WTHIH? The Suisse Version
But seriously, what the hell is happening?🇨🇭🔥
Will Credit Suisse go under?
Will the Fed and the ECB start cutting rates?
What’s happening?
European markets woke up today to Credit Suisse crashing through the floor after its Saudi backer ruled out further capital injections 👇
The events of the past few days in the US with Silvergate, Silicon Valley and Signature bank all failing suddenly didn’t exactly help confidence in the financial system!
Every investor — from retail to multi-billion dollar family office, is looking at his risks and being careful not to be left holding the bag. But CS problems aren’t exactly new problems, they just accelerated today.
Credit Suisse has been suffering from financial cancer for years, and frankly didn’t do enough about it. The bank has been mired in spying scandals, basic mistakes and even extremely stupid ones. The list is endless.
Last October I wrote a thread on the situation and what would happen if Credit Suisse needed to be resolved. The events of the past few days however and the collapse of its share price today shows the bank cannot continue in its current form.
Stakeholders (bondholders/shareholders) will need to take a haircut to allow the bank to recapitalise. If push comes to shove the Swiss National Bank (the SNB) will be called to inject equity into the bank.
This effectively nationalises the bank and makes things even more complicated down the line. Even so, Credit Suisse management asked SNB for a public show of support, as per the Financial Times.
CS is bleeding deposits and losing clients — forcing management to take draconian measures in stemming the outflow. While the CS saga was unfolding, European banks were also crashing in consolation.
Suddenly every single market participant started to measure his counterparty risk. In effect CS’s financial cancer became radioactive… ☢️
But this is the side show
Everyone is debating what the Fed and the ECB should do in their next policy rate meetings. The Fed meets March 22nd, the ECB meets tomorrow March 16th. Markets are pricing in rate cuts, as a consequence of this fallout — but I see things differently.
Both the Fed and the ECB have made it clear they will keep going until inflation comes down to acceptable levels. Just because a few banks that mismanaged their balance sheets faced problems doesn’t mean they should pause hikes or cut rats! Here’s a meme to make it easier for you to understand:
Is it the Fed’s fault?
The US banks that failed made massive treasury errors, taking on bad trades which caused them to blow up when the Fed started rate hikes. This is what happens when market paradigms change.
The Fed is not at fault for hiking rates through this inflationary spike.
The Fed is at fault for their ultra-loose monetary policy for more than a decade.
This caused financial actors to reach for yield, extending themselves further down the yield curve. i.e. They were long duration massively.
The banks with weak deposit franchises were exposed and blew up.
Conclusion
If the central banks pause hikes here the market will lose confidence in them. They will show that they will never be able to reverse QE or hike rates sustainably. Sovereign yields will blow out and the crisis will be reinforced.
I believe that deep down the central bankers understand this higher-order effect and this is why they will hike.
Sincerely,
Philo 🦉
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