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13 July, 2015

Eurozone is ready to explode, but probably not for the reasons you think

globinfo freexchange

Wolfgang Schäuble and the German leadership of the eurozone have good reasons to worry, maintaining an uncompromising attitude in the negotiations with Greece. But the repayment of Greek debt, which amounts to EUR 317 billion, is not one of the most important ones. The Greek debt is insignificant in comparison with the financial dynamite of the German (and other) banks, which in recent months gives more daily ignition signs.

Only Deutsche Bank, the largest bank in Germany, is significantly exposed, holding dubious financial products known as "derivatives", worth 67 trillion euros. This amount is similar to the GDP of the entire world and 20 times greater than the GDP of Germany. Any comparison with the situation of the bank Lehman Brothers in 2008 would not be irrelevant. Just when Lehman Brothers went bankrupt, had available derivatives of only 31.5 trillion. The crisis of 2008 confirmed the concise definition of derivatives as proposed by the American tycoon Warren Buffet: "financial weapons of mass destruction."

2008 may now be a past, but recent developments are particularly bleak for Deutsche Bank. The competent authorities of the US and Britain imposed on the bank in April a fine record (which, together with a previous fine, are EUR 2.2 billion in total) for fraudulent interbank rates. In early June, two co-CEOs suddenly resigned. Four former bank executives had been prosecuted by the German judicial authorities for false statements and misleading testimonies. A few days later, prosecutors raided the bank's offices in Frankfurt to collect customer data.

At the same time, financial products are becoming daily more precarious. Immediately after the announcement of the failure of the negotiations between Greece and the "institutions" on June 12, the risk of eurozone bonds recorded vertical rise. The German ZEW economic outlook index fell on June 16 for the third consecutive month, and has fallen by 43% in three months.

Admittedly, Germany is no exception. Other countries have similar problems, such as Austria, Netherlands and Finland. But these are minor compared to the size of the risky investments of Deutsche Bank.

In view of the above problems, a possible Greece's stance of payments should not be of particular concern in the eurozone, especially when it has repeatedly announced that the "institutions" have ready plans to handle a potential Grexit. But perhaps the intensive efforts of the German leadership, highlighting the crisis of the European periphery economies (Greece, Spain etc.), as the main problem of the eurozone, are simply a smokescreen to cover the inherent instability of the financial system. Because as the developments have shown so far, the primary objective of European leaders is to protect banks.

When a giant bank must get rid of "junk" bonds or to obtain additional liquidity, turns to the ECB. Immediately before the PSI, the ECB helped Deutsche Bank, among others, to sell at a good price the "toxic" Greek bonds, which are now held by the ECB, which of course is backed by European taxpayers. The Deutsche Bank and the other banks had relatively insignificant losses from PSI, in contrast to the Greek pensioners. And since the banks did not failed, they didn't have to learn any lesson, convinced that the leaders of northwestern Europe would not leave them helpless in a similar situation in the future.

This situation is coming closer every day, and even a small jolt of the bank boat (a Greek default), can have unintended consequences, such as an uncontrolled chain bankruptcy. Because if something goes wrong, the Deutsche Bank, like most banks, is able to cover only a small part of "derivatives" and other toxic products held.

Therefore, Mr. Schaeuble, Mrs. Merkel and the other "tough guys" of the eurozone have every reason to worry. Of course, the real reason for their concern and their intransigent attitude can not be the Greek debt, which corresponds to 0.5% of the derivatives possessed only by one German bank, but the insecurity created by the possibility of the financial paper tower turbulence.

For the German leadership, the Greek crisis is a convenient scapegoat to divert attention of the European public from the painful reality. The tough stance of lenders to Greece and the countries of the periphery of Europe notably aim at avoiding two undesirable developments. First, a shaking of the market, which can cause a default or a deletion of part of the Greek debt. Second, a series of concessions to Greece, which will threaten the European neoliberal establishment. But when the bank boat starts sinking, the adaptation of the Greek passengers to the captains' orders cannot by itself prevent the sinking.

The Greek negotiators probably know a lot more than the usual accusations by their interlocutors and the "institutions", who use Orwellian tactics to present as 'inexperience' the thorough negation of Greek side to adapt in a flimsy financial framework.



  1. Anonymous14/7/15 13:18

    I am pretty sure most of the derivatives of Deutsche Bank are denominated in US Dollars and therefore have nothing to do with the Euro as such.

    1. Anonymous26/9/16 16:55

      you kinda said everything. US recession this year or next year for sure.