Credit Suisse Takes Up The Offer Of An Emergency Lifeline As Banking Turmoil Continues To Roil Markets

Credit Suisse (CS) is the first major bank, deemed too big to fail, to take up the offer of an emergency lifeline. The announcement that it will draw on emergency funds from the Swiss National Bank underlines how fragile the lender had become, as the withdrawal of deposits continued at pace and confidence seeped away. It also highlights the lightning speed of the global fallout of Silicon Valley Bank’s collapse, which has shaken the banking sector, and prompted investors spotting weaknesses in other institutions, to race for the exit. The $54 billion rescue wad is staunching worries about a bigger run on Credit Suisse and the repercussions for other institutions around the world exposed to its operations.

For now, the move has restored a little stability to global markets, with the S&P 500 regaining ground, once it appeared the Swiss National Bank was standing by to help. Nerves are still frayed though and that has been evident during trade in Asia. Investors are trying to swim in a sea of red, as worries ripple around about where the next weakness in the global banking sector will rear up. More are clinging to the rafts of assets considered to be safe havens. Gold prices have slipped back a little in the past few hours but have shot up over the past week and are now hanging around the strongest level since early February, above $1,915 an ounce. The dollar and the yen have also gained ground since Credit Suisse’s problems intensified yesterday, though have retreated a little as the bank reached out for the financial lifeline.

Systemic risk to the sector is still considered to be low, as larger banks have built up bigger capital buffers from the financial crisis and have stable deposits, while the coffers of some are believed to have swelled as customers seek out sturdier institutions for their deposits.

Looking on, central banks are now caught between a rock and a hard place. They are still super-nervous about high inflation, but fresh rate hikes run the risk of prompting fresh financial instability. The pace and duration of interest rate rises has been punishing for holders of large bond portfolios, and many are sitting on unrealised losses. Policymakers at the ECB must make the difficult decision today about whether to hike rates as planned by 0.5%, and keep its inflation fighting game face on, or go softer to calm feverish sentiment. It looks increasingly likely that policymakers will opt for a watered-down decision of a 0.25% hike, mindful that going to hard right now, could intensify the banking sectors woes.

As investors await that decision, trading is expected to stay volatile. If policymakers decide to ease off another big monetary policy squeeze, the initial market reaction is likely to be one of relief, but worries are then likely to bubble back up about the insidious effect of inflation and whether the price spiral risks getting out of control again.

Worries about the effect on the global economy of the contagion from the global banking rout is showing up in the oil price. Brent crude is languishing around $74 a barrel, though made small gains after the Swiss National Bank’s intervention to stem further immediate woes at Credit Suisse. The benchmark has fallen by more than 10% over the past three sessions, as spreading banking malaise has sparked worries about longer-term fortunes for the EU and US economies, particularly if financial institutions become more risk-averse in lending.

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