Understanding Deutsche Bank’s Possible Bail-in…(Get Out Of The Banks…)

Monday, October 3, 2016
By Paul Martin

by Martin Armstrong
ArmstrongEconomics.com
Oct 3, 2016

Chancellor Merkel cannot afford to bailout Deutsche Bank from the point of view of a conflict perspective within the EU since she has taken such and intolerable hard line in the Italian bank rescue not to mention Greece. Merkel fails to understand that the very pretense of government was to protect the people. Taking their savings to bail-in banks is really insane. Just because she got away with it in Cyprus, and has demanded that same result in Greece and Italy when they have no right to vote her out of office, is a very insane and dangerous position for the EU as a whole. What Merkel has done to Germany’s image in the Southern EU is very damaging. It has revived the old wounds and cast Germany as a dictator that people have no right to change in any possible democratic process.

On the other hand, Deutsche Bank is different since it is the primary clearing bank in Europe. Any bail-in is more likely to take place by wiping out its bonds called CoCos, which have no maturity date. Indeed, investors may never get their money back. Under the terms, the bank can redeem them, usually after five years if it wants to. The annual coupon payments are contingent on the bank’s ability to keep its capital above certain critical threshold levels. If the bank’s capital falls below that threshold, the bank won’t make the coupon payment. Investors cannot call a default on these bonds, and that sets them up for a bail-in. Investors are simply sitting on bonds that they bought because they had a 6% coupon. However, there is not maturity and no guarantee of redemption and if capital falls below the threshold they plunged in value and pay no coupon. Consequently, if regulators deem that the bank is failing, then these CoCos will be bailed-in by either being converted into declining values in shares or could be just canceled.

The Rest…HERE

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