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The collision of Credit Suisse’s profit problem and fears about rising global fragility created panic on markets on Wednesday night. How long can regulators keep playing whack-a-mole?
It’s one of those great unwritten rules of life: when someone tells you everything’s fine and there’s no need to worry, you can be pretty sure the opposite is true.
The statement from the Swiss National Bank and the Swiss Financial Market Supervisory Authority on the staggering sell-off in Credit Suisse stock and credit default swaps on Wednesday night is a classic example.
The sell-off at Credit Suisse spread around the world. Bloomberg
The very fact the regulators needed to reassure markets that “Credit Suisse meets the higher capital and liquidity requirements applicable to systemically important banks” and then make clear it will “provide liquidity to the globally active bank if necessary” you know you’ve got a serious issue on your hands.
Still, there’s no denying this statement was a vital circuit breaker, given the way the sell-off in Credit Suisse shares that started before European markets opened spread across Europe banking stocks and then through global markets.
This was a truly scary night.
Credit Suisse shares were already falling in pre-market trade after it revealed on Tuesday night that it had found “material weaknesses” in its financial reporting processes for 2022 and 2021.
But the sell-off went to another level after Credit Suisse’s biggest shareholder, the Saudi National Bank, explicitly ruled out providing the group with further support, ostensibly because it did not want to breach shareholding caps.
But the Saudi retreat sparked panic, with Credit Suisse’s shares down more than 30 per cent at one stage; the stock was eventually halted down 24.2 per cent.
Credit default swaps shock
That’s clearly a shocking move, but the really shocking price action was in the credit default swaps that insure investors against Credit Suisse defaulting on its bonds.
Quoted prices (it seems there were few actual trades given poor liquidity) for a one-year credit default swap jumped from 836 basis point on Tuesday night (Wednesday AEDT), indicating a probability of default of 10 per cent, to above 3000 basis points.
Credit Suisse’s additional tier 1 bonds traded below 80 per cent of face value, a level typically seen as signalling distress. Even bonds due next month traded well below face value.
We’ve been constantly told that the risks of GFC-style contagion are much reduced in today’s banking system, but fear still moves through markets as well as it ever did.
European banks were smashed, with BNP Paribas and Societe Generale down more than 11 per cent, UBS off 7 per cent and Germany’s Commerzbank down nearly 10 per cent. And already battered US banks were whacked too, with Morgan Stanley down more than 5 per cent and Goldman Sachs down 3 per cent. Expect selling in Australian banks on Thursday, too.
Those moves in financials are not surprising. As economist Nouriel Roubini points out, SVB was a relatively small US bank with a relatively small clientele; Credit Suisse is a global giant, with tentacles throughout the global banking sector and indeed the global economy.
“Anything that happens to Credit Suisse will be of systemic effect for not just the European financial system, but also for the global financial system,” he told Bloomberg.
“If SVB created a ripple effect in global markets, something happening to Credit Suisse would be an order of magnitude more severe. It would be more like a Lehman [Brothers] moment.”
The Swiss regulators’ statement might have helped calm those apocalyptic fears – the Nasdaq Composite even finished green for the day on Wall Street – but Roubini is right to emphasise the potential for broader pain from problems at Credit Suisse.
Even the world’s biggest and most liquid markets are gyrating wildly. The yield on US two-year Treasuries, which plunged wildly on Monday night and then recovered on Tuesday night, saw another session of historic trade, with the yield falling 70 basis points at one stage. That’s simply unheard of.
Copper and oil, the two commodities that are seen as leading indicators of global economic health, also plunged.
And that’s perhaps the central point here.
As this column has been arguing since Credit Suisse struck trouble last year, the bank has a decidedly old-school problem: its revenue is too low and its expenses are too high, forcing it into a long and complex restructure at exactly the wrong time, in exactly the wrong environment.
But when that profit problem merged with growing fears that the global financial system is suddenly showing cracks from the fastest increase in interest rates in history, the result is panic that can spread very quickly – and was only really stopped on Tuesday night by a promise of regulatory intervention.
Former US Treasury Secretary Larry Summers is right when he says that even if contagion fears can be doused, what we have here is a growing string of events – the British pension crisis last year, the collapse of FTX, the collapse of SVB, the panic at Credit Suisse – that keep coming on top of each other, with regulators seemingly playing a game of whack-a-mole to keep calming markets.
“I think that as more and more companies are caught up in this, the complexity and extent of the solutions that are required goes up,” Summers says.
Can the financial world keep putting out these spot fires? Or do they explode into something bigger?
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March 16, 2023 at 04:49AM
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Pure panic at Credit Suisse is now everyone's problem - The Australian Financial Review
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