Global markets await relief after UBS bailout of Credit Suisse

LONDON, March 19 (Reuters) – Financial markets are poised for relief on Monday after UBS Group AG (UBSG.S) agreed to buy Credit Suisse Group AG (CSGN.S) in a state-orchestrated bailout, and major central banks announced a coordinated move to shore up liquidity in the financial system.

In an early sign that risk appetite was set for a rebound, the euro, sterling and Australian dollar rose, data from trading platform EBS and Reuters Dealing showed. Cryptocurrency Bitcoin is up over 5%.

UBS will buy rival Swiss bank Credit Suisse for 3 billion Swiss francs ($3.23 billion) and agree to absorb up to $5.4 billion in losses if it follows the smaller competitor’s investment bank of a shotgun merger orchestrated by the Swiss authorities.

In a coordinated global response, central banks including the Federal Reserve, the European Central Bank and the Bank of Japan said they would strengthen dollar swap lines and help calm investors shaken by the turmoil in the banking sector.

The euro was last up 0.2% at $1.0684.

“It appears to be a very large and crucial intervention. Assuming markets don’t sniff out other ongoing issues, I think this should be pretty positive,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments.

“Governments are keen to quench the spark of contagion before the flames get out of control.”

The collapse of two US banks and a collapse in Credit Suisse stocks sent shockwaves through markets last week, reviving memories of the 2008 financial crisis.

European banks slumped nearly 12% last week, their biggest weekly drop in just over a year (.SX7P), Japanese banks fell nearly 11% – their biggest weekly drop since the COVID-induced market turmoil in March 2020 (.IBNKS .T) – and US bank stocks have posted double-digit losses for two consecutive weeks (.SPXBK).

Without the Swiss intervention on Sunday, the risk of further market stress would have been likely.

At least two major banks in Europe were examining contagion scenarios that could potentially spread to the region’s banking sector, two senior officials with knowledge of the deliberations told Reuters on Sunday, before the deal with Credit Suisse was announced.

The central banks of the US, UK and Switzerland will all meet in the coming week.

Bond market volatility is increasing. HIGH Stakes

The stakes are high for central banks and policymakers, who have emphasized the resilience of their banking sector but are also aware of the need to contain a crisis of confidence that could destabilize financial markets.

Even after Sunday’s news, analysts’ optimism was peppered with caution and some skepticism.

“Switzerland’s reputation as a financial center has been shaken – the country is now viewed as a financial banana republic,” said Octavio Marenzi, CEO of Opimas in Vienna.

Others drew attention to the losses creditors of Credit Suisse subordinated debt were likely to incur.

The decision to write down the value of Credit Suisse’s Additional Tier 1 Notes (CSGN.S) to zero as part of the deal was “staggering and difficult to understand,” bondholder Axiom said.

“CS shareholders will be essentially wiped out and some (AT1) bondholders will be wiped out, but the fundamental functioning of the banking system has been protected,” said Michael Rosen, chief investment officer at Angeles Investments.

Reporting by Dhara Ranasinghe and Amanda Cooper in London Additional reporting by Carolina Mandl, Lawrence Delevigne and Tom Sims Editing by Matthew Lewis

Our standards: The Thomson Reuters Trust Principles.

Source