Germany's banks are a timebomb. And if they crash, it'll be 2008 all over again, writes ALEX BRUMMER
By ALEX BRUMMER CITY EDITOR FOR THE DAILY MAIL
PUBLISHED: 00:37 GMT, 28 September 2016 The crash in the value of the shares and bonds of Germany’s largest lender, Deutsche Bank, is the biggest threat to economic stability and the future of Europe’s monetary union since the financial crisis of eight years ago.
Unless Angela Merkel’s Berlin government gets to grips with the parlous condition of its banking system, the Eurozone risks a convulsion every bit as far-reaching as the one that started with the collapse of the American investment bank Lehman Brothers, bringing lending to a shuddering halt and leading to what has become known as the ‘Great Recession’.
The most remarkable aspect of this looming banking catastrophe is that it is taking place in Germany — the European Union’s supposedly invulnerable powerhouse economy.
Yet there is a straightforward explanation for this.
The fact is that, unlike Britain and America, Angela Merkel’s government failed properly to address the cracks in its financial system — particularly in respect of overexposed banks with too many bad debts on their books — that first surfaced during the credit crunch of 2007-08.
And, even though Germany’s public finances are in better shape than most of its European partners, growth in the country — as in the rest of the Eurozone — has been woefully slow since Greece went into meltdown in 2010.
As the Nobel Prize winning economist Professor Joseph Stiglitz told me earlier this month: ‘If you look at the growth numbers, you would say that Germany is not a good, well-performing economy.’
On top of its huge underlying difficulties, the U.S. Department of Justice has just imposed a whopping great fine of £10.8 billion on Deutsche, on account of its role in disguising rotten loans in the form of highly complicated debt packages or ‘derivatives’ which it sold on to financial institutions around the world.
These derivatives were in fact valueless, because they were based on loans in so-called sub-prime mortgages in America that would never be paid back.
The trouble is that the bank — which has a British boss in straight-talking Yorkshireman John Cryan — almost certainly won’t be able to pay the fine.
Because of its bad debts and the poor economic performance of the Eurozone, Deutsche generates very little profit and ran up £5.9 billion losses last year.
Yes, it set aside a reserve of £5 billion to pay the expected fine.
But it has no means of finding the rest of the cash it needs without asking shareholders for new funds, which it says is unnecessary, or receiving a bailout from Chancellor Angela Merkel or the Frankfurt-based European Central Bank.
Little wonder its shares have fallen 50 per cent in the past year, hitting record lows this week.
And while Britain, being outside the Eurozone, will escape much of the fall-out from Deutsche’s catastrophic failures, there will certainly be some repercussions — not least because Deutsche Bank employs 11,900 people in the City of London, making it one of the most significant foreign banks in the Square Mile.
And it is not just Deutsche Bank which is in trouble.
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In the latest manifestation of Germany’s banking problems, Commerzbank, the nation’s second largest, has just announced that it is to cut 9,000 jobs
and axe the dividends it pays to shareholders in a desperate effort to cut costs and build up its capital reserves.
Elsewhere in Germany, the so-called Landesbanken or regional banks are reportedly burdened with bad loans and desperately need a major overhaul.
All of which is potentially worrying. But Germany is loath to bail out and thereby stabilise its banking system — as Britain did.
And this is for deeply held historical and political reasons, as I shall explain.
First of all, the bitter experience of the hyper-inflation in the Weimar Republic after World War I — remember all those wheelbarrows of useless cash — means that there is huge revulsion against bailouts in the German political system, which regards the printing of money and inflation as cardinal sins.
Secondly, the strict enforcement in Brussels of rules banning state subsidies to private enterprise makes it extraordinarily hard for Merkel and her hardline finance minister, Wolfgang Schäuble, to pump emergency capital or loans into the banks.
But there is a third, and far bigger, reason why Berlin is prepared to risk pushing its economy over a precipice before it opts to bail out its banks — even though the country is rich enough to do so.
As a member of the Eurozone, Germany would have to seek permission from the European Central Bank in Frankfurt — which governs Europe’s banks — to bail out Deutsche Bank.
But for the past six years, Berlin has fought tooth and nail against the ECB writing off debt and bailing out banks in Greece and the weaker economies of Southern Europe.
So rigid has been the monetary orthodoxy in Berlin and Frankfurt that when banks in Cyprus were overwhelmed in 2012-13 as a result of the austerity in Greece, an EU bailout was not ven considered.
Instead, wealthy depositors in the Cypriot banks saw up to 10 per cent of their money seized and used to rebuild the capital of the banks.
Merkel is terrified that if Germany’s banks were bailed out, then other countries — such as Italy — would demand similar bailouts.
For it is Italy’s banking system — rotten to the core and with an astonishing level of €350 billion (£300 billion) of bad loans — that is the elephant in the room.
The Italian PM, Matteo Renzi, is desperate to rescue his banking system and restore the supply of credit to consumers and businesses in an effort to jump-start a stagnating economy which faces surging youth unemployment.
But his efforts to put together a comprehensive bank rescue have largely been torpedoed by hardliners in Frankfurt, Berlin and Brussels who fear they will lose all control over bank regulation and credit control in the Eurozone if they go soft on Italy.
How exquisitely ironic that Germany, having insisted that Greece, Italy and others should not be bailed out, finds itself needing bailouts itself.
If Merkel did try to pump billions of euros into her banking system to shore it up, there would be a tidal wave of requests for rescues which could bring the whole edifice of the Eurozone tumbling down.
But then Germany’s banking predicament is surely proof that the one-size-fits-all Eurozone doesn’t work.
No, the EU is facing a financial catastrophe of enormous proportions just at a time when the world is already facing huge uncertainty from the economic slowdown in China.Here, in Britain, we should surely be thankful that, after the Brexit vote, we are preparing to jump clear of the clattering train as it heads for a ravine.
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