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Credit Swiss, When It was Due

In November 2021, Credit Suisse (CS) announced a restricting plan after taking a $5.5Bn loss due to Archegos Capital Management collapse and reputation hit from a corruption scandal involving tuna bonds of Mozambique. In addition to this was hit by the closure of Greensill Capital as it was one largest creditors to the firm.

This continuous spiral downwards resulted in its share price falling from $11.28 in November 2021 to $2.01 on Friday. But during this period liquidity was tightening and the cost rose as the Swiss National Bank reversed its policy of Negative Interest Rate ( NIRP) with a -1% repo rate to 1%.

This reversal in a quick period makes capital raising even more difficult. And problem became even more clear when the bank’s largest shareholder Saudi National Bank mentioned that it won’t be providing any further capital.

It caused a large panic among the banks that were exposed to the CS wealth management division as the liquidity crisis turned into a solvency crisis. This led to the Swiss National Bank (SNB) arranging a deal between UBS and CS within 48 hours.

Though there were reports that SNB was not interested in providing any immediate support it ended up providing CHF (Swiss Franc) 100 Bn liquidity support along with Government providing a CHF 9Bn loss guarantee to UBS. This is somewhere also backed by Federal Reserve opening a US Dollar swap lines for central banks.

Though the speed at which this all unfolded was surprising to many, few who were anticipating it had already created large positions on CS Credit Default Swap (CDS) by March first week.

Whether UBS will able to complete the transaction without any hiccups as it will take weeks or even months to close it. The CDS market is already pricing in trouble for UBS as its own CDS is at a record high.


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