Credit-default protection on German banks, including Commerzbank and Deutsche Bank has widened over the last two weeks because of rumors about the financial viability of Commerzbank and a negative ratings report from Moody's Investor Service on others. Traders said five-year credit-default swap spreads on Commerzbank blew out to 150 basis points/170bps on Wednesday compared with 80bps/85bps 10 days before. Five-year protection on Dresdner Bank blew out to 75bps/80bps from 50bps/60bps and swaps on Deutsche Bank moved to 60bps/70bps from 45bps/50bps over the past two weeks. Additionally, there were offers for protection on the subordinated debt of Hypovereinsbank at 200bps, with no bids. Weekly volumes have doubled in the past two weeks to approximately 20 trades for each credit. Spokeswomen at Commerzbank, Hypovereinsbank and Dresdner Bank in London declined comment. A spokesman at Deutsche Bank declined comment.
Moody's put the long-term and financial strength ratings of Commerzbank, Hypovereinsbank and Deutsche Bank on negative watch two weeks ago. It also put Dresdner's ratings on review for possible downgrade at the same time. There were also rumors circulating on the solvency of Commerzbank during the last two weeks, but nothing has been substantiated.
"A lot of [the investor nervousness] is tied in with the equity markets," said one credit-default swaps trader. "German banks have cross holdings in German corporates and the DAX has fallen the most of the European indices," he said.