The reverberations from Merkel’s Boner will be systemic in nature. The more I think about the ridiculousness of Chancellor Merkel’s ill-advised comment about not financially supporting Deutsche Bank, the greater my fear of a cataclysmic credit event. According to a recent Zero hedge piece, DB has many trillions of derivatives on its books. Yes, it is notional value but as we learned with Lehman notional value is irrelevant when counterparties to Deutsche’s SWAPS and other credit derivatives demand their collateral back. In today’s shadow banking environment, the rehypothecation of credit through securitized instruments compounds the problems of a default or bankruptcy.
THE SPARK OF THE DEFAULT REVERBERATIONS FROM CREDITANSTALT IGNITED THE GREAT DEPRESSION as loans were called and liquidation of global assets caused price deflation, which put further downward pressure on the global economy. THE GERMAN FINANCE MINISTRY WILL NOT ALLOW DEUTSCHE BANK TO DEFAULT. That is a certain. And Merkel will again have to do a “volta face,” but she has succeeded in bringing global financial issues to the forefront of German politics.
A lack of understanding of financial history was further revealed today when Mario Draghi appeared before the Bundestag’s European Affairs Committee. The head of the committee, Gunther Krichbaum, was very critical of the ECB‘s low interest rate policies. Draghi said he is “sensitive” to German savers concerns about negative interest rates, but Draghi, in stealing a page from the Bernanke/Yellen playbook, maintained that the European economic recovery was in everybody’s interest. The bottom line is that the Burghers of Bavaria are suffering a massive bout of financial repression under the authoritarian strictures of an unelected body. But Draghi caused great pain when he maintained that he “does not share the view Deutsche Bank poses systemic risk.”
This is a preposterous position for the President of the ECB to take. Mr. Draghi it is time to visit Basel and spend some time in the BIS archives studying the default of Creditanstalt. Again, Deutsche is a big deal because of its massive derivatives book. Watch the markets closely as the ripples from the debt problems will spread across the world’s oceans. The DB issue will also complicate the domestic political situation as Chancellor Merkel is already suffering from the ill-advised immigration policy. Plus, Merkel dragged the Greeks, Italians, Spanish, Irish and Portuguese through the pain of fiscal austerity as she pressed for no government bailouts of the debt-stressed nations. Merkel and Schaeuble have repeatedly pushed for depositors and bondholders to bear the brunt of undercapitalized banks.
Deutsche Bank’s potential $14 billion fine is a mere pittance compared to the losses incurred from a liquidation of securitized assets on DB’s books. How will the German electorate react to a bail out of a mega financial institution who has been a mainstay at the table of casino capitalism? As I discussed in Monday’s blog post, the German Chancellor has brought financial concerns to the forefront of the upcoming elections. What party will benefit from a massive Deutsche bank bailout? Remember, not long ago Social Democratic Party (SPD) Party Secretary Franz Muntefering referred to foreign investors “as a swarm of locusts.” The Deutsche Bank saga may be a non-event as many have opined but the reverberations of Creditanstalt are making me aware of the possibilities of a larger problem.
We are coming upon month- and quarter-end so positions are being squared and window dressed. Pay attention to GOLD, BONDS and currencies as the safe havens should indicate investor angst. GOLD IS UNCHANGED ON THE QUARTER HAVING CLOSED AT 1324.70 on June 30. Yesterday, Goldman put out a sell recommendation but if the fear of DB is real GOLD OUGHT TO BE BID AGAINST ALL CURRENCIES for with interest rates at zero or lower, what potential policies do the world’s central banks have to meet a systemic crisis such as a Deutsche Bank credit event? I have warned about the coming rise in volatility in the fourth quarter and DB was not even one of the main sparks in the list of global prairie fires. Draghi and Merkel have much to ponder as we head into election season, but guarantee, President Draghi, that Deutsche Bank is a systemic event.