Major Dollar Shortage Exposed In Europe As Deutsche Bank Contagion Spreads

"Storm in a teacup" this is not.

While global markets remain calm(ish), distracted by OPEC headlines, US election 'entertainment', and Middle East proxy wars, the reality is, something very ugly is accelerating in Europe. With the collapse of the "most systemically dangerous bank in the world" we should hardly be surprised, but Deutsche Bank's crash is being shrugged off by average joes on mainstream media... and besides, the central banks will save us, right?

Well, Deutsche contagion is spreading... rapidly.

Since Deutsche's recent highs, the short-end of the EUR-USD basis swap curve has collapsed...

Simplifying - this chart measures the degree of USD shortage (willingness to spend money just to get USD now) across time - the lower the level, the more desperate for USDs.

And no, it's not a quarter-end issue...


Still not sure... Then explain why European banks just increased their demand for USDs from The ECB's 7-day lending facility by over 2000%...

As @Landonthomasjr notes, since 2009: DB shareholders put up 13.5 billion euros in equity. DB has paid 19.3 billion euro in bonuses. Perhaps they should have saved some of that cash eh?

Simply put - trust in the European Banking system is faltering, counterparty risk hedging is accelerating...


And liquidity concerns are exploding... ahead of Germany's bank holiday on Monday.

Mint's Bill Blain - in his Morning Porridge note - had some more 'market realist' thoughts...

Meanwhile, Mario Draghi was in “robust” form yesterday telling Europe’s languid political classes about the need to do more in terms of structural reform – yada, yada, heard that one before - but also the need for other policies to boost recovery in Europe. Optimal fiscal policy? That’s an interesting call.


The likelihood of banking embarrassment in Germany means his comments about banks being able to operate successfully in zero interest rate environments were particularly elucidating.


Let’s see.. if interest rates are zero, then borrowers don’t pay any interest and can extend their loans indefinitely? Then banks can’t have any NPLs, and will therefore be absolutely default free?


Suddenly I understand.


ECB NIRP is absolute genius. European banking is fixed and nothing to worry about. (US Readers – massive sarcasm alert!)


My day started in the Bloomberg studio where I was somewhat surprised to read a comment from Man’s CEO that Deutsche Bank is “healthy”. Right….


I’m not sure I buy that.


Banks are enormously complex beasts. They are not simple businesses. To turn around a bank is complex. To reinvent a bank – which is what Deutsche Bank, UBS, CS, and others are desperately trying to do, is one level below impossible.


Earlier this year we had commodities firm Glencore teeter on the edge of disaster. Swift action, clear plan, and it’s back from the brink. That is not going to happen with banks. In my 30 years of markets I can’t think of a single bank that’s got in trouble that has staged anything like a similar comeback. Once bank’s catch a cold, it often develops into dangerous pneumonia.


Deutsche – and the others – are anything but healthy. The need to reinvent. The news flow yesterday was positive-ish. Rumours of a SWF capital injection, rumours of a domestic rescue plan, but the reality is more likely to be further deterioration. If that develops into a full crisis any rescue will come at the cost of contingent capital deals being triggered (which will send shock-waves around banking confidence) and the strong/inevitable bail-in of senior debt holders.


Others say the senior debt is safe. Delighted they think so. Call me and tell me how much you want to buy?

Confirming there is a problem:


The denials continue... and so does the blame-mongery...

The U.S. Department of Justice fine imposed on Deutsche Bank is very high and “damaging for financial stability,” Dutch Finance Minister Jeroen Dijsselbloem tells lawmakers in The Hague Thursday.


U.S. fines against European banks are “repeatedly so high that all the money European banks tap on the international markets, also from U.S. investors, is skimmed by the U.S. government. That’s a risk for the financial stability and that worries me sincerely.”


If Deutsche Bank has to pay the $14b fine, it will reduce capital, then it will have to raise new capital.


Deutsche Bank will have to bring things "back in order."

Add another to the list of 'elites' distancing their actions from Deutsche's demise. And one more denial...

Deutsche Bank's troubles are not Europe's Lehman Brothers moment, Austria's finance minister said on Thursday, although he warned the region's lenders were facing a broader profitability crisis.


"After the financial crisis we haven’t quite worked through the banking issues….but what I am very convinced of is that we don’t have a banking crisis, we have a profitability crisis in our banks,"