in recent months, matters political and military have occupied centre stage — from never-ending slaughter in Syria to the Wagnerian presidential campaign of Donald Trump and the resurgence of racist-tinged nationalism and communal protectionism across Europe.
One has been almost tempted to forget that there is a simmering financial and economic crisis out there.
But last week, there was more than a whiff of sulphur about the place.
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This followed reports that the US Department of Justice was planning to impose a fine of €14bn (€12.44bn) on Germany’s leading financial institution, Deutsche Bank, over its activities in the US mortgage market at the height of the home loans bubble.
The news was grist to the mill to the various hedge funds which had shorted the bank’s shares.
The hedgies quickly cashed in their chips and banked their winnings following another precipitous drop in the bank’s share price.
The rumour mill was working overtime all week as speculation grew that the German government was preparing a bailout for implementation over the weekend.
Schadenfreude is a German expression designed to capture that satisfaction which one quietly feels when misfortune attaches itself to an object of resentment.
There was a lot of it about, in recent days, particularly in the City of London, and indeed among commentators across Europe.
The German political and financial establishment has set its face against any further state bailouts of financial institutions.
Chancellor Angela Merkel pressed her EU colleagues into accepting a new ‘bail in’ regime for struggling institutions.
Investors and depositors, many of them Russian, in banjaxed Cypriot banks were the first to be hit really hard.
The Irish Government has waited in vain for the new rules to be made retrospective.
During the summer, Berlin set its face against moves by the Italian government to prop up struggling banks with taxpayer money, adding in no small part to the woes of prime minister Matteo Renzi.
By Friday lunchtime, it looked like Frau Merkel was going to have to eat her previous words, while consuming a large dollop of humble pie in order to ensure that the country’s leading bank did not hit the buffers, dragging much of the global financial system along with it.
But later in the day, a sense of calm was restored when reports emerged that the US Department of Justice’s fine would fall far short of the originally speculated $14bn.
The fine may come in at around $5.4bn.
The bank’s share price immediately rallied on the news, although analysts caution that these reports have yet to be verified.
Ms Merkel must be mopping her brow.
Her generosity towards refugees and migrants has dealt a body blow to her personal standing and that of her Christian Democratic Union party.
National elections are due next year and any enforced taxpayer-funded bailout would mangle her credibility while boosting Germany’s far right and left wing parties.
It is no exaggeration to say that a bailout of the bank could be Ms Merkel’s version of ‘Black September’ in 1992 when sterling was forced out of the European exchange-rate mechanism, leaving the Tory Government’s reputation for financial competence in ruins.
Last week, the US department of Justice was engaging in shape throwing.
Officials are naturally seeking to strike a hard bargain.
A few are also boosting their own careers.
Many in Washington DC are still smarting over the ruling concerning Apple’s back taxes delivered recently by the EU Competition Commissioner Margrethe Vestager. Tit for tat, if you like.
But one suspects even higher officials were quickly on to the department to warn them off, as it looked the game could get out of hand.
The last thing president Barack Obama’s administration wants is a full-blown financial blowup ahead of the US presidential vote. No, thank you.
This crisis has passed, but Deutsche Bank’s problems are considerable. Its CEO, Englishman John Cryan, who was appointed last year, is a bank restructuring expert, but he faces an uphill climb.
In reality, Deutsche has been struggling for years. Back in 2011, Simon Johnson, the former IMF chief economist, warned that the bank was sick and was the source of potential contagion for the global financial system.
The problem is with its capital base: Its leverage ratio is exceptionally high.
The bank is over-stretched, a legacy of years of uncontrolled expansion which left it over dependent on overnight finance.
Management has attempted to address this issue by building up the deposit base. But Rome was not built in a day.
Many analysts insist that the bank does have the capital resources to see out difficult times.
Yet it also faces longer-term structural issues, not least a sluggish domestic economy while it rebuilds its position.
Mr Johnson has been particularly critical of its former CEO Josef Ackermann, who pursued ambitious profit targets.
The current boss Mr Cryan, meanwhile, has moved to reduce the bank’s investment banking business while selling off subsidiary assets, such as the Abbey Life business, to generate badly needed capital.
However, sceptics such as George Soros have spotted a weakness and over the past year Deutsche’s share price has halved. It is now back at levels last seen in the 1980s.
The Deutsche Bank is a story about pride before the fall, about a bank which outgrew an economy but could yet end up being rescued like a Prodigal Son.
This week’s events serve as a reminder of just how fragile Europe’s financial system remains.
The ECB’s current strategy of quantitative easing has attracted plenty of criticism.
Banks complain that low-to-negative interest rates are impeding their ability to make a profit.
However, just imagine where an institution like Deutsche Bank would be today without recourse to the easy money on offer from the ECB’s Mario Draghi.
reference: http://www.irishexaminer.com/
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