Greece (and the PIIGS) Are a MAJOR Problem... Even for the Strongest German Banks

Phoenix Capital Research's picture

Graham’s note: this is an excerpt of a client letter I sent out to clients.


Deutsche Bank trades on US stock exchanges and so has to publish SEC filings on its balance sheet risk. Well, according to Deutsche Bank’s own filings, it had 1.6 billion Euros’ worth of credit exposure to Greece at the end of 2010. True, this is credit exposure not direct exposure to sovereign debt… but it’s still four times what the Guardian claims to the case.


More interesting that this, the term “Greece” is only mentioned twice in Deutsche Bank’s 2010 416-page annual report. Remember, this was the year in which the Greek Euro Crisis nearly took the system down: between January 2010 and June 2001, when the first Greek bailout was announced, the Euro lost 17% if its value. Worldwide, stock markets cratered despite central bank intervention. And it was only the Fed’s promise of QE lite and QE 2 that got the global equity rally rolling again.


So it’s a bit odd that Deutsche Bank’s 2010 416-page annual report would only mention the term “Greece” two times. Regardless, let’s fast forward to Deutsche Bank’s Third Quarter 2011 filing (its most recent) for some more recent data.


This time around, the term “Greece” shows up six times in the 100-page report. And this time around Deutsche Bank states it has 881 million Euros’ worth of exposure to Greek sovereign debt (TWO TIMES what The Guardian claimed).


By the way, Deutsche Bank has only 59 billion Euros’ worth of shareholder equity, so this position alone is worth roughly 1.5% of the banks’ equity. True, this is not a huge percentage, but if Greek creditors take a 70-80% haircut, Deutsche Bank would need to raise capital.


On a side note, I want to point out that we’re completely ignoring the fact that if Greece defaults so will Italy and Spain whose sovereign debt and financial institutions Deutsche Bank has 14.8 BILLION EUROS worth exposure to: an amount equal 23% of Deutsche Bank’s TOTAL EQUITY.


But let’s just focus on Deutsche Bank’s exposure to Greece for now. According to its Third Quarter 2011 filing, aside from the 881 million Euros’ worth of exposure to Greek sovereign debt, Deutsche Bank also has 665 million Euros’ worth of exposure to Greek financial institutions, and a whopping 1.3 BILLION Euros’ worth of exposure to Greek corporates (plus a negligible 8 million Euros’ worth of exposure to Greek retails) for a total of 2.8 BILLION Euros’ worth of exposure to Greek debt and businesses.


So… having taken our analysis one step further, we find that one single German bank, one of the alleged strongest I might add, has in fact, far, far more exposure to Greece and its economy than both the Bank of International Settlements and the mainstream financial press indicates.


Bear in mind, the numbers presented in Deutsche Bank’s are simply those that Deutsche Bank’s executives have told the company’s accountants are acceptable for public disclosure (we have no clue about the banks off-balance sheet risk).


It’s also worth noting that in 2010 Deutsche Bank claimed to have only 1.6 billion Euros’ worth of credit exposure to Greece, whereas by late 2011 the number has swelled to 2.8 billion Euros.


I have to ask… how exactly does a bank, which is supposedly managing its risk levels and adjusting its exposure accordingly, manage to increase its credit exposure to something as financially toxic as Greece by 75% in a nine month period?


This hardly strikes me as good risk management. But here’s how Deutsche Bank’s accountants try to explain that none of this (even the 2.8 billion Euros’ worth of exposure) is actually a big deal.



If the above chart sounds like it’s written in obfuscating language, let me translate it for you. According to Deutsche Bank’s accountants, once you include collateral held (likely garbage assets valued at mark to model fantasy land valuations), guarantees received (from GREEK institutions!?!?!), and “risk mitigation”, Deutsche Bank’s “actual” exposure to Greece drops from 2.8 billion Euros to only 1.2 billion Euros.


So… this is a bank whose credit exposure to Greece increased by 75% as the Greek Crisis worsened from 2010 to 2011... now claiming that thanks to their risk management, their “real” exposure to Greece is only 1.2 billion Euros.


Ok, well if we’re going to play by those rules, let’s consider that when we include the rest of the PIIGS countries, Deutsche Bank’s “actual” exposure (as downplayed as it might be) is still 35 BILLION Euros, an amount equal to 60% of the banks’ total equity.


At these levels, and using the currently proposed Greek 50% haircuts as a model for future defaults in the EU, Deutsche Bank could very easily see 10-15 billion in write-downs from its PIIGS’ exposure.  This would wipe out 16%-25% of the bank’s entire equity and render it borderline insolvent.


And we’re talking about one of the biggest, most “solvent” banks in Germany here.


Make no mistake, the situation in Europe is far far worse than 99% of investors realize. Even if the second Greek Bailout is finalized (the details are still emerging) we’ve still got Italy and Spain to deal with: two problems that are far too big for any of the current troika (ECB, IMF, and EU) to handle.


On that note, if you have not already taken steps to prepare for the next round of the Crisis now is the time to do so while the system is still holding together.


If you’ve yet to take steps to prepare for this, I can show you how: my Surviving a Crisis Four Times Worse Than 2008 report is chock full of information on how to not only survive but thrive during the months to come.


Within its nine pages I explain precisely how the Second Round of the Crisis will unfold, where it will hit hardest, and the best means of profiting from it (the very investments my clients used to make triple digit returns in 2008).


Best of all, this report is 100% FREE. To pick up your copy today simply go to: and click on the OUR FREE REPORTS tab.


Good Investing!


Graham Summers


PS. We also feature four other reports ALL devoted to helping you protect yourself, your portfolio, and your loved ones from the Second Round of the Great Crisis. Whether it’s my proprietary Crash Indicator which has caught every crash in the last 25 years, or how to stockpile food (where to get it, what to buy, and how to store it) our reports cover this information in great detail.


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steve from virginia's picture


I think Summers is way off. Just look @ LTRO and work backward. Nobody is going to swap remunerative assets to the ECB (basically a discount window operation) so what 'goes into' LTRO is going to be garbage.

And it's not going to be Spanish/Italian garbage b/c the debt swappage 'terms' are only (somewhat) clear for Greek collateral. So you have € 400 billion in the first LTRO with 'x' amount of that being Greek. Subtract the 'purpose built' debt issued (to 'recapitalize' Italian and French banks) and Greek euro debt is half of the first LTRO. Next up is LTRO 2.0 @ € 1 trillion which will be (almost) all Greek. Any other euro-denominated debt is subordinate to ECB's paper so anything other than Greek debt is going to be held off the LTRO simply because it is too early in the game to commit non-Greek debt to an ECB subordination.

Who is in line to pick up the ECB's tab when it is clear (next week) that banks will turn up their noses at buying back the LTRO garbage? Germany.

Something is going to have to bail out the ECB, it's not a real central bank and it lacks a national fiscal counterparty. It can get away w/ a LTRO in the first place because Draghi is ambiguous about who picks up its tab. He says Santa Claus, reality says Germany This is because the tab-picker is the one who has the spare change. Fact is NOBODY/NOTHING can pay off Greek finance debts but the Germans have made the rules that say the debt must now be paid off, in this case a trillion or more Greek euros that is on the balance sheet of the ECB!

Who can pay? Germany. They made the rules, right?

The individual bank's 'ownership' of Greek debt is penny-ante stuff, the real 'git' is on the ECB books. This is coming to a Germany near you, they have basically fucked themselves.

I may be wrong, but I don't think so: when Greece finally gets around to defaulting, Germany will default soon afterward. Otherwise, it's ruined. It -- Germany -- HAS to get out of the euro ponzi before it is stuck with the bag of euro debts. These total debts are probably more than € 30 trillion euros.

I'm not making this up: there was a list of bondholders (creditors) of Anglo-Irish bank posted here @ ZH not so long ago where these 'entities' were examined and seen to hold + € 20 TRILLION! There are other bondholders.

 Total European debt is going to be almost-not quite of the order of USA debt which is at LEAST (by Federal Reserve) $55 trillion. The two entities' GDP is similar, GDP itself is a measure of money supply ... of debt, if you will.

Keep yr eyes on the ball, folks! Yr looking at trillions in euro-denominated debt (euro-denominated WEALTH).

Buck Johnson's picture

The US will have to bailout the ECB, pure and simple.  But all that does is to delay the inevitable even more.

q99x2's picture

The Drones will keep a lid on it.

walküre's picture

LTRO 1.0 was consumed within days by European banks including Deutsche. The banks took the cheap money from the ECB and parked it right around the corner, with the ECB. The banks have been preparing.

Interesting how the market zoomed straight up following LTRO 1.0 especially the DAX. Makes me wonder how much of the cheap money went into equities either direct or as leverage. DAX shot up close to 20% since December. Looks exactly like S&P after QE 1.0 was announced.

Now LTRO 2.0 is planned for next week. We will likely see a repeat of the same IF there is a true conviction that Greece will take the bailout money and make due on its payments starting March 20th (15 billion Euro).

Greece is hoping (really?) to cut existing debt by 107 billion with voluntary haircuts. The facility to exchange debt has opened. Creditors are encouraged to exchange existing debt coupons for new debt coupons at 50% less face value and lower interest, with a total combined loss of 74%.

The facility is open until March 12th. How much debt will be exchanged? NOBODY KNOWS.

The voluntary 74% haircut is a major piece in the strategy to grant the 2nd bailout tranche.

Personally, I think its not getting the response they were hoping for and the whole thing is going to shit. Collecting 26% or gaming a CDO payout? Tempting to let the chips fall where they may and collect on the CDO!!!! Because who is to say that the new coupon at 26% value vs. the old one is not getting diluted further down the road again and again? Better imo to try this CDO protection and see if it works. I always collect on insurance claims and worry about increased premiums IF and when it happens. What the hell do I buy insurance for if I would never claim against it? Surely, that same logic applies to buyers of sovereign debt.

Hello! Last one in the casino, turn off the lights.

The market bounce since December is due to a flooding of cash by the ECB. This is not investment cash coming back to the market. The bankers are playing the market with almost free cash from the ECB. If they loose, they don't care as they know they're going to shit anyway unless they get another bailout.

For the banks, this is the do or die moment. All they can do is take the cheap money, game the market upwards in financial stocks and a few household names and hope!!! that retail investors will come back so they can offload their stock to someone. Failing that, the banks will have major market exposure going forward. Coupled with a possible Greek debt default, one can only imagine the fireworks when the banks START SELLING and filling every bid just to RECOVER SOME LIQUIDITY!!! Market volume is incredibly low, no matter how positive the propaganda from our spin meisters.

Retail money is still attracted to bonds and has NOT found its way back into equities. Wonder if it will anytime soon.



slewie the pi-rat's picture

the zombies are gonna liquidate their victims for their masters, walk_!

remember when there was all that talk about "consolidation"?  we may be hearing more about how well that is going soon, comrade!

the "market" is starting to focus on corporate assets in the "helpless victim" economies, here, imo

the G7 gonna back this play, only the sovereigns can fight it by saying fukYou and going it "alone" 

i mean, how "alone" is the "alone" we already know when "alone"?

of course, it is for the greaterGoodTM

trust is a wonderful "commodity" ain't it? 

right up there w/ "liquidity"!  L0L!!!

Portugal's picture

When will you understand that it is in Europe that the Mercedes, Audis, Porsches, Ferraris, Lamborghinis, Airbus, Chateaux wines, Armanis, Dolce & Gabbanas, Bulgaris, Valentinos, etc, etc, etc and etc and whatever other thing you might want to image every single person on this planet wishes to buy at least in its lifetime. 

It’s not produced anywhere else. Investors around the world should be worried with that anywhere else... where apart from printing money, they do not know what to produce anymore. What? Apple ? Intel ? … you can always buy a cheaper alternative. But you will never buy a cheaper Mercedes simply because its not a Mercedes!

When considering Italy, think Ferrari, Fiat ( bought Chrysler ), Ducati, you name it and all known clothing brands that are massively consumed around the world. Its not something done by a company named wall mart. Who the F... buys his wife a dress made by a Wall Mart?

slewie the pi-rat's picture

"conspicuous" consumption dept  L0L!!!

a lot of women use the family money to buy clothes on sale all over the place, including walMart, penney's sears, kohl's, designer outlets, macy's

some people also prefer toyota for the "money"

used ones too, if they wish to avoid debt!

you say:  whatever other thing you might want to image every single person on this planet wishes to buy at least in its lifetime. 

how long have you had these views, comrade?

would you like some help?

dontgoforit's picture

used cars are a good value, comparatively speaking.  And if you're not too proud, there's a ton of ways to buy what you need at lower prices: in America we call it "shopping around."  Goodwill, Salvation Army - flea markets, yard sales - people who respect money for what it is, try hard not to spend $50.00 on an item they can get for $2.00. 

slewie the pi-rat's picture

the guy i responded to [portugal] has been a zeroHead for almost two years, but doesn't write much

i had no way of of knowing whether he was trying for a cosmicSarc-0-drama, there, or not!

he's good at something, i figure, tho!  L0L!!!

EL INDIO's picture

Less than a month to wait.

Reality will impose itself.


dontgoforit's picture

...but this is an unreal situation in a virtual world...get ready to eat Greek

onlooker's picture

Italy and Spain are the scary numbers on the chart. What if?

disabledvet's picture

Let me answer the question posed by this article: "DB was ordered by their government to do this." Europe does not want exactly what I say they're gonna get: American tanks in the streets of Athens. To that I say "fine-how 'bout we throw in some Spanish Infantry for good measure." there's always an answer folks--move along.

digitlman's picture

Should have defaulted.

williambanzai7's picture

Ackermann is a jackass who has had to have his bank bailed out repeatedly. A rich highly overpaid jackass.

battle axe's picture

I wonder how much is not on their books and hid in some off shoot fiscal holding company, a la Lehman Bros? Just sitting there ready to go off like a bomb that no one knows about?

slewie the pi-rat's picture

so here's DB and it is loading up on greek corporate debt, right?  why?

well, first, they screw the "economy" down by Xn %, then:

  • how do greek businesses look in the event of a weaker greece?  not too good
  • what if they fail?  the bondholders grab the assets and either liquidate or "re-organize"*

*see carl icahn & "vulture" capitalism

disabledvet's picture

"we had to destroy the country to save it" is an odd way to get your money back. "would you like that in sea shells or women" would have been my response. Interestingly "the Greeks still don't get it." I must say I've underestimated the German negotiating style on this one...