Global markets rattled again by fresh Deutsche Bank crisis

Two new issues have jolted the world markets. Bond insurance rates at Deutsche Bank increased, which is mimicking what occurred to Credit Suisse before it failed. Also, according to news sources, the US Justice Department is looking into European institutions, such as Credit Suisse and UBS, for allegedly assisting Russian oligarchs in avoiding sanctions. On the announcement, American stocks declined.

Lawmakers and the president have given the Federal Reserve a mandate to keep prices steady for the US economy. Its goal has been established by the central bank as 2% inflation (as measured by the headline Personal Consumption Expenditures price index).

According to James Bullard, president of the St. Louis Federal Reserve, the Fed cannot deviate from its goal of 2% annual inflation because doing so would be a “catastrophe” that may set the US economy and others back fifty years. “That 2% is a worldwide norm that was developed in the 1990s,” Bullard said at a Greater St. Louis Inc. event. He further said

“I think giving up that standard would be disastrous. All the other nations would then abandon their norms, and we would be back in the 1970s. Hence, we don’t want to do that; instead, we want to maintain our 2% target. I believe that letting go of that standard would be disastrous. We would then be back in the 1970s since all other nations would then abandon their norms. Thus, we don’t want to do that; instead, we want to adhere to our 2% objective. Bullard continued by saying that he thinks it is possible for inflation to decline this year and anticipates that “price-setters” would be mostly responsible.

German Chancellor Olaf Scholz said there was “no reason to be concerned” about Deutsche Bank, after its shares fell as much as 14%. “Deutsche Bank has modernized and organized the way it works. It’s a very profitable bank,” Scholz told reporters.

French President Emmanuel Macron also expressed his faith in the euro area banking system. “We have strict regulations in the euro zone, with a very high transparency of the ratios that are closely followed,” Macron told journalists on Friday. He dismissed the stock turbulence of Deutsche Bank today as “speculative behavior and players looking to make money from short-term moves.”

Investors have been rattled by the collapse of two US regional banks; Silicon Valley Bank and Signature Bank, earlier this month. Sunday’s rescue of Credit Suisse by bigger Swiss rival UBS calmed markets at the start of this week, but the fear of a wider banking crisis returned Friday.

In their joint statement, EU leaders said the European economy had “entered 2023 on a healthier footing than previously expected, despite high inflation and energy prices.”