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China Might Be Deutsche Bank’s Last Hope

Companies / Credit Crisis 2016 Oct 06, 2016 - 02:37 PM GMT

By: John_Mauldin

Companies By Olivier Garret: The pressure has been mounting on Deutsche Bank (DB), with the German government spurning the possibility of a bailout and the stock slumping. DB recently hit a record low.

The German titan has been trying to sell assets to raise money to pay the US Department of Justice its record US$14 billion fine. And there have been rumors that Berlin is applying pressure to get the huge fine reduced.

But financial analysts say any figure above $6 billion means DB will still have to raise money.

Something has to give soon as investors are worried. The European banking system is in no condition for major problems right now. Several major Italian banks remain on the edge. And Greece will need to have large amounts of debt forgiven. This means more large losses for European banks.

It looks like the stage is set for China to bail out the West yet again.

Nothing is set in stone, of course, but China would seem to be at the top of the short list of those with pockets deep enough to bail out the highly leveraged Deutsche Bank.

Germany Refuses to Bail Out Deutsche Bank

The Merkel government is not likely to bail out DB. Chancellor Merkel and finance minister Wolfgang Schäuble made a big deal about no state-sponsored bank bailouts when the eurozone crisis hit a few years ago.

The German government wanted new European rules that require creditors (such as bondholders and depositors) to put cash in before the government does. These rules passed and are now in force.

“State aid won’t happen,” Thomas Oppermann, floor leader of the ruling Social Democrats, said in a recent press conference. “It’s now, first of all, up to the bank to solve the problems.”

Various sources have claimed there is a plan to recap Deutsche Bank, but so far, nothing has come of it.

Die Zeit just reported that Berlin has a plan for DB in case all else fails. The paper said a state bailout is still possible.

The report was immediately denied by the German finance ministry. Martin Jäger, spokesperson for the finance ministry, noted, “The German government is not preparing a rescue plan, and there is no reason for such speculations.”

Merkel Considering Merger

Germany does not want to bail out Deutsche Bank. They have, in effect, been “playing chicken” with the European Central Bank (ECB), trying to convince it to lead a bailout.

An article in the Wall Street Journal suggests Merkel may also be considering a merger of Deutsche Bank and Commerzbank. Although this will not improve the quality of the merged entity’s balance sheet, it could make a stealth recap of DB possible.

The German government holds a 15.6% stake in Commerzbank from a 2009 bailout. A merger could be used as a backdoor to inject capital into Deutsche Bank without appearing to do so.

This entire situation sets up for an external white knight, but the list of possible candidates is quite short.

Potential Candidates for Bailout

Saudi Arabia, like China, participated in the “great bailout” of the West during the Financial Crisis, but now, it is distracted by politics, war, and low oil prices.

Several sources say the newly launched Turkish Wealth Fund could be another possibility to take a stake in DB. So far though, Turkish officials have not commented on this.

Frankly, China seems like the logical candidate to bail out DB. The People’s Bank of China (PBOC) has plenty of cash. $14 billion is just a drop in the bucket. And the Chinese government would love the prestige of being a major stakeholder in a huge European financial institution.

It also makes great sense financially for the Chinese. China has close to US$600 billion in euro foreign reserves, which are currently earning negative interest rates. Buying discounted equity in the largest bank in Europe is a no-brainer.

It’s increasingly obvious that some kind of bailout must come soon for Deutsche Bank. Both the bank itself and the global financial markets are feeling the pressure. If DB doesn’t get help soon, there is a risk of a repeat of the crisis of 2008. If this worst-case scenario comes to pass, gold would be one of the safest places an investor could be.

China’s Second Rescue of the West in 10 Years?

It’s almost a given that Chinese President Xi would love a chance to put China back on the world economic stage in a positive light. So the only question is whether a Chinese bailout of Deutsche Bank would be acceptable to Germany, the rest of Europe, and the financial sector in general?

While there is no clear answer, a strong argument can be made that a Chinese institution taking a major stake in DB is the best answer for all parties. A Chinese bailout not only provides a financial backstop for DB, it gives the German government political cover. It also gives China a much-needed boost in prestige at a critical moment in its own economic transition.

Any way you slice it, a Chinese bailout of Deutsche Bank will upset global financial markets. But, so would no bailout at all. And either one will lead to a move up in safe-haven investments such as gold.

While price movements are hard to predict, Dan Tapiero, former macro strategist for hedge fund managers Steve Cohen and Stan Druckenmiller, suggests a spike of as much as $80 to $100 an ounce in gold is not out of the question, depending on how the DB situation works out.

Given the growing pressure on DB, a resolution will take place soon. And, financial markets are almost certain to tumble when the news breaks that the largest bank in Europe had to be recapped… no matter who steps up to the plate with the cash. If Dan Tapiero is right, this could be the catalyst that sends gold prices back to $1400 per ounce.

Get More Insight Into the Looming European Financial Collapse

Watch this provocative interview to learn how the beleaguered European banking sector could spur a gold rush (and a significant price spike). Hear what the European banking index means for the US, what the Deutsche Bank fallout could do to liquidity in the markets, and discover the trend over the last 15 years that proves gold is the safest haven when banks are failing. Watch Gold as a Safe Haven now.

John Mauldin Archive

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