Holy Roman Empire

Chapter 451: Secretly Crossing the Chencang Pass

The turmoil in the Austrian financial market was still within controllable limits. Everyone knew that the Austro-Russian alliance hadn’t completely shattered, so even if the Russians defaulted, they would ultimately still owe their ally.

The current deadlock in the Austro-Russian negotiations was, in a way, a positive sign. Having a dialogue was always better than having none.

Before this, the Russians had unsuccessfully tried to negotiate with several other countries. Many financial institutions had been burned badly, forcing capitalists to cut their losses and retreat.

The financial markets in Paris and London were hit the hardest. Contrary to what one might expect, loans were extended even to enemies. In the pursuit of profit, capitalists would work with anyone.

The Russians had secured loans by pledging their future grain export revenues. Initially, no one worried about the Russian government defaulting. As long as the Russians exported their grain, the creditors would get paid.

However, plans often fail to keep up with changes. With the loss of the fertile North German Plain and the devastation of the Moscow region due to the civil war, the Russians now have very little grain to export.

Large-scale farming is labor-intensive, and increased labor means more mouths to feed, leading to a higher domestic demand for grain.

Since the outbreak of the Russo-Prussian War, the Russians had stopped exporting agricultural products to Britain and France, and even briefly imported grain from Austria.

With the Russians out of the grain export market, other players naturally filled the gap. The supposed collateral of grain export revenues had become a joke.

Expecting the Russians to repay their debts by selling grain was now laughable. Instead, they had lost their market share, and any future attempt to re-enter the market would likely depend on getting help to regain their footing.

Otherwise, how would the Russians repay their debt if they couldn’t sell their grain?

Given the current situation, it would be 2-3 years before the Russians could return to the international market. Investors couldn’t afford to wait that long, and capitalists certainly wouldn’t play along with the Russians.

They would simply declare bankruptcy, shifting the losses onto the ordinary citizens. When these bonds hit rock bottom, they could use shell companies to buy them back, waiting for a future opportunity to claim the debt from the Russians.

Of course, the chances of actually collecting the debt were slim. The power of individuals, even wealthy financiers, paled in comparison to that of a nation. Even powerful financial groups hesitated to confront a giant like the Russian Empire.

Without government intervention, these issues were nearly impossible to resolve. Given the strained international relations, it was clear there was little hope.

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

If the Russians lowered their prices, grain merchants in Britain and France would eagerly smuggle the grain in. Once it hit the market, who would know where it actually came from?

Had the recent economic crisis not just passed, the financial turmoil erupting in Britain and France might have triggered another economic meltdown.

Telegraphs had shortened the distance between people, and the financial turmoil in London and Paris quickly reached Vienna.

A larger-scale market upheaval ensued, causing speculators to panic. They preferred to default rather than hold onto their Russian bonds any longer.

If the securities companies hadn’t opened up early repayment windows for defaults, and if Wells Fargo Securities hadn’t started buying Russian bonds at low prices to appease the public, Austria would be in chaos by now.

Take Paris as an example: at least 100,000 people participated in protests against the Russian default.

Normally, there wouldn’t be that many people in Paris who bought Russian bonds, even if you included their families.

To Franz’s surprise, the same scene was playing out on the streets of New York, indicating that Americans had also been cheated by the Russians.

This once again proved that being allies with the Russians was risky. The U.S. and Russia hadn’t even managed to form an actual alliance before Americans found themselves inadvertently caught in the fallout.

The hardest hit weren’t the securities companies but the banks that had lent to the Russian government. Russian bonds were always the hardest to sell among national bonds, and their sales figures were always dismal.

Globally, selling off 100,000,000 to 200,000,000 guilders worth of Russian bonds was the limit. Even if there were issues, it wouldn’t impact too many people.

Bank loans were a different story. Although the money lent out belonged to depositors, those bad debts became the banks’ own problem.

Yes, the Russian government did pledge a hodgepodge of tax revenues as collateral, but now the Russians had no intention of honoring that.

The Russian government played the rogue, telling creditors to collect the taxes themselves. No creditor was bold enough to venture into the Russian Empire to do that.

Not to mention whether they could collect the taxes, even if they did manage to collect them, could they safely take the money away?

No one wanted to test the desperate Russian government’s integrity by attempting such a dangerous task.

Banks couldn’t resist the temptation of high interest rates, always assuming that since the Russians had joined the civilized world, they would play by the rules.

They overlooked that a desperate Russian government was capable of anything, and now they were paying a steep price for that oversight.

While securities companies could slink away, banks couldn’t follow suit. Their investment costs were on entirely different scales, and the social impact of their actions was vastly different.

In this era, securities companies didn’t have many clients—mostly middle-class and up. They hadn’t reached the point of marketing financial products to everyone on the street.

Even if they went bankrupt, the impact would be limited to a few hundred or thousand people. A company with over ten thousand clients would already be considered a large firm.

Not everyone had bought Russian bonds, so even if the company went under, the social effects wouldn’t be too severe.

Banks, however, had a much broader customer base with less stringent standards for depositors. If a bank declared bankruptcy, it could cause significant social unrest and prompt government intervention.

Moreover, while the losses this time were significant, they weren’t fatal. Establishing a bank was easy, but building trust and attracting depositors was not, so they couldn’t afford to give up easily.

This was the nobles’ last era; the age of the capitalists had yet to fully arrive. Apart from the two Americas, most countries are still dominated by the aristocracy.

Even in Britain and France, the nobility suppresses the capitalists. However, their dominance is not as pronounced as in Austria, Russia, or Prussia, where the government is entirely controlled by the aristocracy.

Faced with substantial bad debts, banks inevitably need to tighten their credit for a while to handle potential bank runs.

This is undoubtedly a blow for securities companies trying to raise funds.

In the Wells Fargo Bank, Philippot roared, “What? Two percent monthly interest? Why don’t you just go rob a bank?”

TN: 富国银行 is the raw for this. I think this is one of Franz’s parody companies.

Not being aligned means not sharing the same fate. The bank in which Philippot holds shares is also mired in the Russian debt crisis and is now busy protecting itself, unable to rescue him.

Left with no choice, he went to Wells Fargo Bank. The main reason was that Wells Fargo Bank had not undertaken any Russian loans and was one of Austria’s four major banks with strong financial strength.

Account Manager Albert remained unfazed and said, “Sorry, Mr. Philippot. This is a high-risk loan, and we must account for the risk cost of the funds.”

The term “high-risk loan” snapped Philippot back to reality, and he hurriedly asked, “Does this mean the loan amount will be issued at ninety percent of the value, with monthly repayment of principal and interest, and even the deduction of the first year’s principal and interest?”

Account Manager Albert smiled and said, “Yes, Mr. Philippot. I didn’t expect you to be so familiar with banking practices. Have you visited other banks prior?”

Although Philippot didn’t show it on his face, he was cursing inwardly. After all, he was a shareholder of a bank himself—how could he not know these deceitful practices?

Back then, when he saw these practices, Philippot was quite pleased since they were used to trick others. But now that the tables had turned, the situation changed.

Following a series of such manipulative tactics, getting sixty percent of the loan amount was considered a blessing from God.

If luck was bad, getting just half of the loan amount was also a common outcome.

The actual funds received might be less, but the principal and interest on the debt still had to be repaid in full as agreed, not a penny less.

Philippot stormed out of the bank without looking back. If he borrowed such high-interest loans, he might end up working for Wells Fargo Bank in the future.

Rather than that, he’d be better off selling his bonds and cashing out from Wells Fargo Securities to weather this crisis.

Thinking of this, Philippot felt even more frustrated. It seemed Wells Fargo Securities was also a subsidiary of Wells Fargo Bank—there was no escaping it.

As for trying other banks, that was a pipe dream. Philippot had visited over a dozen large banks, and the terms they offered were all roughly the same.

When it comes to profiteering, banks all have the same face. You can’t entirely blame them, though; in a potential bank run situation, the risk of issuing loans increases significantly, so naturally, the interest rates go up too.

As for the so-called low-interest loans with a few percentages, they only exist in theory. In actual practice, except for policy loans, banks are very reluctant to offer such low interest rates.

At this point, Philippot had no choice but to take the loss. His funding gap wasn’t too large; he could get through this by selling his Russian bonds.

This way, his losses would be substantial, but the risk would be reduced. Relying on loans to get through the crisis while holding a large number of bonds with uncertain value meant that if the Russo-Austrian negotiations failed, he would go bankrupt.

Many others were making the same choice. Those with insufficient financial strength, facing a life-or-death crisis, had no choice but to take the loss.

At Sch?nbrunn Palace, seeing the ever-increasing pile of Russian bonds, Royal Steward Mirabelon was deeply troubled.

Yes, this was another one of Franz’s bad jokes. It had unexpectedly grown into one of Austria’s four major banks.

To Mirabelon, this was a high-risk investment. The Austrian government had no way to ensure that the Russians would fully honor their contracts. Buying up Russian bonds now meant there was almost no chance of short-term returns.

Waiting ten years or more would result in a huge loss. The time cost of funds also needed to be considered.

Franz reassured him, “Royal Steward, don’t worry. These bonds will be redeemed by the Russians, just not in our hands. We can buy them up cheaply now, and once we’ve accumulated enough, we’ll resell them back to the Russian Empire.

The Russian nobles won’t mind making a small profit. At worst, we sell them at half price, which is still double the profit. These nobles won’t mind using the bonds to offset their taxes.”

This trick could only be used once. If the Russians caught on and enacted legislation to prevent bonds from being used to offset taxes, the bonds would become unsellable.

Future redemption by the Russian government would take at least ten years, with no guarantee of full repayment. Franz didn’t know what others thought, but he certainly couldn’t wait that long.

Hearing Franz’s explanation, Royal Steward Mirabelon was stunned. This was completely beyond his imagination.

He had initially thought that Franz had insider information and could use his connections to get the Russian government to prioritize repaying this debt.

He hadn’t expected such a straightforward approach, directly exploiting the nobles’ greed to solve the problem.

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