The world banking industry is under stress: After the bankruptcy of the American institute Silicon Valley Bank (Svb), the acquisition of Credit Suisse by rival Ubs is stirring the markets. In Italy, fear is always a fear of “contamination” because of the potential financial ties that may exist between Italian banks and others abroad. But Economy Minister Giancarlo Giorgetti continues to reassure the results for Italy as he voices doubts about the priority order of the Swiss bank’s bailout. Analysts are also hesitant and investors are worried.
Recovery of Credit Suisse at affordable prices
After intense negotiations, Switzerland’s largest banking group, UBS, agreed to buy Credit Suisse for an insignificant sum, with substantial guarantees from the Bern government: 3 billion Swiss francs – about 3.02 billion euros – to be paid by shares. At the close of Friday, Ubs was worth almost three times as much.
Shares of Credit Suisse responded by falling below the bid price of UBS and initially falling more than 62 percent above the bid price. UBS shares tumbled as much as 15 percent before rebounding. UBS’s acquisition of Credit Suisse will also result in a loss of 16 billion Swiss francs for subprime bond holders.
Institutions are putting in place all the necessary tools to give confidence to the markets. The European Central Bank, along with the EBA and the European Bank Resolution Mechanism (SRB), reiterated today that the eurozone banking system is “resilient with solid capital and liquidity levels”. Similar words were voiced by the German banking supervisory agency Bafin, while Bank of France Governor François Villeroy de Galhau assured that French banks have strong liquidity and capital reserves and are “very solid”.
Analysts’ skepticism
Investors are not calm. In Europe, the Stoxx Europe 600/Banks sector index fell 2 percent at the end of the morning: European stock markets weren’t even sure of the measures central banks were taking to improve access to liquidity; financial system.
The Ubs-Credit Suisse marriage was – quickly and with minimal negotiation – probably the only possible solution to stabilize the Swiss (and therefore European) financial system. However, the formulas adopted were met with some skepticism by industry analysts; Not to mention the implicit criticism formulated in the note by the ECB, EBA and Srb in which they reminded that any loss in the European Union will continue to be ‘first’. shareholders and then bondholders (while taking the opposite route in Bern).
But while marrying Credit Suisse isn’t UBS’ “first choice”, according to Canadian RBC analysts, Vontobel emphasizes that on paper, three billion for the purchase is a pretty low number considering the value a few weeks ago. Credit Suisse was several times higher. But analyst Andreas Venditti continues, the operation is also “significantly changing the nature of UBS’ investments, and the issues currently affecting the global banking industry are not yet settled”. According to the Zurich Cantonal Bank (Zkb), “the potential advantages still seem to outweigh the disadvantages for Ubs”, but this is “only if it is possible to rebuild trust”, which is likely to happen according to experts.
Other economists point to many prominent issues. It’s hard to judge the true value of the operation, according to American Jefferies, as Credit Suisse is currently posting heavy losses. According to US investment bank Kbw, the deal will be positive in the long run, but it will take some time before the operation stops making too much noise. According to Capital Economics experts, this type of “forced marriage” experience is highly heterogeneous: there are positive examples as well as situations with decidedly negative consequences.
Investor fears
In the background, however, the real question is the impact on investors of the Swiss regulator Finma’s decision to write 100 percent of Credit Suisse’s AT1 bonds, which are part of the renamed CoCo bond category; liquid’. Typically, AT1 bonds should rank above equity in the debt hierarchy.
According to Markets.com chief market analyst Neil Wilson, this “arrogant” reversal of loss hierarchies will affect markets’ confidence in such instruments. And for Charles-Henry Monchau, Syz Bank’s chief investment officer, this “interesting development” could have “scatterings” in global credit markets, given that even unsecured bond holders are often above shareholders in the capital structure. The fact that stockholders get ‘something’ and CoCo bondholders get ‘nothing’ raises serious questions about the true value of these bonds.
Giorgetti assures: “Insignificant impact”
Regarding the rescue of Credit Suisse on the sidelines of an Intesa Sanpaolo event in Milan, Economy Minister Giancarlo Giorgetti said, “It seems to me that the markets have calmed down for a moment. I think the situation in Europe is under control.” “We are in constant contact with the regulatory authorities and above all we are residents of the Italian banking system. The method followed and the order of guarantee priorities between shareholders and bondholders surprised European officials who reaffirmed the order of priority. But I will not comment on what others are doing,” he said. He added to those who asked him to comment on the role played by the Central Bank.
Regarding the increase in interest rates, Giorgetti said, “Raising interest rates is useful for reining in inflation, but it must be very carefully calibrated as it can cause some problems for financial stability.” Therefore, according to Giorgetti, the impact of Credit Suisse’s problems in Italy is “insignificant. We believe that the repercussions on the Italian banking system are insignificant”, the Minister of Economy assured.
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Source: Today IT
Roy Brown is a renowned economist and author at The Nation View. He has a deep understanding of the global economy and its intricacies. He writes about a wide range of economic topics, including monetary policy, fiscal policy, international trade, and labor markets.
