Sunday, 14 September 2014

Please don't break the global economy like we did

Deutsche Bank has compared a possible Yes vote in the Scottish independence referendum to the mistakes which led to the Great Depression of the 1930s.

Speaking on the Today programme, the bank's global strategist Bilal Hafeez warned that "the economic uncertainty that would ensue from independence, the unstable banking system that would also result, would really result in the Scottish debt having to offer much higher interest rates to attract investors."

I'm guessing that Scots who haven't been asleep since 2008 won't have taken very kindly to lectures on economic prudence from an organisation whose fingerprints were all over the last global economic crisis and the subsequent Eurozone crisis:
Deutsche Bank has long been something of a basket case. In 2007, when the first signs of the impending financial crisis began to appear, it was the most highly leveraged bank in Europe, with assets 68 times its Tier 1 capital. It narrowly managed to avoid sovereign bailout in the financial crisis, but it was a principal beneficiary of the US government’s bailout of AIG and it received liquidity support from the Fed and the ECB. But its problems weren’t limited to US subprime and toxic derivatives. The Icelandic journalist Sigrún Davíðsdóttir reports that Deutsche Bank had lent extensively to Icelandic banks and was left with the toxic loans when the Icelandic banks failed.

Deutsche Bank also turned out to have sizeable interests in Ireland’s teetering banks. When the Irish property market collapsed, the Irish government – partly at the EU’s insistence – bailed out its banks to prevent a chain of contagion spreading out across the Eurozone and risking the solvency of the large European banks such as Deutsche Bank. The banking crisis caused a deep recession in Ireland, while the bailouts caused a fiscal crisis, eventually resulting in sovereign bailout. The price of this has been five years of painful retrenchment by both government and private sector in Ireland.

But it didn’t end there. Deutsche Bank was also heavily exposed to periphery sovereign debt and associated credit derivatives. The exposure of German banks to Greek debt and credit default swaps was the principal reason for German nervousness about the private sector accepting losses: it was two years before the inevitable partial Greek default finally happened – by which time, of course, Deutsche Bank had largely unwound its exposures. It escaped serious damage in the PSI, unlike Greek pensioners whose funds were virtually wiped out. The ECB’s Securities Markets Program helped Deutsche Bank and others unload their toxic Greek debt (and other dodgy sovereign debt) at better than market rates. Guess who holds it now? Yes, the ECB does – and the ECB is of course backed by taxpayers. Yet another disguised bailout for Deutsche Bank.
Frances Coppola