Germany’s biggest bank on the brink of collapse?
Perhaps we’ve been paying too much attention to buzzwords such as “economic slowdown” and “recession” in North America for the past few years, which has caused us to take our eyes off a possibly bigger problem in Europe.
It hasn’t been very long since the Greek debt crisis that all but shut down its banking system and required bailouts from other Eurozone nations. With the region still feeling the economic sting from that fallout, now Germany’s Deutsche Bank is facing a crunch.
The bank announced its first full fiscal year loss since the 2008 economic crisis, fuelled by the American prime mortgage collapse that sent shockwaves throughout the developed world. This is especially concerning because the German bank has traditionally been a rock and survived the 2008 bumps without a bailout, as The Guardian newspaper points out.
The question is, Who will clean up the mess if Germany’s biggest bank defaults? If you recall, Greece and other Eurozone countries looked to Germany as a saviour during its past crisis (other countries coughed up funds, but Germany handed out the largest share ). Greece had to make an emergency payment to the European Central Bank last year to prevent falling into default.
In fact, Greece was then criticized for using additional financial aid for debt payments rather than rebuilding the country’s shattered economy. You can boil down a country’s financial practices and compare them to those of an individual: if you keep spending money on “minimum payments” on a loan without touching the bigger debt, you’ll end up bankrupt again, eventually.
Not to say Germany will make the same mistake if it spirals out of control, although the United States has apparently waded back into the same dangerous territory of subprime loans that got it into trouble in the first place.
Meanwhile, in Canada, new mortgage rules were introduced to help prevent the country’s economy from suffering the same fate as its European cousins (and its biggest partner to the south). The banks and government here have managed to keep the housing market viable while reducing risk — perhaps becoming a model for other economies.
While he wasn’t especially popular (especially near the end of his tenure), Harper can be thanked for stabilizing the Canadian economy by putting a spotlight on balancing the budget as well as encouraging more global trade agreements. Canada also has much fewer retail banks than the United States — which experts say increases competition and leads American banks to take bigger risks.
It’s also easier for Canadian regulators to keep track of what the banks here are doing.
But back to Germany: its near-default means higher insurance costs, as well as lower values per share for a number of European banks. While this historically has made investors nervous, Deutsche Bank co-CEO John Cryan reportedly said in February that the bank’s capital position was “absolutely rock solid.”
The last thing the world needs is another major financial system collapsing with bailout funds needed. Since our economies are becoming increasingly intertwined, when one country’s pockets are empty, more of us feel the burn.
This is definitely a situation to keep our eye on overseas, while we also keep a close check on how our own government is spending money and how our central bank handles interest rate cuts. It’s a wonderful and scary time to be a global investor, but panic will not serve anyone in the long term.