Another massive bank — and bank bailout — has occurred as the global financial crisis that began (where else?) in the United States earlier this month continues to spread.
On Monday, global stock markets experienced a sharp decline following the announcement by Swiss authorities that troubled Credit Suisse would be taken over by UBS Group. In an effort to prevent an international banking crisis, central banks took action to alleviate concerns, the UK’s Daily Mail reported.
In premarket trading, Credit Suisse shares witnessed a significant drop of 60.5% to hit a new low while UBS experienced an 8% loss. The steep movements came after a day of intense selling in Asian financial markets, where early investor confidence in official measures to contain a banking crisis dissipated rapidly, the report continued.
On Sunday, the most notable intervention since the global financial crisis occurred, with UBS acquiring Credit Suisse for 3 billion francs ($3.2 billion) in a sudden merger, and the world’s leading central banks committing to daily dollar funding offerings. In a deal orchestrated by Swiss regulators, UBS Group AG agreed to take over the 167-year-old Credit Suisse Group AG and absorb potential losses of up to $5.4 billion, said the outlet.
The central banks of the world announced coordinated actions to stabilize banks. They also provided access to a loan facility that allows banks to borrow dollars from the United States if needed, which was a common practice during 2008’s crisis.
The UBS acquisition has caused investors to focus on the huge financial loss that Credit Suisse bondholders will suffer. This has increased anxiety about key risks such as contagion and the fragility of U.S. regional banking systems, said the report.
As markets opened, European bank shares plunged by more than 5 percent. Credit Suisse’s shares plunged over 63 percent while those of acquirer UBS fell nearly 13 percent. The wider European STOXX 600 dropped 1.6 percent before making a modest recovery, the Daily Mail continued.
“Credit Suisse is our Lehman moment in Europe but we recognise that and we are not going to make the same mistake,’ said Close Brothers Asset Management Chief Investment Officer Robert Alster after fast actions were taken over the weekend.
The European Central Bank, Bank of England, and other central banks are cognizant of the next potential targets for acquisition by large banks with investment banking arms, such as Deutsche Bank, BNP in France, or Barclays in the UK. He also said he anticipates that these central banks will provide assistance if necessary.
“There is a lot of firepower from the authorities to counter what is the steadily eroding loss of confidence,” said Alster, according to the outlet.
The Daily Mail went on to report that the demand for traditional safe havens has caused government bonds in Europe to surge while stock markets have declined. The yields on German Bonds, which are rated triple A, have fallen to their lowest point since mid-December at 1.951%, indicating a rise in bond prices. However, there are signs of risk aversion, with the spread between Italian debt — which is considered riskier — and German debt widening to over 200 basis points once more.
The Japanese yen saw a further rise of 0.75% in the currency markets due to the demand for safe-haven currencies. However, there were no significant movements from either the Swiss franc or the euro.
It should be clear that after more than a week into the banking panic, and two interventions organised by the authorities, this problem is not going away. Quite the contrary, it has gone global,’ said Mike O’Rourke, chief market strategist at Jones Trading. “The reports that UBS is acquiring Credit Suisse will likely magnify Credit Suisse’s problems by moving them to UBS.”
This is just the beginning of the next economic and financial crisis, as we are now seeing.