Global markets brace for bailout after UBS bails out Credit Suisse

LONDON, March 19 (Reuters) – Financial markets braced for relief on Monday after UBS Group AG ( UBSG.S ) agreed to buy Credit Suisse Group AG ( CSGN.S ) in a rescue orchestrated by the state and major central banks announced a coordinated initiative to strengthen liquidity in the financial system.

In an early sign that risk appetite was set for a rebound, the euro, pound and Australian dollar all rose, data from trading platform EBS and Reuters Dealing showed. Cryptocurrency bitcoin rose over 5%.

UBS will buy rival Swiss bank Credit Suisse for 3 billion Swiss francs ($3.23 billion) and agreed to absorb up to $5.4 billion in losses as it unwinds the smaller peer investment bank following a shotgun merger engineered by the Swiss authorities.

In a coordinated global response, central banks including the Federal Reserve, the European Central Bank and the Bank of Japan said they would improve dollar swap lines and help calm investors rattled by banking sector turmoil.

The euro was last traded up 0.2% at $1.0684.

“It seems like a very big and decisive intervention. Assuming the markets don’t smell other long-term problems, I would think this should be quite positive,” says Brian Jacobsen, senior investment strategist at Allspring Global Investments.

“Governments are keen to extinguish the spark of contagion before the flames get out of control.”

The failure of two US banks and a drop in Credit Suisse shares have sent shockwaves through markets over the past week, reviving memories of the 2008 financial crisis.

European banks fell nearly 12% last week, their biggest weekly decline in just over a year (.SX7P), Japanese banks fell nearly 11% – their biggest weekly decline since the COVID-induced market turmoil in March 2020 (.IBNKS.T) – and U.S. banking stocks have posted double-digit losses for two straight weeks (.SPXBK).

Without Sunday’s Swiss intervention, the risk of further market stress had appeared likely.

At least two major banks in Europe were examining scenarios of contagion possibly spreading across the region’s banking sector, two senior executives with knowledge of the deliberations told Reuters earlier on Sunday, before the Credit Suisse deal was announced.

The US, UK and Swiss central banks are all scheduled to meet in the coming week.

Volatility on the bond market is increasing


The stakes are high for central banks and policymakers, who have highlighted the resilience of their banking sector but are also mindful of the need to contain a crisis of confidence that could destabilize financial markets.

Even after Sunday’s news, optimism from analysts was tempered with caution and some skepticism.

“Switzerland’s status as a financial center is shattered – the country will now be considered a financial banana republic,” said Octavio Marenzi, managing director of Opimas in Vienna.

Others drew attention to the losses likely to be incurred by Credit Suisse junior bondholders.

The decision to write down the value of Credit Suisse’s ( CSGN.S ) Supplemental Tier 1 bonds to zero under the deal was “amazing and difficult to understand,” bondholder Axiom said.

“CS shareholders are essentially wiped out and some (AT1) bondholders will be wiped out, but the fundamental function of the banking system was protected,” said Michael Rosen, chief investment officer at Angeles Investments.

Reporting by Dhara Ranasinghe and Amanda Cooper in London Additional reporting by Carolina Mandl, Lawrence Delevigne and Tom Sims Editing by Matthew Lewis

Our standards: Thomson Reuters Trust Principles.

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