Confidence remains fragile in global financial markets at the start of another trading week which will see the judging of the second bailout attempt in less than a week for stricken Swiss bank Credit Suisse.
A week ago Credit Suisse was to be bailed out via a $US60 billion package of measures including a $US50 billion assistance package from the Swiss National Bank.
On Sunday, after two days and nights of talks, the cost of the bailout had doubled to a package around $US120 billion and the absorption of Credit Suisse by its rival, UBS.
A deal had to be done by Sunday night in Europe to assure markets in Asia, led by Australia, that the festering sore at Credit Suisse had been lanced and bandaged in a convincing manner.
Futures trading on Friday night had the ASX 200 starting down 1.4% this morning (Monday). News of the second bailout should at least provide some support but confidence remains uncertain.
UBS agreed to buy its embattled rival Credit Suisse for 3 billion Swiss francs ($US3.2 billion) late Sunday – that was less than 50% of the bank’s value before last week’s sell off.
The terms of the deal will see Credit Suisse shareholders receive 1 UBS share for every 22.48 Credit Suisse shares they hold.
The Swiss National Bank (Switzerland’s central bank) also pledged a loan of up to 100 billion Swiss francs ($108 billion) to support the takeover. That is double the $US50 billion support deal reached last Wednesday.
The doubling in the size of the package and especially the support from Swiss taxpayers confirms just how bad Credit Suisse’s position finished the week.
There are reports that it was losing 15 billion francs in deposits and investment funds every day last week, with the amount’s escalation after Wednesday’s first bailout.
“With the takeover of Credit Suisse by UBS, a solution has been found to secure financial stability and protect the Swiss economy in this exceptional situation,” read a statement from the Swiss National Bank, which noted the central bank worked with the Swiss government and the Swiss Financial Market Supervisory Authority to bring about the combination of the country’s two largest banks.
“This acquisition is attractive for UBS shareholders but, let us be clear, as far as Credit Suisse is concerned, this is an emergency rescue. We have structured a transaction which will preserve the value left in the business while limiting our downside exposure,” said UBS Chairman Colm Kelleher in a statement.
The combined bank will have $5 trillion of invested assets, UBS claimed – but how much of that figure will stick remains to be seen credit Suisse is a toxic bank from the point of view of investors and the question now is, will it infect the larger UBS?
There must be fears of that happening because of the curious structure of the deal.
The Swiss National Bank’s loan of up to 100 billion Swiss francs ($1US08 billion) will be supported by a Swiss government guarantee to assume losses up to 9 billion Swiss francs from certain assets over a preset threshold “in order to reduce any risks for UBS,” said a separate government statement.
That’s a confirmation that there are billions of francs/dollars in dodgy assets in Credit Suisse
“This is a commercial solution and not a bailout,” said Karin Keller-Sutter, the Swiss finance minister, in a press conference Sunday. That sounds like a statement of denial, not fact.
News of the deal was welcomed by US Treasury Secretary Janet Yellen and Federal Reserve Chair Jerome Powell in a statement.
“The capital and liquidity positions of the U.S. banking system are strong, and the U.S. financial system is resilient. We have been in close contact with our international counterparts to support their implementation,” they said.
They would say that but it does show the relief that the US and the Fed don’t need to become involved in the rescue and bailout of a foreign bank – it has enough problems on hand with the tottering First Republic Bank whose $US30 billion deposit deal last week has not convinced American markets.
Investors should not regard Credit Suisse’s problems as isolated to Switzerland, Europe and then the US – markets here would have been crunched had it gone bust like Lehman Brothers sid in September, 2008.
Credit Suisse’s balance sheet is around twice the size of Lehman Brothers’ when it collapsed, at around 530 billion Swiss francs as of the end of 2022 (well over $US750 billion).
It is also far more globally interconnected, with multiple international subsidiaries — making an orderly management of Credit Suisse’s situation even more important. It would be crunched global financial markets had it collapsed, freezing liquidity and damaging economies large and small and trigger a recession.
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While this deal was being arranged, global central banks have revealed a massive, six-week boost to global liquidity to prevent markets from following the GFC template and freezing up and locking out millions of companies and people from accessing their funds.
The Federal Reserve and other global central banks announced fresh measures to improve US dollar liquidity as global financial markets reel from the turmoil hitting the banking sector.
Working with the Fed will be the Bank of Canada, Bank of England, Bank of Japan, European Central Bank and Swiss National Bank which will coordinate action to enhance the provision of liquidity through the standing US dollar swap line arrangements.
The central banks didn’t mention an amount to be injected, but it will be in the tens of billions of dollars a day – a sign they see the global financial system close to freezing and even collapse.
Central banks have had to invent ways of keeping liquidity flowing through their financial system and the Fed has co-ordinated a serious of US dollar swaps with other central banks to keep liquidity alive and allow governments to continue paying and repaying each other.
“To improve the swap lines’ effectiveness in providing U.S. dollar funding, the central banks currently offering US dollar operations have agreed to increase the frequency of seven-day maturity operations from weekly to daily,” the Fed said in a statement issued alongside announcements from the other five central banks.
Operations will start today (Monday) and will continue at least through the end of April, the Fed said.
The daily swaps arrangements tell us the fed and other central banks had come to understand that the problems hitting US regional banks and now Credit Suisse, were starting to impact liquidity elsewhere in global financial markets.
For all the rhetoric about how bad previous outbreaks of financial strain (the Greece crisis a decade or so ago), various ‘temper tantrums’ by markets over quantitative easing changes, the crisis that started on March 9 is by far the most serious.
This is a move to ensure there is enough money around the banking and other financial systems to support activity for at least six weeks, which if you think about it, is a serious, serious outlook.
