European Stability
Pfäffikon SZ, Switzerland – When we look at the price development of several European banks, a comparison with 2008 is obvious. U.S. Citigroup was then getting picked, and now Deutsche Bank seems to take on this role in Europe. Once, “Deutsche” was the pride of the German banking system; everyone wanted to work there; those days are now far behind us.
Market value
Deutsche Bank has lost about 90% of its market value since June 2007. Shareholders apparently see no more benefit in the bank which is overloaded with a too large and complicated derivatives portfolio. The comparison with the scenario of Citigroup is therefore easily made. Investors slowly lost confidence in Citigroup, under which the bank more or less unexpectedly fell into a death spiral within five days. Eventually, U.S. taxpayers had to step in to save Citigroup from destruction.
Stress test
In June this year, the Fed announced that Deutsche Bank had failed her stress test. Unresolved regulatory issues would play tricks on Deutsche Bank. The fact is that Deutsche Bank (including Credit Suisse) has been removed from the leading Stoxx Europe 50 Index. Again, the comparison with Citigroup goes on, because, in mid-June 2009, the bank has knocked out of the Dow Jones Industrial.
Stability
The IMF recently published a report on financial stability in Germany. The report deals with an acute crisis situation where German institutes were involved. The conclusion can be drawn easily; the problems would affect not only Germany but also France, the UK and even would be felt in the U.S. An interesting detail is that in particular, Deutsche Bank would make the greatest contribution to the financial chaos in such a scenario.
The key question remains whether the EU will be ready to save Deutsche Bank when it goes wrong. I think that the EU will be put on the spot, and Deutsche Bank knows this. At the end of the day, the EU will have to intervene anyhow to prevent a systemic financial crisis for its citizens. The economic chaos will be so extensive that it will surpass almost any imagination. Therefore, it is noteworthy that investors apparently are not worrying about such a scenario at this moment.
Alarm bells
For some time, several alarm bells are ringing concerning the European banking system. In that sense, nothing has changed compared to 2008. In several cases, the problem increased rather than it has been solved. Also, Deutsche Bank may find itself in a Citigroup scenario within five days; we should not be under any illusion. No one can say afterward that there were no warning signs present. That still some financial disasters lie ahead for the EU is not a matter of dispute.
It remains for me to wish you a good weekend.
Jan Dwarshuis is a senior asset manager at Thirteen Asset Management AG, where he is responsible for the Thirteen Diversified Fund. Dwarshuis writes his columns in a personal capacity and is not paid for them. Nor is he paying for his columns to be placed. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has no position in the above mentioned shares and has no intention of doing so in the next 72 hours.
