Reassurances are not enough, the fundamentals are solid but the contagion effect is already there
Contagion was the most feared effect of the new banking crisis, opened by Silicon Valley Bank in the United States and landed in Europe with Credit Suisse. And, punctually, the risk is materializing. Because when trust is lost, the markets move by betting on the next victim, also reacting in a disorganized way to the news coming from the banking system. The case of Deutsche Bankwhich today lost up to 15% on the stock exchange, is significant.
What happened? The German bank is weighed down by a substantial mass of sales of AT1 bonds, the same type of Coco bond canceled by the Swiss authorities in the Credit Suisse rescue operation, with the involvement of UBS. In recent days, as a result of the sales, the yield on those bonds has risen and the price has fallen. It was foreseeable that it would happen, because if the message gets around that Credit Suisse bonds are worth zero, the whole market inevitably loses value. Today, in an effort to cheer markets, Deutsche Bank announced plans to prepay a subordinated bond. The result, as happens when the climate is tense, was a failure. Because it was read as an obvious sign of trouble.
Even the reassurances that reached the highest level, those of the German Chancellor Olaf Scholz, may have the opposite effect to that intended. “There is no reason to worry” for Deutsche Bank, he said in Brussels, adding that the bank “has modernized and organized the way it works, it is a very profitable bank”. And even the more generic and by now inflated affirmation that “the European banking system is solid”, as repeated several times by the EU, governments and the ECB, is at this stage too little to convince investors not to make speculative choices.
There is in fact another element which reflects the dangerous addiction to standardized messages of these hours. 5-year credit default swaps on Deutsche Bank surged to above the 200 basis point mark from 134 on Wednesday.
What does it mean? CDS are financial products that serve to hedge against the risk of the bankruptcy of a company, in this case of a bank, and are often used precisely for speculation.
Analysts speak of the “irrationality” of the markets, because it is this conclusion that is reached by comparing the fundamentals of Deutsche Bank and those of Credit Suisse. They are two different banks, in different situations. “It seems to me there is awareness of a system whose fundamentals are solid, I don’t think there is any particular concern,” he says Prime Minister Giorgia Meloni. But failing to consider what is happening on the stock market in these hours as the clear signal that the risk of contagion is not only always potentially present but is already real could be a serious mistake in underestimating the problem. (From Fabio Insenga)