The German banking giant Deutsche Bank has seen its share price plummet by more than 14% on Friday, reaching its lowest level since November 2022. The reason behind this sharp decline is the surge in the cost of insuring its debt against default, which has reached its highest level since early 2019.
Credit default swaps (CDS) are contracts that allow investors to hedge against the risk of a borrower failing to repay its obligations. The higher the CDS spread, the more expensive it is to buy protection and the more risky the borrower is perceived to be.
According to data from S&P Market Intelligence, Deutsche Bank's five-year CDS spread jumped above 200 basis points (bps) on Friday, up from 142 bps on Wednesday. This means that it would cost $200,000 per year to insure $10 million worth of Deutsche Bank's debt for five years.
This spike in CDS spreads reflects growing concerns about the health and stability of Europe's banking sector, which has been hit by a series of shocks in recent weeks. These include:
- The state-backed rescue of Credit Suisse, Switzerland's second-largest bank, which had to write off $17 billion worth of its riskiest bonds (known as Additional Tier-1 or AT1) as part of a deal with UBS to avoid collapse.
- The turmoil among regional US banks, which have suffered heavy losses due to their exposure to Archegos Capital Management, a family office that imploded after making highly leveraged bets on stocks.
- The uncertainty over the impact of rising inflation and interest rates on banks' profitability and solvency.
Deutsche Bank has been struggling for years to restore its reputation and profitability after being plagued by scandals, fines and lawsuits. It has undergone several rounds of restructuring and leadership changes in an attempt to cut costs and focus on its core businesses.
However, these efforts have not been enough to convince investors that Deutsche Bank has overcome its legacy issues and can compete effectively with its rivals. The bank's market capitalization has shrunk by more than half since 2019 and now stands at around $19 billion.
Deutsche Bank declined to comment on its share price performance or CDS spreads when contacted by Reuters. The German financial regulator BaFin also had no comment.
Some analysts believe that Deutsche Bank may need further support from the government or other institutions if it wants to survive in the long term. Others argue that Deutsche Bank still has some strengths and opportunities that could help it turn around its fortunes.
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