Wolfgang Schäuble, Germany’s Finance minister, is once again on the frontline in criticizing the European Central Bank (ECB)’s president, Mario Draghi, just as he is set to appear before the Bundestag, Wednesday, September 28 (yesterday), according to the newspaper Bild. “Schäuble has prompted the members of the Bundestag’s Finance Commission to put Draghi to test on the monetary policy,” Bild goes on. Everyone knows there is no love lost between Schäuble and Draghi, the former criticizing the latter’s ECB policy of negative rates, which puts a damper on both the savings of the German people and the banks’ margins.
As a matter of fact, what did the ECB achieve, finally? Draghi’s asset buyback program, started in March, 2015, 18 months ago, hasn’t met any of its objectives: that 2% annual inflation is still not materialising, economic recovery is still a wish, and demand for credit by companies is picking up a little, but it remains weak. On that last point, one must note that, according to La Tribune, “business loans in the Euro zone have totalled 4,300 billion € in July, 2016, which is 440 billion € less than in August, 2010, and 620 billion € less than the February, 2009, record level. Since March, 2015, these loans have only progressed by 30 billion €. This situation shows the lack of investment in the Euro zone since 2010.”
But Germany is also confronted with another problem: because of Deutsche Bank, it cannot put too much pressure on the ECB. Demanding an end to monetary laxity is one thing, but condoning a rate hike that could bankrupt Germany’s largest bank is another. This is because Deutsche Bank is a giant with feet of clay, due to its high exposure to derivatives.
The German bank already has the lowest capital ratio of all the large international banks, at 2.68%, or 1/37 (37 € of liabilities for only 1 € in cash!), and it owns a gigantic derivatives portfolio (off-balance sheet, which drives the ratio even lower) totalling 64 trillion $, or 16 times Germany’s GDP... Those derivatives are essentially based on interest rates and they would lose much value if interest rates were to rise significantly. This would be sufficient to put the institution in bankruptcy, which would be felt like a cataclysm by the German economy and, in turn, the European economy. It would be a sort of European Lehman Bros moment.
And to that we have to add a record fine of 14 billion $ being claimed by the United States authorities for the bank’s role in the subprime loans scandal. The bank’s future is at stake here, and the country’s foremost economic newspaper, Handelsblatt, expresses it thus: “German financial officials reacted with shock and dismay to the leaking of a U.S. government demand for a $14 billion fine against Deutsche Bank, which may ultimately need a state bailout to pay the bill.” If Berlin had to bailout the country’s main bank, just like the South European countries (Greece, Cyprus, Italy, Spain, Portugal), looked down upon, had to... now this would be awkward!
On Monday, September 26, Angela Merkel and the bank’s executives denied the need for a bailout, but the bank’s stock price fell to its lowest since... 1983. This is a position that will be hard to hold for a long time. In any case, this goes to show that the financial and banking crisis can hit Germany as well – it could even become the epicentre of the crisis, given the size of Deutsche Bank.
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Philippe Herlin Finance Researcher / Member of the Goldbroker Editorial Team
Philippe Herlin is a researcher in finance and a doctor in economics of the Conservatoire National des Arts et Métiers in Paris. A proponent of extreme-risk thinkers like Benoît Mandelbrot and Nassim Taleb, and of the Austrian School of Economics, he will be bringing his own views on the actual crisis, the Eurozone, the public debts and the banking system. Having written a book on gold that has become a reference (L’or, un placement d’avenir, Eyrolles 2012), he wishes to see gold play a growing role in our economies, all the way to its full re-monetization.