From Svb to Credit Suisse, this is why banks are collapsing on the stock market. All the unknowns for the ECB

Global banks are in the sights of the markets. The collapse of Silicon Valley Bank and Signature, plus the turmoil of Credit Suisse, send stocks into a tailspin. A new tile for the global financial system, already grappling with the rebalancing of monetary policy by central banks. Double-digit losses for the major credit institutions in the euro area, starting with the French Société Générale and Bnp Paribas. The European Central Bank (ECB), which tomorrow will decide whether to raise interest rates by 50 basis points as planned, is in a complicated situation. In the face of so much uncertainty, deviations from the path set by Christine Lagarde in December cannot be ruled out. The certainty, as financial sources explain, is that Frankfurt has urgently requested the European institutions to calculate the exposure to Credit Suisse.

Yesterday’s rebound is just a memory. Or rather, as they would call it in the US, it was a “Dead cat bounce”. An illusory situation, therefore. Milan minus 4% in mid-afternoon, the European banking sector in clear contraction, generalized panic among investors and a request from Frankfurt, ie a complete calculation of the exposure of European banking institutions on Credit Suisse. In today’s meeting, which will decide on the possible increase in the cost of money tomorrow, the ECB is called to provide clear-cut answers to a problem of trust. What should have been a meeting full of divisions, between the front of central bankers who ask for more gradualness and those who ask for more aggressiveness, is turning into a debate that is involving both sides of the Atlantic. Washington, as well as Frankfurt, are also moving to understand the extent of the crisis of confidence around the European banking system.

The stress is such that even the Elysee has intervened. The French Prime Minister, Elisabeth Borne, has asked the Swiss authorities to resolve the problems of Credit Suisse, whose situation is causing concern on the markets. “The subject is within the competence of the Swiss authorities. And it must be solved by them”, the French prime minister said before the Senate, specifying that Finance Minister Bruno Le Maire “would have had contact with his Swiss counterpart in the next few hours”. The head of the transalpine government reiterated that French banks were not infected by the crash of Svb and Signature. “I confirm, as the finance minister reminded him yesterday, that French banks are not exposed to any risk following the bankruptcy of the SVB,” Borne said. The interconnections with Credit Suisse, however, are high.

Mouths are sealed by the European Central Bank. But it is clear that today’s turmoil is one that recalls the toughest periods of the eurozone sovereign debt crisis. Unchanged, however, should be the outcome. Increase from 50 basis points it should be and, barring surprises, it will be. According to Frederik Ducrozet, head of macroeconomic research at Pictet, “over the past few days, a liquidity event in the US regional banking sector has catalyzed a dramatic reassessment of the macro outlook and the interest rate cycle”. Central banks, he explains, “will probably be more cautious in monitoring the tightening of credit conditions. However, a key difference from previous episodes of banking crises is a more resilient macro scenario, including persistent inflationary pressures. This will make it difficult to trade off inflation and financial stability risks, with monetary institutions trying to resist rate cuts for as long as possible. Therefore, says Ducrozet, “this week, we expect the ECB to implement the 50 basis point increase in the deposit rate already announced, as well as a further tightening of 50 basis points by June, to 3.50%”. Then, there will be the debate about when and how to recalibrate the current monetary policy normalization path.

It is not the only vision of this kind. “While it is almost certain that during tomorrow’s meeting there will be a 50 basis point hike in the main refinancing rate by the ECB, what will be really important will be the signals about future moves that will be launched by President Lagarde,” he said. note Gero Jung, Chief Economist of Mirabaud AM, in view of tomorrow’s ECB meeting. “During this week’s meeting, we expect the main refinancing rate to be raised by 50 basis points to 3.5%, while the deposit rate will reach 3%.” As for the forward guidance “in light of the current data, which have shown that inflation – in particular the core CPI – is more persistent, while growth is weaker, we expect Lagarde to suggest that in May it will be more likely a 50bps move of a 25bps move,” Jung continues. “Beyond May – concludes Jung – we continue to have, in the medium term, a more dovish baseline scenario as regards rate hikes. This is due to the final data of the Eurozone GDP, which at the end of last quarter showed a marginally negative number, demonstrating the strong negative influence of energy-driven inflation on domestic demand”. All net of the uncertainty deriving from Credit Suisse.

Confirming this is also the vision of Tomasz Wieladek, Chief European Economist of T. Rowe Price. “Despite the market turmoil related to the SVB crash, I think it is likely that a 50 basis point hike will be announced at this week’s ECB meeting, for several reasons. First, core CPI inflation data surprised significantly to the upside. Many experts believe that inflation will remain ‘sticky’ at current levels, while some argue that it could reach 6% before the summer and then start to decline. These high spot inflation data will keep the ECB in hawkish mode, despite the current market volatility. According to Wieladek, “there are also important financial stability reasons which push the ECB to stick to a 50bp hike this week”. On the one hand, he points out, “President Lagarde clarified that the intention of 50 basis points is not a “pre-commitment”, on the other hand he underlined that an extreme scenario would be needed for the ECB not to follow this intention. If Frankfurt increases by 25 basis points, it will send the financial markets the signal that the banks of the The euro area could be vulnerable to risks similar to those of the US banking system. The ECB must stick to the previously communicated script if it wants to avoid scaring the market,” Wieladek said.

For now, given the current unknowns, it’s hard to predict what could happen before the weekend. All eyes are on Zurich, Frankfurt and Washington. The contagion of SVB and Signature to US regional banks, as Moody’s points out, cannot be ruled out. Not even that towards the European groups. But above all, it is still to be understood how severe the crisis of confidence towards Paradeplatz is.