“European integration is the greatest peace project the world has ever known. Europe has rarely known 70 years of peace before. The common market, and the common currency area, have created unprecedented prosperity for Europeans.”
-Deutsche Bank co-CEO Anshu Jain, Wirtsschaftsrat Deutschland, June 12, 2012
Leaving aside the debatable claim that “the common currency area” has created “unprecedented prosperity” for Europeans, why is Mr. Jain positioning himself as a champion of European integration? One possible answer: dissolution risk.
“Very few people seem to have gotten their head around dissolution risk,” writes MIT professor and former chief IMF economist Simon Johnson, “Here’s what it means: If you have a contract that requires you to be paid in euros and the euro no long exists, what you receive will be unclear.” What, for example, would happen if Deutsche Bank’s loans and securities are in lira, peseta or drachma while it’s borrowings from the ECB are in euros?
According to Espirito Santo Investment Bank’s Andrew Lim, Deutsche Bank “has a funding gap of as much as €14 billion at its Italian and Spanish units, which could reduce capital levels at the firm if those countries leave the euro.” Lim calculates that if Spain and Italy exit the euro and the lira and peseta each fall by 30 percent, Deutsche Bank could lose as much as €4.2 billion in equity.
Lim reiterated his “sell” recommendation on Deutsche’s shares and commented that the impact of Italy and Spain leaving the Euro could be “quite significant for a bank which is already very thinly capitalized.”