Deutsche Bank & the EU

[OFSO]

Deutsche Bank shares have tumbled as the crisis around the lender has grown

There are some words that make such an unlikely pairing that we find it hard to put them together. Italy and efficiency, for example. Or Bake Off and Channel 4. And ‘Germany’ and ‘banking crisis’ is another one. Our image of German banks, and the German economy, as completely rock solid is so strong that it takes a lot to persuade us they might be in trouble.

And yet it has become increasingly hard to ignore the slow-motion car crash that is Deutsche Bank, or to avoid the conclusion that something very nasty is developing at what was once seen as Europe’s strongest financial institution. Its shares have been in free-fall for a year, touching a new low of 10.7 euros on Monday, down from 27 euros a year ago. Over the weekend, the German Chancellor Angela Merkel waded into the mess, briefing that there could be no government bail-out of the bank.

But hold on. Surely that is an extra-ordinary decision? If the German government does not stand behind the bank, then inevitably all its counter-parties – the other banks and institutions it deals with – are going to start feeling very nervous about trading with it. As we know from 2008, once confidence starts to evaporate, a bank is in big, big trouble. In fact, if Deutsche does go down, it is looking increasingly likely that it will take Merkel with it – and quite possibly the euro as well.

Deutsche Bank has been wobbly for a year now. Back in July, it announced a slump in profits and revenues. Back in February, the Bank’s co-CEO John Cryan put out a statement re-assuring staff and investors that the institution was ‘rock solid’ amid an earlier slide in the share price. Anyone whose memory stretches back a whole eight years will know that is the kind of thing bank CEOs say about three minutes before the whole thing goes pop.

Ever since then, the news has gone from bad to worse. Deutsche has struggled to cuts costs and restore profitability, legal challenges have mounted, and then earlier this month the US Justice Department hit the bank with a $14 billion fine over sales of mortgage securities. In its pomp, Deutsche could have written out a cheque with a nonchalant shrug. Right now, no one is sure where it can get the money from.

The damage can be seen in its share price. Last October, the shares were at 27 euros. Back in 2007, they were over 100 euros, and even in the spring of 2009, when banks were crashing all across the world, they were still trading at close on 17 euros. For most of this year they have been sliding fast. On Monday, they crashed again, down another 6pc. Its bonds have slumped as well, while the cost of credit default swaps – essentially a way of hedging against a collapse – have jumped. It all has a very 2008 feel to it.

To make matters worse, the German government looks to have abandoned it to its grisly fate. An article in Focus magazine quoted senior officials as saying the German Chancellor Angela Merkel was adamant that bank would not be rescued. There could be no state assistance if the bank was unable to raise the capital it needs to stay afloat, and she was not planning to intervene to get the American fine reduced. If it was in trouble, it was on its own.

There is, of course, something to be said for a hard-line position. It is hard to be sure the massive bank bail-outs of 2008 were such a great idea. Perhaps we would be better off now if a few had been allowed to fail. That said, Merkel is surely playing with fire. In the markets, investors, along with other financial institutions, have rightly or wrongly come to assume that major banks are, as the saying has it, ‘too big to fail’. You didn’t really have to worry about how solid they were, because if the crunch came the state would always ride to the rescue.

In Germany, that appears not to be the case – certainly for Deutsche, and possibly for its next biggest player, Commerzbank, which is hardly looking much healthier. Would you want to trade a few billion with Deutsche right now, and would you feel sure you’d get paid next month? Nope, thought not. The risk is that confidence evaporates – and as we know, once that is gone a bank is not long for this world.

True, Merkel’s position is understandable. The politics of a Deutsche rescue are terrible. Germany, with is Chancellor taking the lead, has set itself up as the guardian of financial responsibility within the euro-zone. Two years ago, it casually let the Greek bank system go to the wall, allowing the cash machines to be closed down as a way of whipping the rebellious Syriza government back into line. This year, there has been an unfolding Italian crisis, as bad debts mount, and yet Germany has insisted on enforcing euro-zone rules that say depositors – that is, ordinary people – have to shoulder some of the losses when a bank is in trouble.



For Germany to then turn around and say, actually we are bailing out our own bank, while letting everyone else’s fail, looks, to put it mildly, just a little inconsistent. Heck, a few people might even start to wonder if there was one rule for Germany, and another one for the rest. In truth, it would become impossible to maintain a hard-line in Italy, and probably in Greece as well.

And yet, if Deutsche Bank went down, and the German Government didn’t step in with a rescue, that would be a huge blow to Europe’s largest economy – and the global financial system. No one really knows where the losses would end up, or what the knock-on impact would be. It would almost certainly land a fatal blow to the Italian banking system, and the French and Spanish banks would be next. Even worse, the euro-zone economy, with France and Italy already back at zero growth, and still struggling with the impact of Brexit, is hardly in any shape to withstand a shock of that magnitude.

A rock and a hard place are hardly adequate to describe the options Merkel may soon find herself facing. The politics of a rescue are terrible, but the economics of a collapse are even worse. By ruling out a rescue, she may well have solved the immediate political problem. Yet when the crisis gets worse, as it may do at any moment, it is impossible to believe she will stick to that line. A bailout of some sort will be cobbled together – even if the damage to Merkel’s already fraying reputation for competence will be catastrophic.

In fact, Merkel is playing a very dangerous game with Deutsche – and one that could easily go badly wrong. If her refusal to sanction a bail-out is responsible for a Deutsche collapse that could easily end her Chancellorship. But if she rescues it, the euro might start to unravel. It is hardly surprising that the markets are watching the relentless decline in its share price with mounting horror.

(Daily Telegraphy, yesterday).

[Boac]

Yes, as om15 said yesterday as well, things are looking pretty ropey for Chuks and his money and his friend Angela.

Their shares have gone from €99.60 in July 2007 to €10.22 in Frankfurt this morning. They also now face a $14bn fine in the US for mis-selling mortgage-backed bonds before the financial crisis of 2008.

The amazing thing is that this crisis has come about WITHOUT the problems Brexit will bring to the European economy. I do think that anyone holding uneccessary Euros should trade soon!

It will be very interesting to see if the same treatment Merkel gave to the Greek banks and their depositors will be applied here if liquidity becomes an issue, as it surely must on the current track. Will we see limits on daily withdrawals in Germany?

Now. let me see, is there a German word for this....?

[Capetonian]

I have always said that the EU and its pillars are inherently unstable and waiting to collapse.
I did not anticipate it happening so soon.

[Boac]

More worrying news:
"After recent declines, the bank's market capitalisation is approaching $16bn. (NB The size of the US fine). That's not the worst part. According to some estimates, Deutsche has $42trn of gross derivative exposure, three times more than the GDP of the European Union. If Deutsche's troubles extend into this derivatives book, the systematic damage could be unprecedented as it would leave the other leading European banks such as Barclays with a large hole in their balance sheets."

Shares up slightly on news of some possible 'deal' with the US DoJ over the fine.

[500N]

I think Merkel may have made a mistake ruling out a bail out.

Our banks here in Oz are strong but during the financial crisis a few years back, very early on the Gov't came out with a statement
of support, at least of consumer savings up to a set amount. It went down very well and calmed everyone's nerves. (we had had runs on
a couple of banks and fin institutions that led to collapses in the past).

[Boac]

I think it would have to be an EU Central Bank 'loan' a la Greece or there would, I think, be a major earthquake inside Greece and the other EU countries - a straight German 'bail-out' would be unacceptable.

How embarrassing? From uber-meister of EU finance to cap-in-hand?

[MoreAviation]

A collapse of either Deutsche or CommerzBank would hurt multiple counterparty British Banks as well and in truth any German bank collapse would be bad for Britain (pro or anti Brexit) as well.

I imagine behind the scenes the German government are in talks to prop up or help sell the ailing bank, if it comes to it, in much in the same way that Chemical bank bought the ailing Chase Manhattan for the proverbial one dollar back in the 90's at the behest of the Fed.

MA

[MoreAviation]

Of course, if Deutsche does down the contagion will be work its way around the globe and given that it has the greatest amount of derivatives in the world - $75 trillion ?? $46 trillion?? such a crash will make the 2008 crash look like a walk in the park for all the big economies.

The situation is serious. No denying that.

MA

[Boac]

Wow! I only got $45 Trillion.

Any advance?

[MoreAviation]

Wow! I only got $45 Trillion.

Any advance?

I knew you BA (ex BOAC) guys got a good pension but I didn't expect such an order of magnitude?

Keep watching that Deutsche share price. If we go under $8 per share then we should put on our tinfoil helmets, bend over and prepare to kiss our arses goodbye...

MA

[Boac]

Hey - don't confuse me with a real BOAC (or BA) pilot................

[MoreAviation]

Hey - don't confuse me with a real BOAC (or BA) pilot................

What! You are going to tell me you work(ed) for RyanAir?

In which case you probably owe them money...

MA

[Boac]

No, DanAir

[MoreAviation]

No, DanAir

Did you guys all sit in different canteens after the takeover?

The ex Dan-Air guys eating tea biscuits while the BA folks snacked on chocolate biccies?

MA

[Boac]

You pretty much have it. It was not a pleasant time (worse, of course, for those not taken on), and one of our delightful lady F/O's was actually spat on by a real Nigel in a passing crew bus. Nice bunch.

Hey ! I reckon Alison's 'off topic' red pencil will be twitching here

[MoreAviation]

You pretty much have it. It was not a pleasant time (worse, of course, for those not taken on), and one of our delightful lady F/O's was actually spat on by a real Nigel in a passing crew bus. Nice bunch.

Hey ! I reckon Alison's 'off topic' red pencil will be twitching here

Yeah it sounds pretty awful. A topic for another time or for a chat over a beer.

Back to Deutsche bad news!

MA

[MoreAviation]

More worrying news:
"After recent declines, the bank's market capitalisation is approaching $16bn. (NB The size of the US fine). That's not the worst part. According to some estimates, Deutsche has $42trn of gross derivative exposure, three times more than the GDP of the European Union. If Deutsche's troubles extend into this derivatives book, the systematic damage could be unprecedented as it would leave the other leading European banks such as Barclays with a large hole in their balance sheets."

Shares up slightly on news of some possible 'deal' with the US DoJ over the fine.

Numbers are up from the figures quoted here. (according to my investment advice)...

http://www.zerohedge.com/news/2013-04-2 ... t-jpmorgan

Fortune note the $75 trillion exposure but note that this number has come back down to the $46 trillion range...

Deutsche has the world’s largest so-called derivatives book—its portfolio of financial contracts based on the value of other assets—in the world. It peaked at over $75 trillion, about 20 times German GDP, but had shrunk to around $46 trillion by the end of last year. That’s around 12% of the total notional value of derivatives outstanding worldwide ($384 trillion), according to the Bank for International Settlements.

http://fortune.com/2016/09/27/deutsche-bank/

MA

[om15]

Bit more information on the serious situation developing in Germany, this could not be happening at a worse time for the EU, already shaken by the prospect of the massive contributions from the UK drawing to a close, their own stability is being demonstrated to be very shaky.

Commerzbank, the second-biggest bank in Germany, has suspended its dividend and revealed more than 9,000 job losses as it tries to shore up its business in the face of ultra-low interest rates and sagging client activity.
The bank said its decision to cut almost one in five of its employees worldwide and merge two of its largest businesses will result in a €700m write-off and a loss for this quarter.
The bank’s Mittelstand division, seen as the engine room of Germany’s mid-sized corporate economy, will be combined with its corporate branch, while investment activity will be scaled back.
Commerzbank also warned that “ongoing weakness in the shipping markets” would push up its loan loss provisions in the coming months.
In total, 9,600 jobs are set to be cut while the bank hopes to hire 2,300 people in new areas to make its business more digital.
Despite its difficulties, Commerzbank reassured investors that its capital ratio was on course to remain at around 12pc by the end of the year, up from 11.5pc at the end of June.

Commerzbank’s new chief executive Martin Zielke joined in May after his predecessor Martin Blessing left the bank, proclaiming the organisation had “overcome the major challenges of the financial crisis or will do so in the coming months”.
This latest round of job cuts comes on top of extensive restructuring in the wake of the financial crisis. The bank resumed dividend payments last year for the first time since 2007, and remains partly-owned by the German government.
This latest overhaul comes at a sensitive time for the German banking industry, with larger rival Deutsche Bank battling rumours that the government is readying a rescue plan in case it cannot afford a $14bn fine from the US regulators over mortgage mis-selling