Angela
Merkel shorts Deutsche
Germans
aren’t great fans of bank rescues, but Deutsche occupies a unique
place in the economy.
By MATTHEW
KARNITSCHNIG 10/2/16, 11:32 PM CET Updated 10/3/16, 5:27 AM CET
BERLIN — Deutsche
Bank has spent much of the past two weeks blaming its spiraling share
price on foreign media “speculation” that it would have to pay a
$14 billion fine in connection with its role in the U.S. housing
crisis. In private, German bankers identify a culprit closer to home
— Angela Merkel.
Given the
opportunity to douse rumors that Berlin was not prepared to jump to
Deutsche’s rescue last week if need be, the German leader stayed
mum.
“There’s no
reason for such speculation,” Merkel’s spokesman said last Monday
in response to a report in the weekly Focus that the government was
prepared to let Deutsche fend for itself. Investors looking for a
full-throated defense of Germany’s most important financial group
got mealy-mouthed political speak instead. The bank’s shares went
into a nosedive, fanning fears the German financial behemoth could
become the next Lehman Brothers.
If that weren’t
bad enough, government officials denied a report on Wednesday that
they were preparing a rescue plan for Deutsche, pushing the shares to
fresh lows.
Berlin’s
ham-handed response to the crisis prompted speculation that Merkel
was refusing to help for fear of a political backlash. A bailout of
Deutsche Bank on the heels of her struggles with the refugee crisis
could sink Merkel’s hopes for another term, the prevailing wisdom
holds.
The reality is
somewhat more complicated.
For better or worse,
Deutsche Bank is the epitome of “too big to fail.”
If nothing else,
Merkel has proved after more than a decade in office that she doesn’t
put Germany’s strategic interests at risk for short-term political
gain. And when it comes to the smooth functioning of the German
economy, no institution in Germany is more strategic than the
country’s largest bank. For better or worse, Deutsche Bank is the
epitome of “too big to fail.”
To put its position
into context, consider that its total assets are roughly half the
size of the Germany economy. Put another way, to build a financial
institution of similar dimension in the U.S. would entail combining
the top five American banks.
Considering
Deutsche’s unique position in the German economy, it’s far from
clear there would be much of a political backlash were a bailout
necessary. Germans don’t like rescuing banks any more than citizens
of other countries. But when the stability of their financial system
is hanging in the balance, they’ve proved to be very tolerant.
If Germans were up
in arms over Merkel’s decision in 2008 to establish a fund worth
hundreds of billions of euros to support the country’s flagging
financial sector, for example, they didn’t show it at the ballot
box. Less than a year later, she won reelection by a wide margin.
Flouting the rules
The real reason for
Berlin’s reluctance to openly stand behind Deutsche in the face of
the pressures the bank faces is Europe. At a time when Germany is
encouraging other countries to take the state aid restrictions
enshrined in the European Union’s new bank rescue framework
seriously, it can’t afford to appear to flout those rules itself,
even in spirit. In trying to show there’s no double standard,
Merkel may have just made matters worse.
So far, officials in
Berlin continue to insist the issue is being blown out of proportion.
At a meeting of the executive committee of Merkel’s Christian
Democrats last week, Deutsche Bank was not even discussed, according
to a person who was there. Merkel also didn’t raise the banks
plight during a phone call with U.S. President Barack Obama last
week. It’s a subject for “connoisseurs,” said a senior
Bundestag aide. German officials say they are confident the U.S. fine
will be significantly reduced and that there’s no reason to even
begin thinking about a bailout.
The question is
whether the government’s confidence is misplaced. There has been no
shortage of detailed, sober analyses in recent days attesting to the
relative stability of Deutsche’s balance sheet. As Chief Executive
John Cryan pointed out, the bank is much less risky today than it has
been in years. It has both reduced its exposure to risky assets and
increased its capital cushion. Still, the bank is still considered
among the world’s riskiest. Investors know that a loss of trust
like that threatening Deutsche can quickly spin out of control. Yet
when the market looked to Merkel for reassurance, she wasn’t there.
Rumors have been
swirling about Deutsche Bank’s fragility for years. In the wake of
the financial crisis it avoided a bailout, mainly because investors
were confident that Berlin would stand behind it, come hell or high
water.
Merkel’s silence
this week suggested that’s now changed.
Germany’s biggest
companies are getting nervous. Companies like Siemens and
Mercedes-parent Daimler rely on Deutsche to provide them with
commercial banking services around the world. They regard the bank as
an essential cog in the engine driving Germany’s export-driven
economy.
“Strong
German banks are important for a strong Germany economy” —
Daimler Chief Executive Dieter Zetsche
“Strong German
banks are important for a strong Germany economy,” Daimler Chief
Executive Dieter Zetsche told Frankfurter Allgemeine’s Sunday
edition. “This relationship is close and it will remain so.”
He wasn’t alone.
That paper quoted more than half a dozen prominent corporate leaders
on its front page, each delivering testimonials for Deutsche.
“Germany’s
industry needs a Deutsche Bank to accompany it in the world,”
Jürgen Hambrecht, chairman of chemical giant BASF, said.
While the chancellor
would no doubt agree, it’s unclear if she shares the executives’
urgency.
If not, Monday’s
trading session looks likely to offer another reminder that Berlin’s
decision to stay on the sidelines remains risky.
Rumor of a pending
settlement between Deutsche and the U.S. Justice Department fueled a
rally in its shares on Friday. But a deal didn’t materialize over
the weekend, sparking predictions of a further sell-off when trade
resumes. German markets will be closed for a national holiday on
Monday, but New York where the bank shares are also traded will be
open.
“So long as a fine
of this order of magnitude is an even remote possibility, markets
worry,” UniCredit economist Erik Nielsen warned clients on Sunday.
Authors:
Matthew Karnitschnig
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