Germany's About To Bail Out Its Biggest Bank. Just Don't Call It That.

The country's been imposing strict austerity measures on Greece. Now, its largest bank needs help.
German Chancellor Angela Merkel will likely try to prevent Deutsche Bank's collapse without bailing it out directly.
German Chancellor Angela Merkel will likely try to prevent Deutsche Bank's collapse without bailing it out directly.

What is the European Union’s wealthiest and most powerful nation to do when it risks running afoul of the rules it has spent years enforcing on other countries?

We may soon find out when Germany acts to shore up Deutsche Bank, a financial colossus teetering on the brink of collapse.

The government is likely to try to thread the needle with an unofficial bailout that allows Germany to claim it is still obeying post-financial crisis rules forbidding such measures, according to Mark Blyth, a political science professor at Brown University who specializes in international finance.

“The Germans know the rules aren’t working and that they are backwards, but they are kind of in a bind with their own voters,” Blyth said. “When you have basically said that all debts will be paid and insist on your European partners paying debts, and then you bail out your own bank, that looks like a huge inconsistency ― which it is.”

As a result, the “smart money,” Blyth said, is on the German government helping facilitate a takeover of Deutsche Bank by its smaller competitor, Commerzbank. In that scenario, the government would provide sweeteners and guarantees that would enable the acquisition to occur, but not a direct capital infusion or partial nationalization of the bank.

Deutsche Bank is in trouble following the U.S. Department of Justice’s announcement earlier this month that it is asking Germany’s flagship bank for $14 billion to settle an investigation into its sale of mortgage-backed securities leading up to the 2008 financial crisis. The bank is likely to negotiate a lower sum, but it now faces a crisis of confidence from investors that jeopardizes its existence.

That poses a quandary for German leaders. They must prevent Deutsche Bank from failing for the sake of the country’s economy, but cannot be seen by the public to be rewarding banks’ bad behavior ― or viewed by other countries as violating the rules Germany has so strictly enforced.

Germany, the de facto leader of the EU, has gone to great lengths to police other countries’ efforts to rescue their institutions. German Chancellor Angela Merkel warned Italian Prime Minister Matteo Renzi against bailing out Italy’s foundering banks over the summer.

Italy is a recent case study, but the successive onerous bailouts Germany has imposed on Greece exemplify the costs of Germany’s high-minded narrative about its own behavior. The EU, led by Germany, first bailed out Greece’s government in 2010 largely in order to save German banks like Deutsche Bank, which were overexposed to Greek debt. Most of the money Greek citizens have been forced to repay through several rounds of public spending cuts and tax hikes has gone to financial institutions ― whether foreign or domestic.

But by structuring the first bailout as an emergency loan to the Greek government rather than for its own banks, German authorities convinced their public that they had given undeserved charity to the lazy, spendthrift Greeks. That has primed Germans to back ever harsher austerity measures, which have plunged Greece into a prolonged economic depression with no end in sight.

Blyth anticipates that a non-bailout might have the added benefit of relaxing Germany’s official stance toward an Italian bank rescue ― effectively providing a “green light” for extraordinary action by the Mediterranean country’s government.

But don’t expect it to change Germany’s posture toward Greece. The EU’s powerhouse approved the latest tranche of loans to Greece, but has failed to commit to restructuring Greece’s debts, which economists agree the small country will never be able to pay.