The strategist who predicted the capital concerns now enveloping Deutsche Bank (XETRA: DBK-DE) has told CNBC what could happen next in a saga that has seen the bank's share price fall by over 50 percent this year.
In late 2013, Paul Gambles, a managing partner at advisory firm MBMG International, said that Deutsche Bank was over-leveraged and believed Germany's banking system was one of the worst in the world.
These fears reached the wider investment community this year who think Deutsche Bank'll need to raise capital after the U.S. Justice Department (DOJ) suggested it pay $14 billion to settle a number of investigations related to mortgage securities.
The bank has repeatedly defended itself over recent weeks, telling CNBC that there is "no reason to worry" and that the bank had a "comfortable cushion."
After witnessing Deutsche's dramatic fall in the share price, Gambles now feels like it would take a miracle for Germany's biggest bank by assets to absorb any potential settlement, losses on derivatives, a loss in depositors or any deterioration on its asset book.
"It looks like the only savior would be the state," he told via email on Friday, despite German lawmakers - including the finance ministry - continuing to refute speculation that it is preparing a backup plan.
"If that can only come from the state, then that might be a real barrier to external capital thereafter, creating a vicious downward spiral which is why the finance ministry is so keen to downplay rescue stories when in reality it must know that this is extremely possible."
If any risks get out of control, Gambles warns that it could easily spiral and the total exposure could conceivably be beyond Germany's resources. In which case Deutsche Bank goes, it would take the German economy, the euro zone banking system, the euro zone economy, the Chinese banking system and the global economy with it, he added.
Additionally, if the finance ministry act too late then it could quickly become such an impossible task, that either Germany exits the euro or the euro exits Germany, Gambles warned..
"(In this situation) Germany prints like crazy and before you know it, the German fears of hyperinflation are revisited – Germany is the major global economy that faces the risk of a currency and debt event big enough to cause hyperinflation which may be the most ironic aspect of the whole affair," he added.
On Friday, Deutsche Bank CEO John Cryan sought to reassure his employees in an internal letter on Friday , saying the bank had strong fundamentals and recent media reports were causing "unjustified concerns."
Other analysts also point to a potential backstop from the German government, and some speak about a favorable balance sheet and liquidity reserves at the German lender.
Goldman Sachs analysts on Thursday iterated that Deutsche Bank's liquidity position was stable and highlighted that the European Central Bank was always available to lend money to these banks at record low rates.
—Disclaimer: Paul Gambles holds no position on the shares of Deutsche Bank.
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