Deutsche's Anshu Jain predicts solution to eurozone debt crisis

Anshu Jain, co-CEO designate of Deutsche Bank, is confident that a solution to the ongoing sovereign debt crisis in Europe will be found, even if there are significant hurdles to overcome and the markets are likely to remain volatile in the meantime.

“On the one hand we have countries which are struggling to reach political consensus to implement fiscal austerity, especially given the potential social reaction and the risks for a negative spiral in growth prospects. On the other, there is reluctance on the part of the stronger economies to support the weaker countries in the absence of substantial economic reform and strong fiscal measures.”

And it doesn’t help that the process needed to bridge this gap is a political process that requires 17 countries to reach an overall consensus, Jain said in his first speech since being named as one of two successors to Joseph Ackermann when he steps down at the annual general meeting next year.

Compared to 2008 when we had “a fairly straight forward financial crisis” that could be combated by various measures and interventions, here, either things will work out, or they won’t. The markets hate this, he said. Investors are voting with their feet and are deserting equity markets, and they are no longer distinguishing between companies that are doing well and companies that are not. There is also a reluctance to provide funding, particularly among the European banks.

The markets are effectively shortening the time the politicians have to solve the European crisis, but this, he argued, may not be a bad thing.

“There is a risk of an accident. However, the stakes are very high and all the folks that we are in touch with give us every sign that the enormity of the problem is well understood and that a resolution will be found,” Jain said. “The commitment to the eurozone is absolute, and in our opinion all the speculation about a break-up of the eurozone is unfounded.”

His comments, which were made at Deutsche Bank’s inaugural Women in Asian Business conference in Singapore on Thursday evening last week, came after French President Nicolas Sarkozy and German Chancellor Angela Merkel tried to calm these same speculations a day earlier, reassuring investors that a Greek default is not imminent and that Greece will remain part of Europe’s monetary union.

Jain said that, in his view, the authorities did a terrific job of averting the risks of the great recession from turning into the great depression in Europe. But the price was that private debt was transferred to government balance sheets, which in combination with fiscal stimulus packages and lower tax receipts led to Western governments ending up with significant debt levels. As a result, in this second phase of the financial crisis, the pressures have moved from the private to the public sector.

Jain referred to the sovereign debt crisis in Europe as the “most troublesome” among the headwinds that are currently impacting the global economies at a macro level, but also noted the slowing growth in the US, the unprecedented downgrade of US Treasury debt, the potential for a hard landing in China, and geopolitical events as other key concerns.

However, he also delivered a positive message to the audience: “The macro factors are incredibly challenging, but if we look at the world bottom up, the picture is about as rosy as I have seen it in a very long time,” he said.

He bases this partly on the fact that 70% of US companies in the S&P500 index beat earnings forecasts in the second quarter. Companies also have very low levels of leverage at the moment. In the US, net debt to market cap, at 15%, is at the lowest level it has been in 45 years and financial sector debt is at the lowest level since the first quarter of 2003. Meanwhile, corporate profit margins, at 9%, are at peak levels and M&A activity is robust.

“Most CEOs I talk to are exhibiting enormous confidence and are talking about being consolidators in their sector. They are talking about investments, they are talking about looking forward,” said Jain, who heads the corporate and investment bank at Deutsche, and hence overseas about 80% of the bank’s earnings. His remit includes corporate finance, sales and trading, and transaction banking.

Jain and Jürgen Fitschen, who is head of regional management worldwide and CEO of Germany, were named as successors to Ackermann in July. Their actual titles will be co-chairmen of the management board and the group executive committee – a role that at Deutsche Bank effectively translates into a CEO position.