Anyone who pays any attention to politics or the financial news is aware of the tectonic effect of the UK referendum known now as Brexit. This vote to leave the EU roiled the markets and the full impact is yet to come. Deutsche Bank is making headlines in the news lately, as a continued reminder of Europe’s contentious economic situation.
The Elephant in the Global Markets
The results of Brexit have been so severe in part because so many analysts and political leaders were caught off guard. Likewise, the collapse of Lehman Brothers greatly magnified the damage caused by the Great Recession of 2008 because it was thought impossible.
Many analysts and market experts are now seeing the potential for another such unpleasant surprise, the possible collapse of Germany’s Deutsche Bank. While this long-revered bank refused to take any bailout funds during that economic meltdown, it is now somewhat ironically the potential catalyst of even more economic disaster. (It is worth noting that the bank did, since the Lehman failure, receive more than twice as much in bailout funds from the U.S. 1)
With its stock price down more than 90 percent in the past two years, the bank is another respected financial institution thought “too big to fail.” However, this icon of German financial strength is now staring into the abyss of a seemingly insurmountable financial quagmire. With Germany’s central bank and Chancellor Merkel stating there is no chance for a bailout, the growing probability of a collapse is already affecting markets worldwide. 2
The effect of this statement was felt in many financial markets, and “billions were wiped off stock markets around the world…amid mounting fears over the future of Germany’s biggest bank.” 3
The Effect of the Inevitable?
While there have been warning signs for years, the current news is now forcing more attention on the potential damage from the bank’s demise. At the same time, the looming problems with Italian banks are compounding concerns.
These two country’s central banks are facing a situation where they can’t demand an EU solution that doesn’t deal with both situations. At the same time, most analysts feel there is no flexibility to bail out either situation, much less both.
While there is unanimity on the negatives of any failure of Deutsche Bank, there are conflicting views on the ultimate damage that will occur. The use of the word “contagion” has now cropped up, causing many to think any near or actual collapse will ripple through the global economy and numerous institutions. 4
There are those who try to point out that the comparisons with Lehman are misguided, primarily due to the nature of the former Wall Street giant’s problems. At the same time, many think the consequences will be much worse.
Is this the event that many long-term investors have anticipated? If it triggers a global crisis with central banks addicted to fiat currency, it could have significant ramifications, both political and economic. Even if there is a way out of this potential disaster, as a few think, it is just one more of those canaries in the coalmine—warning of worse to come.
2 – http://www.reuters.com/article/us-germany-deutsche-bank-idUSKCN1213D5
3 – http://www.dailymail.co.uk/news/article-3808905/Billions-wiped-FTSE-100-Merkel-rules-rescue-Deutsche-Bank.html
4 – http://www.nytimes.com/2016/10/07/business/deutsche-bank-as-next-lehman-brothers-far-fetched-but-not-unthinkable.html?_r=0