"It All Has A Very 2008 Feel To It" - For Deutsche Bank, The News Just Keeps Getting Worse
We highlight two feedback loops: one short-term and one long-term. Widening credit spreads can exacerbate market fears, result in negative press coverage and damage counterparty confidence. The February tender offer for senior debt, coupled with a solid funding and liquidity position, has helped to address this loop. However a longer-term feedback loop still exists. Deutsche needs to raise capital in our view. It may choose to wait until litigation issues have been resolved, but the further the share price falls, the more dilutive a capital raise becomes (and vice versa).
Our image of German banks, and the German economy, as completely rock solid is so strong that it takes a lot to persuade us they might be in trouble.
The damage can be seen in its share price. Last October, the shares were at 27 euros. Back in 2007, they were over 100 euros, and even in the spring of 2009, when banks were crashing all across the world, they were still trading at close on 17 euros. For most of this year they have been sliding fast. On Monday, they crashed again, down another 6pc. Its bonds have slumped as well, while the cost of credit default swaps – essentially a way of hedging against a collapse – have jumped. It all has a very 2008 feel to it.
In Germany, that appears not to be the case – certainly for Deutsche, and possibly for its next biggest player, Commerzbank, which is hardly looking much healthier. Would you want to trade a few billion with Deutsche right now, and would you feel sure you’d get paid next month? Nope, thought not. The risk is that confidence evaporates – and as we know, once that is gone a bank is not long for this world.
Merkel is playing a very dangerous game with Deutsche – and one that could easily go badly wrong. If her refusal to sanction a bail-out is responsible for a Deutsche collapse that could easily end her Chancellorship. But if she rescues it, the euro might start to unravel. It is hardly surprising that the markets are watching the relentless decline in its share price with mounting horror.