THE Eurozone’s banking system could implode, dragging the euro down with it, if Angela Merkel’s government allows Deutsche Bank to fail, experts have warned, as the bank’s share price hit new lows in this morning’s trading.
In a bid to restore calm, following a catastrophic drop in value, Germany’s largest bank denied seeking help from Berlin after claims it sought aid from the German government and needed to raise additional funds from investors.
German Chancellor Angela Merkel said the German people would not bailout the Bank and that it had the funds to deal with the gap in dirivitives.
But European stocks failed to rebound this morning as weak sentiment towards the banking sector saw the bank’s shares hit a fresh record low.
Investors remain unconvinced, as another day of sell-offs took Deutsche’s stock price down another three per cent today, after already plunging more than seven per cent on Monday.
The panic surrounding Deutsche’s position continues to seep across Europe’s banking sector, pulling down stocks in the bloc’s biggest players, with Germany’s top stock market the DAX down by almost one per cent mid-morning.
Deutsche rival Commerzbank also saw its share price tumble by almost three per cent as news broke that they would axe as many as 9,000 jobs in a huge drive to cut costs.
Experts said this just a taste of the catastrophic fallout that would ensue if Germany refused to bailout Deutsche if help were needed.
As the largest bank in the eurozone’s largest economy, a failure could spark an epic financial meltdown not seen since Lehman Brothers went to the wall in 2008.
Berlin is thought to have made the comments after refusing to allow Italy to break eurozone rules bail out its own fragile banks in recent months.
But as Deutsche’s position looks increasingly perilous, Ms Merkel may have no choice but to act.
Michael Hewson, chief market analyst at CMC Markets UK, said: “While politics is undoubtedly a factor given the banking problems in Italy and the weariness that voters have with respect to banking bailouts a year before German elections, politicians need to weigh up what the possible scenarios might be.
“German politicians have been particularly insistent that Italy deals with its problem banks without using taxpayer’s money, and by bailing in depositors and bondholders if necessary.
“In being so insistent they have backed themselves into a cul-de-sac of their own making, particularly if they choose to adopt different rules for their own largest and systemically important bank.
“Markets got a taste of the turmoil unleashed in the aftermath of Lehman Brothers and it wasn’t anywhere near as systemically important as Deutsche Bank is, which means there is no way to accurately measure what any ripple out effects might be, if investors lose confidence even more and Germany leaves the bank to its fate.
“Ultimately the German government may have to decide if they can afford not to bail it out, if any resultant turmoil plunges Europe back into recession.”
It comes after Deutsche has now seen a massive 55 per cent wiped off its value this year.
It recently emerged that US authorities want the lender to pay a huge $14billion (£10.5bn) in fines over a scandal related to the financial crisis.
Concerns over the bank’s ability to turn a profit amid low interest rates and the struggling eurozone economy have also plagued the group this year.
And in July the group shocked markets by revealing its second quarter net income had dived by 98 per cent to around £16million (€20m) from £668m (€796m) in the same period last year.
Earlier this year, chief executive John Cryan was forced to speak out over Deutsche’s stability in an effort to ease investor concerns, insisting insisted the company’s balance sheet was “absolutely rock solid”.
Mr Hewson added: “Where a bank’s financial situation is particularly fragile, as in the case of Deutsche Bank, then politicians and regulators need to tread carefully.”