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Credit Suisse Collapses in $3B UBS Deal, Wiping Out $17B in Bondholder Debt – What’s Next for Global Markets?

Published by
WIlliam Dube

On Monday, March 20th, Credit Suisse, one of Switzerland’s largest banks, collapsed into the arms of its local rival UBS in a $3 billion deal brokered by Swiss authorities. This move has shaken bondholders as it wiped out $17 billion in junior debt, also known as Additional Tier-1 (AT1) bonds, in a controversial decision made by regulators FINMA as part of the rescue act. While shareholders are set to receive some compensation, holders of AT1 debt across Europe were upset by the move, causing bank stocks to plummet.

  1. Credit Suisse collapsed into the arms of local rival UBS in a $3 billion deal, wiping out $17 billion in junior debt.
  2. The Federal Reserve and other central banks agreed to swap lines to stop contagion from spreading through the financial system.
  3. Gold hit $2,000 for the first time in 11 months, while industrial commodities were mixed on concerns that financial instability will cause a sharp slowdown in advanced economies later this year.

Despite the controversial decision, the Swiss authorities managed to sidestep Swiss law by forcing the deal through without the approval of Credit Suisse shareholders, which led some analysts to predict potential legal challenges.

Over the weekend, the Federal Reserve and other central banks agreed to swap lines to stop contagion from spreading through the financial system. This move revived a 2008-era instrument of mutual swap lines to backstop local demand for dollars. The European Central Bank Christine Lagarde is set to address the EU Parliament at 12:00 ET (16:00 GMT) to provide information on the strength of Eurozone banks, which face their biggest test of soundness since the euro crisis a decade ago.

The Federal Deposit Insurance Corp. also announced a deal to sell most of Signature Bank, one of the three U.S. institutions to collapse this month, to Flagstar, the owner of New York Community Bank. However, there appears to be little chance of its SigNet payments system being revived, which is beloved by crypto platforms.

The situation in the banking sector has caused confidence to plummet, with U.S. stock markets set to open mixed. The Dow Jones futures are down 13 points, or less than 0.1%, while S&P 500 futures are up by a similar amount. Nasdaq 100 futures are also up by 0.1%. Despite the financial fallout last week, the Nasdaq Composite rose 4.6% on the perception that the Federal Reserve will be forced to cut interest rates to stem the growing sense of crisis.

Chinese President Xi Jinping started a three-day visit to Moscow on the same day, only days after the International Criminal Court brought charges of war crimes against his host, Russia’s Vladimir Putin. Xi will have to tread a fine line between supporting his strategic ally, Russia, and not antagonizing the U.S. and Europe, whose economic slowdown is bad news for China’s export-sensitive economy. Reports suggest that Xi will hold talks with Ukrainian President Volodymyr Zelenskyy after his meetings with Putin to appear even-handed. China recently boosted its diplomatic prestige after brokering a deal under which Saudi Arabia and Iran will renew their diplomatic relations.

Finally, gold hit $2,000 for the first time in 11 months, with havens soaring amid the financial instability. At 06:45 ET, gold had retreated to $1,966/oz from a high of $2,014/oz, while industrial commodities were mixed on concerns that financial instability will cause a sharp slowdown in advanced economies later this year. U.S. crude oil futures were down 1.6% at $65.88 a barrel, and Brent was down 1.6% at $71.81 a barrel. While iron ore futures in China fell 2.5%, nickel fell 1.1% in London, copper futures edged 1.1% higher, and aluminum rose 0.6%.

It remains to be seen how the situation in the banking sector and the economic slowdown in advanced economies will affect financial markets in the coming days and weeks.

WIlliam Dube

William Dube is a finance and economic news expert with over 10 years of experience in economic anaylsis, financial product assessment and market analysis. With a numerous certificates from prestigious universities including but not limited to Yale University and the University of Pennyslivenia. William specializes in providing insightful news developments in South Africa and commentary on investment strategies, risk management, and global economic trends. You can contact him on william@rateweb.co.za

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Published by
WIlliam Dube

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