Deutsche unter alles

12 February, 2016

German Finance Minister Wolfgang Schaeuble said he’s not worried about Deutsche Bank AG after the shares and bonds of Germany’s biggest lender took a battering over investor concern about capital and funding levels.


That was the opening to Bloomberg’s main item on the main story of the day — on Tuesday of this week. Almost needless to say, the sight and sound of a national finance minister making a statement to the effect that the largest bank in his country is safe and sound served to confirm to even the most naïve observer that there was indeed a great deal to worry about. Schauble’s effort followed another “reassuring” statement, this one from Deutsche’s CEO, John Cryan who “told employees in a memo that the bank is “rock solid,” has a “strong” capital and risk position”, in Bloomberg’s words. And that was after Cryan had eliminated Deutsche’s dividend for both this year and next. And that was after Deutsche announced a loss of 6.8bn euro for 2015, because of hefty provisions…


But this column and this crisis is not just about Deutsche bank. True, as the blogosphere was quick to point out, if Deutsche was to collapse, it would take the euro with it — and a great deal else besides. But one bank, even Europe’s largest, can be fixed. The problem is that Deutsche us merely the tip of a very large iceberg that is rapidly melting. The iceberg is European banking — which, by extension, means the global banking system, while the melting process is being driven by the monetary policy of the European Central Banks and its peers across the world.


Deutsche itself, just before it was hit by a full-scale market panic that sent the price of its credit default swaps (CDS) — an instrument that measures the degree of risk of a specific institution or company — to levels not seen since the height of the European sovereign debt crisis in 2012, issued one of the most extraordinary analyses ever to come from a major bank. In it, Deutsche warned that the policy of driving down interest rates toward “the zero bound” and beyond into NIRP (negative interest rate policy) was not only a failure, but was inflicting enormous damage to the financial system (including, of course, Deutsche Bank itself).


In other words, after many months of gradually swelling discomfort expressed by a growing list of the world’s biggest financial institutions over the move by one after another of the major central banks towards and into NIRP, Deutsche let out an unmistakable scream of pain. The financial markets, which had become steadily more uneasy about the failure of the greatest monetary policy experiment in human history, heard that cry and reacted accordingly.


By Tuesday of this week, Deutsche’s shares had lost over half their value compared to last summer. On Wednesday, when the bank issued another statement highlighting its ability to meet its upcoming bond payments without difficulty, a relief rally briefly took the shares up by as much as 15%. On Thursday, they plunged again — in line with almost the entire financial system.


Just as a point of reference, and to illustrate the scale of the carnage in recent days and weeks, I will note that at this time of writing (Thursday noon EST), the main German stock market index, the DAX, is down 18% year-to-date — on the 29th business day of 2016. That’s in line with the overall European indices, but more than France (c-15%) and Britain (11%) — although much less than Italy’s fearful 30%. Across the pond, the Nasdaq and the Russell 2000 have both lost almost as much as the DAX, while the Dow Industrials and the S&P500 are down 10-11%. In Asia the picture is similar, although the Chinese, already down in excess of 20%, have sensibly taken the entire week off to celebrate the arrival of the Year of the Monkey.


In all these cases, it is the banks and the financial sector generally that are leading the wider indices down, so that bank shares have plunged by much greater percentages than those cited above. Prices of bonds issued by banks have tumbled and their yields have soared, while CDS of banks have doubled, tripled and more. In short, in case the point isn’t clear, there is a major global financial crisis underway which, although it hasn’t yet morphed into a general panic, is causing havoc and inflicting huge losses, to which the public will eventually wake up — far too late, as usual.


It is not yet pointless to repeat ideas raised in this column over the last year and more, long before this crash began. It is not yet too late to move assets out of banks and into somewhat safer havens — very short-term government bonds, for example,  although they pay negative yields. Now it’s clear WHY they pay negative yields — that’s a risk premium that more and more people are willing to pay for the relative safety.


And finally, cash is not a dirty word. Cash is good. It doesn’t lose value on the markets. You don’t pay someone else interest on it. True, you have to keep it safe — but at least people understand that and don’t delude themselves that, as with securities, someone else will do that for them.

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