Scramble for safety subsides as markets digest Credit Suisse rescue

Europe’s bank shares fought back from an early slump on Monday and a cross-asset scramble for safety looked to have eased, as markets weighed up the implications of the emergency rescue of banking heavyweight Credit Suisse for the financial 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 wedding backstopped by unlimited funding pledges from the world’s top central banks.

Shocked European bank shares (.SX7P) had initially dropped 6% as Credit Suisse’s own shares (CSGN.S) slumped 63% and those of its acquirer UBS (UBSG.S) tumbled nearly 13%, reported Reuters.

But the losses in banking shares were cut to 2.5% as investors digested the support efforts and the pace at which they had come, while the broader European STOXX 600 index (.STOXX) even managed to make it into positive territory.

“Credit Suisse is our Lehman moment in Europe, but we recognise that and we are not going to make the same mistake,” Close Brothers Asset Management Chief Investment Officer Robert Alster said of the speedy action by authorities over the weekend.

He said the European Central Bank, Bank of England and others would be well aware “of the next gazelles in the chain that the lions will be hunting” - meaning other large banks with investment banking arms such as Deutsche Bank, BNP in France or Barclays in the UK - and will step in with support if needed.

“There is a lot of firepower from the authorities to counter what is the steadily eroding loss of confidence,” Alster said.

With investors seeking out tradition safe harbours, Europe’s government bonds had rallied as the stock markets initially baulked.

Yields on triple A-rated German Bunds, which fall as bond prices rise, had hit their lowest since mid-December at 1.951% in the early panic but had shuffled back above 2% as markets began to relax a little.

Risk aversion had also seen the spread between riskier Italian debt and German debt widen out to over 200 basis points again, but that gap - which reflects how much more Rome has to pay to borrow than Berlin - also improved.

“There was nothing great that could come out of this, but it is probably the best of a bad list of outcomes,” said AXA Chief Economist Gilles Moec, who had been surprised by the initial rout.

“All in all this was pretty swift,” he added. “And in terms of reassurances (from authorities) it is pretty decent.”

AT1s RIP?

The rudest shock in the rushed deal to save Credit Suisse was reserved for the holders of the bank’s riskiest tranche of bonds, known as AT1s, that can be converted into equity when troubles hit.

Not only did they discover they are the only investors not getting any compensation from the rescue, but that the long-established practice of giving bondholders priority over shareholders in debt recovery had been turned on its head.

The result was a selloff in a swathe of Asian AT1s overnight, but European supervisors stepped in there too, reassuring European traders that Swiss authorities’ actions weren’t likely to be replicated in the European Union.

“This approach (of hitting shareholders before bondholders) has been consistently applied in past 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.

“Additional Tier 1 is and will remain an important component of the capital structure of European banks,” they added.

Safe-haven demand eased in the currency markets, with the Japanese yen trimming its day’s gain to 0.5% from 0.75% and both the Swiss franc and the euro started to rise against an unusually subdued U.S. dollar, which is normally a winner in turbulent times. /FRX

Wall Street futures meanwhile struggled for direction, with the odds of the Federal Reserve hiking its interest rates again on Wednesday in flux following this month’s troubles in the banking system.

US authorities have seen two banks, Silicon Valley Bank and Signature Bank, collapse in recent weeks, and a third, regional bank First Republic Bank, has also required emergency support.

Its shares (FRC.N) were expected to drop almost 20% later.