armstrongeconomics.com / by Martin Armstrong / Oct 3, 2016
Chancellor Merkel cannot afford to bailout Deutsche Bank from the point of view of foreign policy perspective within the EU since she has taken such and intolerable hard line in the Italian bank rescue not to mention Greece. 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.