Financial experts claim that the world is heading for a severe new crisis akin to the Great Financial Crisis and are frantically sounding the alarm.
According to one analyst, the contentious Credit Suisse rescue deal and the ongoing effects of Silicon Valley Bank’s failure show that the world is entering a crisis “far worse” than the GFC.
Intense Negotiations to Prevent the Troubled Bank
After intense negotiations to prevent the troubled bank from starting a larger global financial crisis, Swiss bank UBS on Sunday agreed to acquire rival Credit Suisse for $US3.25 billion ($4.8 billion), or less than half of its Friday closing value.
According to the Swiss government, the deal, in which Switzerland’s largest bank will acquire the second-largest bank in the nation, was essential to stop irreparable economic turmoil from spreading throughout the country and beyond.
Clifford Bennett, the chief economist at ACY Securities, said in a note on Monday, “This is as bad as it gets.”
Credit Suisse Revalued Pver the Weekend
Adding that “a full banking crisis has suddenly rushed across the horizon toward us. Not only was Credit Suisse revalued over the weekend at half its Friday market close, but such valuation alsorequired the zeroing of many bondholders’ stakes and massive government guarantees on losses UBS might suffer as a result of this purchase of Credit Suisse.”
Holders of Credit Suisse bonds worth $US17 billion ($25 billion)—known as additional tier one (AT1) bonds, a riskier category of bank debt—were written down to zero under the emergency agreement.
One banker told the Financial Times that the decision could result in a “nightmare” because bondholders were forced to take bigger losses than shareholders, which will likely result in a sell-off of other bank debt when European debt markets reopen Monday.
The decision to sweeten an equity deal at the expense of bondholders and the blatant inversion of the hierarchy of creditors will likely shock the market, according to Jerome Legras, head of research at Axiom Alternative Investments, who was quoted in the newspaper.
According to Mr Bennett, the world is “now in the realms of a full-blown historic crisis” where “investors will simply want out” no matter what the government does.
Along with the fact that investors are now terrified, he added, “some depositors in some banks across Europe and the US will be looking to withdraw their funds” as this news spreads.
“This is now far worse than the Global Financial Crisis. We are truly teetering on the edge of a very deep abyss indeed.”
While banks, economists, and strategists from all over the world would be “talking about how these developments and actions by authorities will stabilize markets and reassure depositors” today, he claimed they were merely “talking their books”.
“They are talking their very own survival,” he claimed.
“We have never been this close to a full-on run on multiple banks. Fractional banking issues have always been there, but they have now entered the mainstream conversation front and centre. The previously leveraged upside is now turning into leveraged downside risk. It is very likely that stocks, in general, will also be sold off.”
The ASX200 index, which measures the performance of the Australian stock market, fell sharply on Monday, ending the day down 1.4% at 6898.50 points, a four-month low.
What’s the ‘Best Solution’?
Following a week of turmoil brought on by the failure of two US banks, the Credit Suisse transaction was warmly welcomed in Washington, Frankfurt, and London as one that would support financial stability.
The takeover was revealed at a press conference following a dramatic day of negotiations at the finance ministry in Bern, the capital of Switzerland, and with time running out before the markets reopen on Monday.
Axel Lehmann of Credit Suisse and Colm Kelleher of UBS flanked Swiss President Alain Berset, who was also joined by the finance minister, the head of the Swiss National Bank (SNB) central bank, and the head of the financial regulator FINMA.
According to Mr Berset, the takeover was the “best solution for restoring the confidence that has been lacking in the financial markets recently” in the affluent European country, which is renowned for its prominence in the banking industry.
He claimed that if Credit Suisse had collapsed, it would have had “incalculable consequences for the nation and for international financial stability”.
UBS would acquire Credit Suisse for “a merger consideration of three billion Swiss francs,” according to a statement from Credit Suisse.
After experiencing significant losses on the stock market the previous week, Credit Suisse’s share price ended Friday at 1.86 Swiss francs, giving the company a market value of just over US$8.7 billion ($13 billion).
Shareholders of Credit Suisse would receive 0.76 Swiss francs per share, according to UBS.
“Given recent extraordinary and unprecedented circumstances, the announced merger represents the best available outcome,” Mr. Lehmann said.
According to Switzerland’s Finance Minister Karin Keller-Sutter, the failure of Credit Suisse could have resulted in “irreparable economic turmoil,” “huge collateral damage,” and “risk of contagion” for other banks, including UBS.
She also said that the takeover has “laid the foundation for greater stability both in Switzerland and internationally,” and urged that it was “a commercial solution and not a bailout.”
Christine Lagarde, president of the European Central Bank, praised the deal’s “swift action” and expressed her approval of it on a global scale. She claimed that the decisions made in Bern “are instrumental for restoring orderly market conditions and ensuring financial stability.”
In a joint statement, Treasury Secretary Janet Yellen and US Federal Reserve Chair Jerome Powell said: “We welcome the announcements by the Swiss authorities today to support financial stability.”
British Chancellor of the Exchequer Jeremy Hunt echoed the sentiment.
In an effort to allay concerns shaking the global banking industry, the US Federal Reserve, along with the central banks of Canada, Britain, Japan, the EU, and Switzerland, announced on Monday that they would launch a coordinated effort to improve banks’ access to liquidity.