"This is a commercial solution, not a Bail Out", what a strange formulation used by the Swiss finance minister to qualify the acquisition of Credit Suisse by its competitor UBS at a price of CHF 3 billion with the support of the government which will guarantee up to CHF 9 billion in future losses! This adds to another strangeness in this file: the clumsy intervention, last week, of the president of the Saudi National Bank, the group's largest shareholder, who, when asked about a new capital injection, replied to the journalist "absolutely not", triggering a massive loss of confidence while the bank was already weakened by the recent setbacks of the US regional banks.
Lease Out or not (it doesn't matter), state support triggered a cancellation of the nominal value of all Credit Suisse Additional Tier 1 (AT1 ) bonds amounting to CHF 15.8 billion. The announcement sent shockwaves through the AT1 segment, which has since fallen sharply. The movement seems quite logical, it is about 7% of the AT1 market that was erased in one weekend and the non-respect of the hierarchy of creditors is very surprising with shareholders (the most junior creditors in the capital structure) better treated than AT1 bondholders! Rest assured, however, Credit Suisse seems to be an isolated and atypical case. The prospectuses of Credit Suisse's AT1 bonds are distinguished by a "Viability Event" clause, allowing the Swiss regulator to intervene to cancel the debt in full and not temporarily. The context is very different in Europe, the regulator does not have at its disposal such a clause and the majority of AT1 stipulating in their prospectus a conversion into shares or the depreciation of the par value, but most of the time, in proportion to the losses/needs and accompanied by a clause of return to better fortune. This morning, the European regulator also wanted to reassure the market, recalling that shareholders had to record losses before AT1 holders, thus confirming that the hierarchy of creditors remains intact in Europe. Taking a step further, the events of the weekend on the Credit Suisse file and the clarifications made on Monday are good news for the European banking system as a whole. While this intervention by the Swiss regulator has so far been met with mixed reviews, it nevertheless strengthens financial stability and confirms that in the event of serious difficulties, the "too big too fail" still holds at this stage. The authorities are not hesitating to multiply support measures to restore confidence, such as the coordinated action of the main central banks (Fed, ECB, BoE, BoJ, SNB and BoC) this weekend, which reactivated daily dollar "swap lines" aimed at ensuring short-term dollar liquidity in interbank markets.
In this complicated environment, let us not lose sight of the monetary tightening cycle. Fears about the banking system led last week to a powerful flight-to-quality rate phenomenon , a sign that investors are anticipating a potential central bank pivot. In any case, this was not the case for the ECB last Thursday, which did not change course and recorded a 50 bps increase in key rates in order to continue the fight against inflation. However, the institution did not commit to the future, in order to take into account the financial environment. On Wednesday, will the Fed open the ball of a lull on the front of rate hikes? Nothing is less certain. In any case, the exercise will be delicate. The institution will indeed have to juggle between inflation that remains high (+0.5% in February at a monthly rate for the core CPI) and the threat of a possible financial contagion.
