According to the Wall Street Journal, Deutsche Bank is at the center of a “tangled web” of sovereign Credit Default Swaps (CDSs) in Europe.  New data from the European Banking Authority (EBA) indicates that European banks have bought and sold €178 and €169 billion in sovereign CDS, respectively.

Deutsche Bank ranks among the top buyers and sellers of sovereign CDS insurance on PIIGS bonds. According to the Journal, Deutsche bought €37.4 billion and sold €34.5 billion of such insurance. The Journal reports: “Of the total protection that European banks have written on government bonds in Europe’s five most stressed countries, nearly one third originated from German banks. Deutsche Bank was responsible for most of that, primarily due to its extensive corporate- and investment-banking businesses.”

Some contend that the sovereign CDSs sold and bought cancel each other out. The Journal states that Deutsche Bank’s purchases and sales of CDSs are with the same counterparties with whom the German bank has legally enforceable “netting” agreements.  The same article adds that Deutsche executives claim that their positions are “well-hedged” and that they buy CDS protection “only from institutions based outside the countries in which the bank is trying to buy protection.”

Yet no one knows exactly what would happen to Europe’s tightly interwoven banking system in the event of sovereign default. According to one analyst cited in the Journal: “‘Netting is all very well provided that you trust your counterparty,’ said Jon Peace, a Nomura Securities banking analyst. But in a crisis situation, ‘what you thought was net could tend toward your gross exposures’ because certain sellers of the default insurance could themselves go bust.”    Furthermore, the EBA concluded that European banks continue to be undercapitalized by a total of €115 billion.  Deutsche Bank, in particular, faces a capital shortfall of €3.2 billion to achieve the EBA’s 9 percent Core Tier 1 capital ratio by June 2012.

A default by any of the PIIGS countries could reverberate across the Atlantic. As some have observed, Deutsche Bank could be the “conduit” for “financial contagion” from Europe to the U.S. due to its large U.S. operations.  Will Deutsche Bank receive, again, more emergency funds from the Fed and U.S. taxpayers like it did in the aftermath of the 2008 crisis?

To view the EBA data on Deutsche Bank’s CDS exposures, click here.