2. Could Credit Suisse be a Lehman Brothers Moment?
- The cost of buying insurance against Credit Suisse defaulting on its debt soared to a record high as the bank failed to calm market concerns around the strength of its balance sheet.
- These moves mean that Credit Suisse’s CDS curve inverted on Monday, a phenomenon that happens when investors rush to buy protection against a default in the very near term.
On Monday, shares of embattled Swiss bank Credit Suisse plummeted 12% to an all-time low after a weekend of fevered speculation about its financial health, before paring losses.
The cost of buying insurance against Credit Suisse defaulting on its debt also soared to a record high as the bank failed to calm market concerns around the strength of its balance sheet.
Traders and investors rushed to sell Credit Suisse’s shares and bonds while buying credit default swaps (CDS), derivatives that act like insurance contracts that pay out if a company reneges on its debts.
Credit Suisse’s five-year CDS soared by more than 100 basis points on Monday. Meanwhile, the the bank’s shorter-term CDS were even more dramatic with one trading desk quoting Credit Suisse’s one-year CDS at 440 basis points higher than last Friday.
These moves mean that Credit Suisse’s CDS curve inverted on Monday, a phenomenon that happens when investors rush to buy protection against a default in the very near term.
Senior Credit Suisse executives spent the weekend calling the bank’s biggest clients, counterparties and investors in an effort to reassure them about the group’s liquidity and capital position.
Many compared the situation to the sharp sell-off in Deutsche Bank’s debt in 2016, when concerns that the German bank would have to skip some coupon payments on its capital bonds drove sharp moves in the CDS market.
Monday’s initially panicked stock-market reaction to Credit Suisse’s rising CDS costs points to a worsening set of options available to the Swiss firm ahead of its emergency strategy review later this month, which is expected to include a large-scale investment banking retreat.
A chief concern amongst investors is the just how many skeletons Credit Suisse has in its closet, with the fallout from the US$10 billion Archegos Capital Management collapse not fully reflected on its balance sheet.
And that’s not including the US$10 billion worth of investor funds that were frozen in the wake of Greensill Capital’s collapse, a British supply chain lender, which Credit Suisse had sold billions of dollars of debt on behalf of.
Although balance sheet wise Credit Suisse “appears” solvent, some estimates of its total liability picture are disconcerting, with as much as US$860 billion in exposure, much of which remains off balance sheet, the exact same strategy that precipitated the 2008 Lehman Brothers crisis.