fortune.

At worst, we sell them for half price, which is still double the profit. Once they hold these bonds, those nobles won’t mind using them to offset their taxes.”

This trick could only be used once, as soon as the Russians were prepared and legislated against using bonds to offset taxes, it would be impossible to sell them off.

Waiting for the Tsarist Government to redeem in the future, that time would be at least ten years away, and they could not guarantee full redemption. Franz didn’t know about others, but he certainly couldn’t wait that long.

Having heard Franz’s explanation, Prime Minister Mirabelon fell into a stupor; it completely surpassed his imagination.

Initially, he had thought that Franz had insider information and could use his connections to prioritize the Tsarist Government in redeeming this debt.

Little did he expect the method to be so brute force, directly exploiting the greed of the nobility to solve the problem.