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OPINION

European banks downplay impact of Russian gas shut-off

If Russia stops the gas this winter, the damage to European banks will be worse than Covid, and Germany will be at the centre of the storm.

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Deutsche Bank reported decent second-quarter results on July 27, including an 8% return on tangible common equity partly thanks to higher FIC trading revenues, which helped the German lender to its best first half since 2011.

The stock edged up, but investors were in no mood to celebrate. They want to know what will happen to the German economy if Russia cuts off gas supplies to Europe in retaliation for sanctions and financial and military support for Ukraine.

Deutsche offers brief detail of its preparations on page 47 of the 112-page interim report, where it says that an immediate gas-supply shutdown would potentially result in additional allowances for credit losses of 20 basis points, likely playing out over 18 months, with 10bp of that in the first year and 10bp in the second.

That doesn’t sound too bad, does it?

“We were surprised that the modelled impact of a gas-supply shock was only 20bp,” say bank analysts at Barclays, who estimate a number almost 17 times higher in a recent severe stress test for an energy crisis in Europe.

Putin may see greater benefits in drip-feeding gas to Europe, earning a much higher price for the reduced volume he allows through, keeping Western countries dependent, maintaining high inflation and uncertainty

Deutsche’s own economics team believes that even without full gas rationing the country is already headed into recession in the second half of this year and its economy will likely shrink by 1% in 2023 as high inflation hits consumer spending.

The


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