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LONDON, Feb 11 (Reuters) - The cost of insuring Deutsche Bank debt against default leapt on Thursday, while costs for other European banks also climbed as their shares plunged to multi-year lows.
Credit default swaps (CDS), used to insure debt, now imply a 24.5 percent probability that Germany’s biggest bank will default on its subordinated, or junior, debt, according to data provider Markit, while on senior debt the probability has risen to 17 percent.
The surge in CDS comes amid a heavy sell-off in the shares of Deutsche Bank and other European lenders, which are facing questions about their ability to cope with slowing global economic growth and persistently low or sub-zero interest rates.
Data from Markit showed five-year subordinated CDS for Deutsche Bank rose 85 basis points (bps) from Wednesday’s close to a record high of 540 bps, while one-year subordinated CDS leapt 114 bps to 552 bps.
At the start of the year the five-year subordinated CDS was trading at 180 bps.
Subordinated debt ranks after other debt if a company goes bust and is therefore considered more risky.
CDS for senior Deutsche Bank debt also jumped. The five-year contract rose 43 bps from Wednesday’s close to 275 bps, the highest since 2011, Markit said. At the start of the year, it was trading at below 95 bps.
Deutsche Bank last month posted its biggest annual loss on record for 2015 while Credit Suisse has reported its first full-year loss since 2008.
Shares in both banks are down around 40 percent this year and across the European banking sector shares have lost around $250 billion, or a quarter of their value, in 2016. The STOXX Europe 600 Banks index fell 6 percent on Thursday to its lowest since August 2012.
“The European financial sector has been selling off very hard this year and there are genuine concerns which underpin the declines,” said Wouter Sturkenboom, a senior investment strategist at Russell Investments.
Several high profile disappointments this earnings season such as Deutsche Bank, Credit Suisse and Royal Bank of Scotland, had raised worries around banks’ future profitability, Sturkenboom said.
“ECB action, rising non-performing loans and emerging market exposure are weighing on the sector,” he added, referring in the first instance to the European Central Bank’s (ECB) ultra-easy monetary policy, which analysts expect to be relaxed further.
Deutsche Bank co-CEO John Cryan wrote to employees on Tuesday telling them they could reassure clients the bank’s capital position was “absolutely rock solid”.
CDS for the five-year subordinated debt of other European banks such as Credit Suisse and UBS also rose on the day by between 25 and 34 bps.
The ITraxx European senior financials index of CDS also hit its highest since September 2013 amid a surge in net traded volumes.
The banking jitters spilled over into the sovereign debt market, where the cost of insuring against a sovereign default in Germany rose to its highest in more than a year.
Five-year sovereign German CDS rose to almost 22 bps, according to Markit data, up almost 9 bps this week.
The move is seen more as a reflection of hedging activity related to concerns about the financial sector than a fundamental reassessment of credit risk facing Germany, Europe’s biggest economy.
“Germany would probably withstand any problem with Deutsche Bank if it needs to ride to the rescue,” said David Schnautz, interest rate strategist at Commerzbank. (Reporting by Claire Milhench, Sujata Rao and Dhara Ranasinghe; Editing by Mark Potter)
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