Issue of the week: Europe’s Lehman moment?

Deutsche Bank shares were on the slide again this week. Could the bank collapse, and would Berlin bail it out?

Some word pairings are so unlikely that we find it hard to put them together, said Matthew Lynn in The Daily Telegraph. “Italy” and “efficiency”, for example. Or “Germany” and “banking crisis”. Yet it has become “increasingly hard to ignore the slow-motion car crash that is Deutsche Bank, or to avoid the conclusion that something very nasty is developing”. Shares in the embattled bank, once Europe’s strongest, have been sliding for a year. And on Monday they fell another 7.5%, touching their lowest level for 33 years, on well-sourced reports that Chancellor Merkel had ruled out a state-backed rescue. You can see why the market is spooked. Without the ultimate promise of government backing, the bank’s counterparties might decide that Deutsche is at risk of collapse – and confidence will evaporate. Deutsche is in “big, big, trouble”. And if it does go down, it could well “take Merkel with it – and quite possibly the euro as well”.

Merkel’s stance should surprise no one, said Nils Pratley in The Guardian. There’s a general election in Germany next year, and there are “no votes in saying you would be prepared to bail out bonus-hungry bankers” – nor in using state funds to pay the $14bn fine recently proposed by the US Justice Department for the alleged mis-selling of mortgage securities by Deutsche. In any event, Berlin can’t bail out the bank “without breaking every state aid rule in the book”, said Alistair Osborne in The Times. So why was the market reacting to something that couldn’t happen anyway? Mainly because confidence in British boss John Cryan’s turnaround plan is very low. Deutsche lost s6.8bn last year, and who knows when it might sniff a profit again, given its “skills at attracting fines for past shenanigans”?

If you think Berlin would refuse to bail out Germany’s biggest bank, you’re quite wrong, said Geoffrey Smith in Fortune. It suits her politically to pretend otherwise, but “Merkel has already experienced one financial crisis and knows that a disorderly bankruptcy is the worst of all possible outcomes. There will be no German Lehman.” Also, the bank’s plight has been over-egged, said Lex in the FT. The bank’s Tier 1 capital ratio (a measure of its risk profile) may be a “dicey” 10.8%, but it is still better capitalised than it was two years ago, and its credit remains good, with bond prices broadly stable. For now, Deutsche is “cushioned by more than one airbag”, said Dominic Elliott on Reuters Breakingviews: by far the most important one is political. Deutsche was recently branded the world’s “most systemically risky” financial institution by the IMF. Berlin has absolutely no desire “to test what that really means”.