Deutsche Bank and Hedge Funds Panic over Negative Interest Rates

The policies of the European Central Bank have wrecked havoc on the entire European financial system, to the point that “the dead bank walking” Deutsche Bank and major European hedge funds are screaming for a change—before they crash and burn altogether. The Global Edition of Handelsblatt dated Aug. 23 featured an article on the consequences of the ECB’s negative interest rates and quantitative easing, quoting extensively from Deutsche Bank’s chief executive, John Cryan, who wrote a guest column on the eve of Handelsblatt’s Banking Summit in Frankfurt, which runs from Aug. 31 through Sept. 1. Cryan complained bitterly: “Monetary policy is now running counter to the aims of strengthening the economy and making the European banking system safer.” By forcing banks to pay interest on funds they deposit with the ECB, under mandatory increased reserve requirements, and by looting pensioners through the negative interest rates, Cryan charged that the ECB has made a terrible situation far worse. Cryan called for a drastic change in ECB policies, freely admitting that Deutsche Bank is going through a “painful restructuring and battling to keep the confidence of investors,” and the ECB policies are making it far more difficult.

Handelsblatt also quoted from a Cologne-based asset manager, Bert Flossbach, that central banks are “forced to resort to ever more aggressive policies to stop the financial system from collapsing, and that has made the markets totally dependent on central bank interventions.”

ECB executive board member and close Mario Draghi ally Benoit Coeure threatened that the ECB could take even more draconian actions, like further reducing negative interest rates, if governments in the eurozone don’t carry out deeper austerity measures and other “reforms.”

Hedge funds are also on the chopping block, due to the ECB’s negative interest rates. Forced to post collateral with the big European clearinghouses that manage the derivatives trade, they are now losing money on those deposits, which usually take the form of purchases of government bonds, now with negative interest rates, “which threaten to erode their main profit driver: the gap between their cost of funding and their revenue from lending,” Reuters warned Wednesday.

The panic of Deutsche Bank and some leading European hedge funds is reflective of a much deeper crisis, that goes far beyond 2008: the entire trans-Atlantic banking and financial system is drowning in worthless debt and engaging in the same gambling games that led to the 2008 blowout. And the remedies being peddled by the ECB and other central banks are accelerating the blowout.