Posts Tagged ‘Deutsche Bank’

Germany Catches Cold

Monday, June 25th, 2012

In a sign that no Eurozone nation is completely immune to the shocks of the European debt crisis, ratings agency Moody’s Investor Services has cut the credit ratings of six banks in Germany.  The largest bank to be downgraded is Commerzbank, Germany’s second-biggest lender, which was cut to A3 from A2.

“Today’s rating actions are driven by the increased risk of further shocks emanating from the euro area debt crisis,” Moody’s said. The downgrade shows that Moody’s thinks Germany could be hit if the Euro crisis becomes a catastrophe.  “It brings the crisis in Southern Europe and Ireland closer to home in Germany,” said BBC Berlin correspondent Stephen Evans.

The other affected banks DekaBank, DZ Bank, Landesbank Baden-Wuerttemberg, Landesbank Hessen-Thueringen and Norddeutsche Landesbank.  In addition to its rating cut, Commerzbank was placed on negative outlook, meaning Moody’s is considering an additional cut.  According to Moody’s that is because of the bank’s exposure to the Eurozone periphery and its concentration of loans to single sectors and borrowers.  Moody’s deferred a decision on the rating of Germany’s biggest bank, Deutsche Bank.

The downgrades are a result of Moody’s concern about the “increased risk of further shocks emanating from the euro area debt crisis, in combination with the banks’ limited loss-absorption capacity”.  Moody’s believes that German banks are likely to find themselves under less pressure than many European peers as personal and corporate debt levels are more modest than elsewhere.  The agency noted that the downgrades are less harsh than it had originally said they could be.  “Moody’s recognizes the steps Germany banks have taken to address past asset quality challenges,” the ratings agency said.

The Group of Seven nations agreed to coordinate their response to Europe’s turmoil, which has tipped at least eight of the 17 Eurozone economies into recession and damped demand for foreign goods. Policy makers at the European Central Bank meeting today face increasing pressure to lower rates and introduce more liquidity support for banks.  Moody’s decision is “a bit harsh” given the strength of the German banking system and economy, said Sandy Mehta, chief executive officer of Value Investment Principals Ltd., a Hong Kong-based investment advisory company.  “But given the events in Europe, unless the authorities and the powers that be are more decisive and take firmer action, then you do have the risk that the economic problems will engulf Germany as well.”

The rating actions were driven by “the increased risk of further shocks emanating from the euro area debt crisis, in combination with the banks’ limited loss-absorption capacity,” Moody’s said.  “We wanted to identify vulnerabilities from further potential shocks from the euro area debt crisis and how this would affect investor confidence in institutions across Europe,” said Moody’s Managing Director for banking, Carola Schuler.  Moody’s agency was especially apprehensive about a potential decline in the value of banks’ portfolios of international commercial real estate, global ship financing, as well as a backlog of structured credit products, she said. “German banks have limited capacity to absorb losses out of earnings and that raises the potential that capital could diminish in a stress scenario.”  Moody’s action was anticipated.

According to Forbes, “This latest downgrade could be used by European politicians to put pressure on Angela Merkel and other policymakers.  Germany is staunchly opposed to the idea of Eurobonds, which Spanish and Italian politicians believe is one of the ways out of this mess.  Moody’s downgrade is but another sign of the extent of financial interconnectedness in the European Union, which highlights the dangers of contagion.  While some have argued that Germany would be better off leaving the monetary union, its financial sector remains in close contact to the broader European economy, making it difficult for Merkel and the rest to give up.  According to Moody’s, German banks’ major headwind is the continuation of the European sovereign debt crisis.  These banks are sitting on assets that will see their quality erode as markets tank, an effect that will be exacerbated if the global economy begins to cool at a faster pace too.”

Writing on the 247wallstreet.com website, Douglas A. McIntyre says that “Germany is assumed to be the home market of some of Europe’s most stable banks because of the relative stability of its economy.  Moody’s has undermined that view as it cut ratings of seven banks there, including Commerzbank, the second largest firm in the country.  The move was the result of worry over exposure to debt issued by some nations in the region that are now in financial trouble.  And the banks Moody’s singled out have less than adequate balance sheet to handle a major shock to the region’s credit system.”

A Long Night in Brussels Ends With a Greece Debt Deal

Tuesday, November 1st, 2011

The midnight oil burned in Brussels as European finance ministers, heads of state, bankers and the International Monetary Fund (IMF) try to reach an agreement to restructure Greek debt.  In the deal, private banks and insurers would accept 50 percent losses on their Greek debt holdings in the latest bid to reduce Athens’ immense debt load to sustainable levels.  Although it required more than eight hours of negotiations that did not end until 4 a.m., the deal also anticipates a recapitalization of hard-hit European banks and a leveraging of the bloc’s rescue fund, the European Financial Stability Facility (EFSF), to give it €1 trillion ($1.4 trillion).

Significant work remains to be done to assure that the rescue works as envisioned.  Several aspects of the deal, including the technicalities of boosting the EFSF and providing Greek debt relief, could take weeks to firm up; the plan to rebuild confidence after two years of crisis could unravel over the details.  “I see the main risk is that we are left waiting too long again for the implementation of these agreements,” European Central Bank (ECB) policymaker Ewald Nowotny said.  “Speed is very important here.”  According to Greek Prime Minister George Papandreou, “The debt is absolutely sustainable now.  Greece can settle its accounts from the past now, once and for all.”

European Union (EU) President Herman Van Rompuy said that the deal will slash Greece’s debt to 120 percent of its GDP by 2020.  Under current conditions, it would have soared to 180 percent.  Achieving this will require that banks assume 50 percent losses on their Greek bond holdings — a hard-to-swallow pact that negotiators now must sell to individual bondholders.  According to Van Rompuy, the eurozone and IMF — which have both propped up Greece with loans since May of 2010 — will give the country another €100 billion ($140 billion).  That’s slightly less than amount agreed in July, primarily because the banks now must pick up more of the slack.  “These are exceptional measures for exceptional times.  Europe must never find itself in this situation again,” European Commission President Jose Manuel Barros said.

While some question whether Greece will be able to meet its debt obligations by the drop-dead date, the fact that leaders were able to finally put concrete numbers to what had previously been little more than vague promises represents an important step forward.  “It’s great news that we’ve got an agreement,” said Deutsche Bank economist Gilles Moec.  “When Europe puts its heads together, they do actually begin to cooperate.”

Greece, whose crippling debt load has in principle been cut in half in the deal that Papandreou says marks “a new day for Europe and for Greece,” emerges as the biggest winner.  Although the necessary austerity measures will be tough for the Greek people to live with, the new plan has set the country on a sustainable debt trajectory, according to Moec.  “At least the deal gives Greece a fighting chance.  It’s not great, it would be much better if we could get the debt below 100 percent…but it’s doable.”

Germany, which had been the driving force behind compelling the banks to take a bigger “haircut” or write down on Greek debt, is another winner.  “If you look at the vote in German parliament outlining what Germany was going to ask for at the summit, and then you see the results of the summit, it’s basically identical,” Moec said.  German Chancellor Angela Merkel believes that the deal is a victory for Europe in general.  “Everybody was aware that the whole world was looking at this meeting,” she said.  “I think that tonight we Europeans have taken the right measures.”

Writing for Reuters, Global Economics Correspondent Alan Wheatley sees some reason for skepticism.Greece, however, has become something of a sideshow.  Investors long ago judged that it was not just illiquid, but insolvent.  Much more critical is what the eurozone could do to prevent the debt rot from spreading to bigger, systemically important but stagnant economies, notably Italy.  Markets will have to wait for details as to how the EFSF will be scaled up; whether the likes of China will top up the bailout fund; and how operationally it will enhance the credit of member states’ new bonds.  But some analysts are skeptical.  Economists at Royal Bank of Scotland said they expected markets to re-price sovereign debt across the euro area given the size of the losses imposed on Greece.  Expressed as the ‘net present value’ of the bonds, the proposed loss will be close to 70 percent, much more than the 40 percent hit that banks had volunteered to take, RBS said.  What’s more, the EFSF will be too small to offer help to any country that might need it for any length of time.  And a promise by governments to help banks regain access to long-term bond market funding implies they will have to assume extra contingent liabilities, thus adding to their debt burdens.”

Time’s Bruce Crumley is more hopeful. According to Crumley, “Let’s hope that upbeat attitude persists, but let’s not be stunned if it doesn’t.  Because let’s be honest about another reality of Thursday’s development: it was only the most recent play by governments in a global confidence game that’s certain to shift and surge again before it’s all over.  That’s not ‘confidence game’ in the usual, illicit ‘con’ sense.  Instead it more literally describes attempts by EU leaders to inspire confidence and calm in financial markets so they’ll cease the doubt-inspired dumping of bonds, and bets against iffy sovereign debt that severely complicates efforts by eurozone officials to overcome current crisis.  To that end, the relatively timid action taken earlier by European leaders was subsumed by the far more dramatic measures adopted  — an emphatic upward ratcheting designed to prove their determination to tackle the evolving catastrophe once and for all.”

Will the Stock Market Recovery Continue in 2011?

Tuesday, January 11th, 2011

Will the Stock Market Recovery Continue in 2011?  With the stock market ending its best December since 1987, there is hope that 2011 will see a strong Wall Street recovery.  One source of hope is the fact that the Standard & Poor’s 500 Index has returned to its pre-Lehman Brothers level.  It joins the Dow Jones Industrial Average, the Nasdaq Composite Index and the Russell 2000 in seeing strong improvements in their levels.  Stocks have risen 20 percent in just four months.

The recent surge was helped by performance chasing.  The proportion of money managers lagging their benchmarks by five percent has increased from 12 percent at the end of October to 22 percent in the middle of December and trimming their risk exposure “on the presumption that the markets had reached the upper end of a trading range,” said JPMorgan’s Thomas Lee.  BTIG’s Mike O’Rourke, chief market strategist, believes the purchase of hard assets as a hedge against depreciating currencies has helped drive the price of oil to above $90 per barrel.  He also points to high silver and copper prices – with the latter at an all-time high.  “There is no doubt commodities have performed well even though the dollar has not broken down, but the question is how long will it take before speculators bail on the trade,” O’Rourke said.

Wall Street market strategists are consistently bullish, generally forecasting 2011 gains of 10 to 17 percent, with Deutsche Bank forecasting gains of as much as 25 percent Main Street investors are equally upbeat: Recent polls indicate the greatest level of optimism since 2007, with the bullish crowd surging to 63 percent of those queried, with just 16 percent claiming bearishness.