The news set off a fresh flight from European bank debt. Credit default swaps (CDS) on the iTraxx Financial index measuring stress in the sector saw the biggest jump since the Lehman Brothers crisis, rising 20 points to 226. Adding to the gloom, Standard & Poor's warned that a fifth of all lower-rated companies in Western Europe and the UK are likely to default over the next two years, greatly exceeding the scale of bankruptcies after the dotcom bust. The agency said up to 75 companies that issue debt in the capital markets would fail in 2009 as they struggle to roll over debt. Four have failed this year. Deutsche Bank, Germany's top lender, said it had chosen not to exercise a "call option" on a subordinated bond worth €1bn (£930bn), breaking an iron-fast code in the credit markets. The bank's share price fell 7pc in Frankfurt, and the default insurance on the company's debt surged. "This has never happened before," said Willem Sels, a credit strategist at Dresdner Kleinwort. "Banks have never wanted to do it because it upsets investors and could mean that future funding will be hit." Deutsche Bank, run by Josef Ackerman, is within its legal rights. The contract lets the bank accept an automatic rise in interest costs after five years, or call the option and raise money on the open market. Ronald Weichert, the bank's spokesman, said it would have been "much more expensive" to secure fresh finance in the current climate. "The situation has changed, and we had to decide what to do in the appropriate interests of Deutsche Bank," he said.Fresh credit strains in Europe as Deutsche Bank shocks markets
Deutsche Bank has refused to redeem a bond issue in an unprecedented move that has rattled Europe's credit markets and cut short the relief rally following America's dramatic move to zero rates.
Friday 19 December 2008
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