A Full-Blown Banking Crisis Is on the Horizon: Credit Suisse Rescue Deal Sparks Fears

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As the financial world reels from the news of Credit Suisse’s controversial rescue deal, fears of a full-blown banking crisis sparked.

On Sunday, Swiss banking giant UBS agreed to take over its troubled rival Credit Suisse in a deal worth $US3.25 billion ($4.8 billion). The acquisition comes after weeks of negotiations and is significantly lower than Credit Suisse’s Friday closing.

Banks’ Credit Suisse rescue ‘as bad as it gets’

“This is as bad as it gets,” ACY Securities chief economist Clifford Bennett said in a note on Monday.

“As a result of this weekend’s revaluation of Credit Suisse at half its Friday close, a full banking crisis suddenly rushed across the horizon toward us. In order to achieve this valuation, many bondholders’ stakes had to be zeroed, and massive government guarantees were made against losses that UBS might suffer if this Credit Suisse purchase resulted in losses.”

The emergency deal between UBS and Credit Suisse saw holders of $US 17 billion ($25 billion) worth of AT1 bonds written down to zero. AT1 bonds are an inherently risky class of debt.

Still, the agreement reinforces the notion that governments and central banks must step in to protect the financial system when a major banking crisis arises.

Bondholders Take Brunt of Credit Suisse

The surprise announcement of the Credit Suisse rescue deal has sent shockwaves through European debt markets, leading to a selloff of other bank debt. In particular, bondholders bear the brunt of the losses, as their stakes in the transaction have been eliminated.

This is a shocking development, as bondholders traditionally take precedence over shareholders regarding profits and losses.

The rescue deal is the latest blow for Credit Suisse, suffering from a prolonged period of weak performance and losses from coronavirus-related economic disruption.

The situation has not yet reached panic levels, but investors are taking precautionary measures, such as diversifying their portfolios and increasing liquidity levels, just in case things worsen. With tensions running high, many fear that it will not be long before we start to feel the effects of this looming banking crisis.

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