Recession
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Deutsche Bank Could Be The “Lehman Moment” Of 2016
Deutsche Bank Could Be The “Lehman Moment” Of 2016
There is a ticking time bomb in the heart of Europe. Deutsche Bank, the largest bank in Europe, needs to be recapitalized. But neither the German government nor the European Central Bank (ECB) wants to fund it. This is leading to an unsafe and unstable situation. It could even trigger another global financial crisis.
The US Department of Justice (DoJ) recently levied a fine on Deutsche Bank (DB) in the amount of $14 billion. But the bank does not have the money to pay the fine.
There are three options:
- The bank could issue equity. This is a bail-in.
- The government could bail out the bank by giving money to it.
- A third party could buy into the bank as an investor. This is also a bailout but a “friendly” one.
With option #1, the highly leveraged, low-profit firm would be issuing equity as the stock price is close to record lows. This bail-in would convert equity and subordinated debt to new equity. If that happens, the fragility of the entire European banking system will be obvious.
Global financial markets are hoping for option #3—an investor-friendly solution to the problem. They want a white knight in the form of a bailout from a deep-pockets third party like China.
The truth is that any solution to the DB issue outside of this “friendly bailout” will be perceived as systemic weakness. And that carries the risk of contagion to the rest of the European banking system.
If a white knight does not ride to the rescue soon, Germany and the ECB may have to step in with a bailout. This option #2, however, is only slightly less pleasant than option #1, a bail-in. It would set a precedent and lead to demand for a huge round of bailouts for troubled banks throughout the euro area.
