Last Thursday morning the International Monetary Fund and the American central bank, the Fed, simultaneously but in the face of it independently, issued warnings about the health of the largest German lender, the long ailing Deutsche Bank. A few days before that the US rating agency Moody’s had degraded the creditworthiness of the bank close to the trash region. The firm’s shares fell by 20% during the week after the UK Brexit vote and 45% since the beginning of the year.
The IMF went even further and said that the entire German banking system made up by around 1700 lenders, operating in the country and abroad, needs “improvements in corporate governance, internal audit and compliance functions as well as strengthening regulation of related party risk and major acquisitions”. This last IMF remark about ‘major acquisitions’, is a direct reference to the ongoing efforts of large German business groups, like Bayer, to acquire iconic US businesses like Monsanto.
Deutsche failed Fed’s stress tests
Apparently for such a huge acquisition project Bayer would need active technical and financial advice and support. Obviously such a demanding task will be undertaken by Bayer’s compatriot, the US subsidiary of Deutsch Bank. Exactly at that point the Fed comes in and leaves the American subsidiary of Deutsche out in the cold. According to Reuters the “U.S. units of Deutsche Bank DBKGN.DE and Santander (SAN.MC) suffered the ignominy of failing U.S. stress tests yet again this year…Both banks failed because of poor risk management and financial planning, not for lack of capital, the Fed said”. This is a real humiliation for the German giant, while the problems of the Spanish banking firm Santander are very well known and the group suffers for three years now in all its operations in Europe, South America and the US. There is more to this story though.
The truth is that the European banking system in general has not recovered from the 2008-2010 financial meltdown, while the American banks are now regarded as much healthier. This is because the US authorities, the government and the central bank, after the bankruptcy of Lehman Brothers in September 2008 rushed and injected into the banking system of the country $5 trillion. The money was handed out either as capital participation by the government or as zero cost financing from the Fed.
US banks better supported
With this unbelievable zero cost money bonanza, the American banks managed in a few years to adequately recapitalize. Of course, to accomplish that they did exactly what they had been doing before the crisis; ‘investing’ in every possible and impossible risky markets. Luckily enough until today those bets have turned out profitable and helped the New York money usurpers to recover.
In Europe the banking system didn’t receive the immediate support of the European Central Bank, because Germany didn’t ‘believe’ in the monetary therapy of the crisis and blocked it. Only last year the ECB introduced extraordinary monetary measures to restore the health of the European banking system. To be noted that all along the years before and after the financial crisis many European and US banks alike, with Deutsche being amongst the more active of them, kept expanding their exposure to the dangerous but lucrative derivatives and CDSs markets. Many went bust during the difficult times. There is information going around that Deutsche presently sits on a pile of derivatives and CDSs of anything between $40 and $72 trillions. Seemingly the Brexit vote is now casting a shadow over Deutsche’s exposure to similar risks and the Americans didn’t lose the opportunity to slam the German expansionism to their ‘own’ markets. There is more to it though.
Some weeks ago the rating agency Moody’s degraded the credit evaluation of Deutsche Bank, from Baa1 to Baa2 and also brushed down its long term creditworthiness for deposits, to A3 from A2. For a banking giant like this German lender, those ratings are not far from the trash region. The agency also commented that the adverse international investment environment and the macroeconomic precariousness are accentuated by the too low interest rate policy of ECB, affecting negatively the largest German banks.
Questioning all German banks
The IMF has inked more negative comments about the entire German banking constellation. It leaves to be understood that the German financial system, in which Deutsche Bank is the key chain-link, constitutes a risk for the entire world. It blatantly states “outside influences can affect developments in Germany, and what happens in the German financial system can have major repercussions around the world. This potentially global impact makes risk management, intense supervision of systemic institutions and the close monitoring of their cross-border exposures particularly important”.
In short the IMF tells the German and the other European watchdogs and auditors of the financial sector, that they should do more to better protect the world from a German crisis. In reality it tells them they aren’t doing enough, so Germany actually constitutes a danger for the world. Of course not a word about the New York banking ‘parties’ of the past or the present.
Deutsche Bank hand picked
The Fund also identifies potential sources for worldwide problems by stating that “Germany is also home to global systemically important institutions, including the insurer Allianz SE, the bank Deutsche Bank AG, as well as the clearing house Eurex Clearing AG, which provides services to almost 190 clearing members from a large number of countries. This creates an additional layer of international interconnectedness”.
The use of the term ‘interconnectedness’ is very crucial in this analysis, because it refers to the channels of crisis diffusion. In short the IMF informs the world that Germany, who boasts about its financial and fiscal orthodoxy, may in reality be a time bomb for the global financial system. If this is not a direct Washington assault against Berlin then words have lost their meaning.
But why the US should want to molest Germany? It doesn’t take much geopolitical thinking to understand, that the US feels obliged to contain the German expansionism in Europe and the world. Let’s see this issue from a different angle. Over the past few years Washington, helped by London and Paris, did what it takes to ostracize Moscow from Europe. The wars in Ukraine and Georgia, the missiles in Poland, the Czech Republic and Romania and the economic quarantine imposed on Russia, are enough proofs that the US wants Russia economically and politically locked out from Western Europe. The Americans by their direct political influence if not control on Poland and Ukraine have practically erected an Iron Wall separating Western and Central Europe from Russia.
It’s Germany however the country that has the most to lose from this separation. The Russian abundance of natural resources and the German capital and technology, if put together could soon threaten the American hegemony of the world. On top of that Germany is challenging the US even on American soil. The latest incident is the offer by Bayer to acquire Monsanto. All those developments oblige the Americans to focus on Germany and try to contain its economic and political supremacy in the EU. After Brexit there are more reasons for that.
Brexit makes it more imperative
Britain is going to need now all the American help it takes, to confront the German obstinacy regarding the future relation of the UK with the EU, if the UK remains united after all. To be noted that Brussels has already started to support the Scottish flare for independence. The US from its side wants Britain to remain as influential as ever in the European affairs, but to achieve that the German resistance needs to be overcome.
Washington has more to blame Berlin for. Everybody remembers the hard time the US Secretary of Finance Jack Lew had with his German counterpart Wolfgang Schäuble. Germany refuses obstinately to cooperate with the US in the way the West is collectively managing its financial affairs. Washington is fuming about that. Besides, the German opposition to forgive a part of the Greek debt has infuriated both the White House and the IMF.
US want Germany to spend
Understandably the US wants Germany to spend a good part of its large reserves, not to acquire prime American assets like Monsanto, but to finance the revival of the Western economic volume, by supporting consumption and infrastructure investments in Europe, and why not buying American defense systems.
Probably there is a lot more to it, but it has not been made as obvious as the facts counted here above. In any case the truth is that Washington is not stepping in the vacuum. There is a lot of ground to castigate Germany about and the Americans are meticulously taking one step after the other. Deutsche Bank and Volkswagen are certainly the most famous cases.