The queues haven’t started forming outside branches in Frankfurt or Cologne yet. Even so, it is hard not to suspect that something is badly amiss at Deutsche Bank, Germany’s and indeed Europe’s mightiest financial institution, and the rock on which that economy is founded. The shares have been in freefall, and executives have been wheeled out to try and reassure everyone that all is well. For Deutsche to be in trouble is bad enough. But here’s the real problem. If Deutsche does go down, it is taking the euro down with it. Why? Because if Germany bails it out, the contrast with the punishment metered out to Greek banks will be too painful to contemplate. And yet, were it to be allowed to fail, it would be catastrophic for the German economy.
There is something nastily 2008 about the trading action in Deutsche. The shares have almost halved over the past month, falling from 21 euros to 13. They are down another 6 percent today. Earlier this week, its Yorkshire-born co-chief executive John Cryan took the unusual step of telling everyone the bank was ‘rock-solid’, while the German finance minister Wolfgang Schauble made a point of telling everyone he was not worried about Deutsche, which is bit like Roman Abramovich saying he totally backs whoever happens to be managing Chelsea this week.
Of course, that might just be the markets getting into a panic about not very much. It would hardly be the first time traders have over-reacted. It may well be the case that Deutsche is in perfectly good shape, and can withstand whatever losses may be heading its way. We will see in the next few weeks. But what if it isn’t? That is where the story gets interesting.
If Deutsche were in serious trouble, the German government would surely feel compelled to bail it out, just as we bailed out RBS, and the Americans their banks, a few years ago. But hold on. It is less than a year ago that the Greek banks were allowed to go down, and the cash machines stopped working. That would be an acutely painful contrast, and one that could hardly fail to be missed. Everyone's sneaking suspicion about the euro - that it is designed to work only for Germany - will be confirmed, and in the most dramatic way possible. It gets worse. The cost of a rescue would blow Germany's debt to GDP ratio – currently 71 percent - through the roof. The rules it has been so fiercely enforcing for everyone else would turn out to be conveniently forgotten about for itself. How is that going to look to the Portuguese or the Spanish, living through German-imposed austerity to keep their debts under control? Not good.
Against that, letting it fail is hardly an option either. It is hard to see an already fragile currency surviving the collapse of its most systematically important bank. Neither would the Germany economy. Deutsche is not really a retail bank, like Barclays or Lloyds. Its main role is to finance Germany’s army of small exporters. But without them, the German economy would be in crisis – and, it hardly needs to be added, the whole of Europe depends on Germany.
Either way, the Chancellor Angela Merkel is going to be stuck in a very hard place. If she bails out the bank, it looks terrible, yet if she lets it fail, the economy goes down. She will probably be wishing she had something relatively simple - like a million Syrian refugees - to deal with. Because were Deutsche to be in trouble, it could turn into the trigger for the euro to unravel – and that would be very serious indeed.