The markets’ doubts about the UBS-Credit Suisse bailout: the risk of contagion is shaking the stock exchanges

It’s official: European markets believe in the possibility of a contagion from the serious Credit Suisse crisis, despite the bailout plan which envisages the purchase by the competitor Ubs and a gigantic injection of liquidity by the Swiss National Bank. Whether it’s simple panic or a conviction, this morning the stock exchanges of the old continent opened in sharp decline with Piazza Affari losing up to 2.7 percent to then recover very quickly (two hours after the start of negotiations, it is trading slightly below parity). The tension is maximum and with it the volatility of the indices. Coordinated action between central banks (Fed, ECB, banks of Switzerland, Japan and the UK) was set up over the weekend to calm the markets in case the situation turns worse. Only the opening of Wall Street in the early afternoon will tell whether global investors, who operate mainly on the New York Stock Exchange, will react with the same aplomb with which they welcomed the crash of the Californian banks just a week ago, the impact of which on the financial system is been stemmed by an intervention from the White House with the help of supervisory authorities.

“There is no doubt that the Italian/European banking sector is more solid and capitalized than in the past – the Equita analysts explain in the morning note – However, the main risk we see with the increase in fears of financial instability is that one of the main transmission channels of the economy, i.e. bank loans, with a deterioration of the willingness to grant credit (both in Europe and in the United States). What will happen to rate hikes in these scenarios? “We believe that monetary policy choices will inevitably be changed, but we think an adjustment phase is still needed”, concludes Equita, therefore suggesting a further downward correction of the stock exchanges.

Credit Suisse is not a regional bank like Svb or First Republic, in terms of size and type of activity it has a “systemic” value. For this reason, the operation that must get it out of trouble must be fully understood by the markets. And at the moment it seems not to be the case. But what is not convincing about the Swiss bank’s bailout plan? It would be taken over by its direct and historical competitor, Ubs, which is larger in size, of proven solidity and the prospect of a merger between the two institutions in other times would have been blessed by the market. There are two problems, the experts explain. The first is investor confidence in the banking system as a whole. The first signs that this trust is starting to wane are starting to show. It is also possible that speculators are starting to bet on the weakness of the banking system as a whole. In a phase of interest rate hikes, it should hit the most fragile financial assets but, due to the interconnections that exist, it could also extend to assets healthy.

The second problem is related to the characteristics of the Credit Suisse bailout. The difference in treatment between Arab shareholders (the Saudi National Bank and the sovereign wealth fund of Qatar), who have been protected more than the holders of subordinated bonds (these risk losing practically everything) has created perplexities. Normally, the opposite occurs: the shareholders are the ones who risk the most and lose first, the bondholders are exposed second. This is a point that plays against distrust of the banking system and could potentially have consequences that only central bank intervention could contain with new injections of liquidity. The moral of the story of this credit crisis story lies in a question: is a new era of bank bailouts opening up in Europe with state aid as well?