by Secular Investor
The earnings season has started, and several major banks in the
Eurozone have already reported on how they performed in the fourth
quarter of 2015, and the entire financial year. Most results were quite
boring, but unfortunately Deutsche Bank once again had some bad news.
Just one week before it wanted to release its financial results, it
already issued a profit warning to the markets, and the company’s market
capitalization has lost in excess of 5B EUR since the profit warning,
on top of seeing an additional 18B EUR evaporate since last summer.
Deutsche Bank is now trading at less than 50% of the share price it was
trading at in July last year.
And no, the market isn’t wrong about this one. The shit is now really
hitting the fan at Deutsche Bank after having to confess another
multi-billion euro loss in 2015 on the back of some hefty litigation
charges (which are expected to persist in the future). And to add to all
the gloom and doom, even Deutsche Bank’s CEO said he didn’t really want to be there . Talk about being pessimistic!
Right after Germany’s largest bank (and one of the banks that are
deemed too big to fail in the Eurozone system) surprised the market with
these huge write-downs and high losses, the CDS spread (‘Credit
Default Swap’) started to increase quite sharply. Back in July of last
year, when Deutsche Bank’s share price reached quite a high level, the
cost to insure yourself reached a level of approximately 100, but as you
can see in the next image, the CDS spread started to increase sharply
since the beginning of this year. It reached a level of approximately 200
in just the past three weeks, indicating the market is becoming
increasingly nervous about Deutsche’s chances to weather the current
Let’s now take a step back and explain why the problems at Deutsche
Bank could have a huge negative impact on the world economy. Deutsche
has a huge exposure to the derivatives market, and it’s impossible, and
then we mean LITERALLY impossible for any government to bail out
Deutsche Bank should things go terribly wrong. Keep in mind the exposure
of Deutsche Bank to its derivatives portfolio is a stunning 55B EUR,
which is almost 20 times (yes, twenty times) the GDP of Germany and
roughly 5 times the GDP of the entire Eurozone! And to put things in
perspective, the TOTAL government debt of the US government is less than
1/3rd of Deutsche Bank’s exposure.
Indeed, oops. And the worst part of all of this, is the fact the
problems at Deutsche Bank are slowly penetrating the other major
financial institutions. Have a look at the CDS spread of Banco Santander
(from 109 in December to 170 now).
And Intesa Sanpaolo? From 82 in November to 147 right now.
Something is rumbling in Europe’s intestines, and Deutsche Bank is
leading the pack towards another huge financial crisis. The CDS spreads
of literally ALL major European banks have posted huge changes in the
past 3-4 weeks, and if you throw in the most recent messages from
Citibank, stating the world economy is trapped in a death spiral, you might want to think about protecting yourself against yet another financial meltdown.