Eurasia Group noted that a "bail-in" was a far more likely scenario as new European banking rescue rules require creditors to take losses before public money is used to save financial institutions.
"Even in a worst case scenario of a $14 billion U.S. Department of Justice fine, capital shortfalls would be covered by bail-in, obviating the need for German taxpayer money," Rahman, Santi and Lichfield said.
Deutsche Bank could convert its estimated 12 billion euros worth of "CoCo" bonds to cover the fine, Eurasia said. Contingent convertible bonds – or CoCos – are converted into equity once a specified event has occurred (if the bank were to undergo a precautionary recapitalization, for instance).
However, they noted that a bail-in could also "create political problems for Merkel."
"It's highly unclear which investors holds these CoCo financial instruments. If it is pension funds or insurers, for example, that will create blowback for the government, especially as these institutions are already reeling from the effects of low interest rates," they said.
"Next, if CoCos are converted to shares, this operation would 'dilute' existing shareholders. Understanding who Deutsche's shareholders are will therefore also be important for the German government, as this could create political headwinds too."
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