- Credit Suisse plunges more than 60% after an emergency takeover over the weekend
- European Banks Backtrack Some Ground After Initial 5% Drop
- Treasury bonds and gold rise as investors seek safety
- Wall Street opens flat, First Republic Bank collapses
LONDON, March 20 (Reuters) – European banking stocks fought back from an early slump on Monday and the cross-asset battle for safety appeared to have eased as markets weighed the implications of bailout heavyweight bank Credit Suisse for the financial sector. system.
Sunday saw the most dramatic state intervention since the 2008 global financial crisis, with UBS buying Credit Suisse for 3 billion francs ($3.2 billion) in a shotgun marriage held back by unrestricted funding pledges from the world’s top central banks.
Shocked European bank stocks (.SX7P) were initially down 6%, while Treasury shares of Credit Suisse (CSGN.S) fell 63% and those of its acquirer UBS (UBSG.S) plummeted nearly 13%.
But losses in bank stocks were cut to 2.5% as investors digested the support efforts and the pace they had come, while the broader European STOXX 600 index (.STOXX) actually managed to gain positive territory.
“Credit Suisse is our Lehman moment in Europe, but we recognize that and we won’t make the same mistake,” Robert Alster, Chief Investment Officer of Close Brothers Asset Management, said of the authorities’ swift action over the weekend.
He said the European Central Bank, the Bank of England and others would be well aware “of the next gazelles in the chain that the lions will hunt” – leading other big banks with investment banks such as Deutsche Bank, BNP in France or Barclays mean. in the UK – and will provide support if required.
“There is a lot of firepower from the authorities to counter the steadily eroding loss of confidence,” Alster said.
With investors looking for traditional safe havens, European government bonds had rallied while equity markets initially vacillated.
Yields on German triple-A-rated Bunds, which fall as bond prices rise, hit their lowest point since mid-December at 1.951% in the early panic, but had shaken back above 2% as markets began to relax somewhat.
Risk aversion had also widened the spread between riskier Italian debt and German debt to more than 200 basis points, but that gap – which reflects how much more Rome has to pay to borrow than Berlin – also improved.
“Nothing big could come out of this, but it’s probably the best of a bad list of results,” said Gilles Moec, AXA’s chief economist, who was surprised by the initial defeat.
“All in all, this was pretty fast,” he added. “And in terms of reassurances (from authorities), it’s pretty decent.”
The hardest shock in the rushed deal to bail out Credit Suisse was reserved for the holders of the bank’s riskiest tranche of bonds, known as AT1s, which can be converted to equity when problems arise.
Not only did they discover that they are the only investors not being reimbursed for the bailout, but that the long-standing practice of prioritizing bondholders over shareholders in debt collection has been turned on its head.
The result was an overnight sell-off in a string of Asian AT1s, but European regulators also stepped in, assuring European traders that the Swiss authorities’ actions were unlikely to be repeated in the European Union.
“This approach (of hitting shareholders before bondholders) has been applied consistently in previous cases and will continue to guide the actions of the SRB (Single Resolution Board) and ECB banking supervision in crisis interventions,” they said in a statement.
“Extra Tier 1 has been and will continue to be an important part of the capital structure of European banks,” they added.
Safe-haven demand eased in currency markets, with the Japanese yen cutting gains for the day from 0.75% to 0.5% and both the Swiss franc and euro beginning to appreciate against an unusually weak US dollar , which is normally a winner in turbulent times . /FRX
Wall Street futures, meanwhile, struggled for direction, with the Federal Reserve likely to raise interest rates again on Wednesday due to this month’s troubles in the banking system.
US authorities have seen two banks collapse in recent weeks, the Silicon Valley Bank and the Signature Bank, and a third, the regional bank First Republic Bank, also needs emergency help.
Shares (FRC.N) were expected to fall nearly 20% later.
Additional reporting by Scott Murdoch in Sydney; Edited by Stephen Coates, Angus MacSwan and Jan Harvey
Our Standards: The Thomson Reuters Principles of Trust.
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