The market was very nervous on Monday after the takeover of Credit Suisse, Switzerland’s second largest bank. The Helsinki Stock Exchange fell in the morning, but turned up as the trading day progressed.
Nordea’s share initially weakened by about three percent, but then turned upward.
The same bounce was seen in the German stock market of the largest euro economy, whose main index first fell by almost two percent, but then turned positive. At noon, the Dax was already up 0.6 percent.
The values of Europe’s largest banks fell sharply in the morning, but returned to roughly their Friday levels later in the day.
The shares of Germany’s largest Deutsche Bank and the second largest Commerzbank lost around ten percent. French banks BNP Paribas and Société Générale each lost eight percent.
Analyst at Danske Bank Antti Ilvonen according to it, it would seem that the crisis was limited to only a few banks on Monday – in addition to the Swiss ones, some US banks. Ilvonen is cautiously optimistic about the situation.
– There is no chain reaction coming with this information. The central banks and the authorities in general on both sides of the Atlantic have taken very strong support measures to prevent the domino effect from spreading to other larger banks, he says.
Europe calmed down
– Recent events show once again how fragile the banking system can be, despite several tightening of regulations since the global financial crisis, Head of European Investments at Barclays Emmanuel Cau said to the business newspaper Les Echos.
However, German banks, for example, are trying to allay concerns quickly during Monday. Both Deutsche and Commerzbank said they have virtually zero holdings of securities like Credit Suisse’s risky bonds.
The European Central Bank, the Joint Resolution Board and the European Banking Authority tried on Monday in the statement (you switch to another service) to assure bondholders that they will not suffer the same fate as those who acquired Credit Suisse’s risky securities. In the opinion of the trio of authorities, the market’s reactions were exaggerated.
The Stoxx 600 Banks index, which describes the performance of 600 European banks, weakened by 5.3 percent, but bounced back in the afternoon.
At the end of February, the index has fallen by more than a fifth, the shares of the largest banks even more.
Switzerland’s largest bank UBS will buy Credit Suisse for around three billion euros, the banks agreed with the country’s authorities over the weekend.
UBS’s stock went into free fall as a result of the takeover right away on Monday morning, but in the afternoon it was already in the positive compared to Friday’s closing figure.
On the Zurich stock exchange, however, Credit Suisse’s share price collapsed by more than 56 percent. The value of the bank declined below the three billion euro price that UBS paid for it.
Now let’s blame the terms of the bonds
Investors are suspicious of the fact that the shareholders were put before the biggest creditors in Sunday’s deal – so they will get theirs before the creditors. In general, creditors are in a better position than shareholders in a bank bankruptcy.
Credit Suisse’s vaults have risk bonds with a total of around 16 billion euros. Creditors will not get anything back from them with this information.
Senior Strategist at Danske Bank Kaisa Kivipelto suspects that this arrangement was written into the terms of the bonds.
– Apparently, the debentures that were wiped out have been higher in terms of risk and they have had such a condition that if such a crisis situation occurs, this is what will happen. The discussion on the subject will probably continue until the market finds out whether there was such a condition in the bonds, says Kivipelto.
Credit Suisse’s bonds therefore probably have a condition that their value will be reset to zero if the issuer goes bankrupt. Thus, they are very high-yielding, but also very high-risk debt securities.
The tensions were also visible in the market so that investors looked for safe havens in, for example, government bonds and gold. The price of gold rose to $2,000 an ounce for the first time in a year. An ounce equals 28.35 grams.
The central banks of Europe, the United States, England, Japan, Switzerland and Canada have said that they will come to the rescue if necessary, that is, they will offer dollars to the market. They therefore jointly organize actions to secure the availability of dollars in the financial system.
President of the European Central Bank Christine Lagarde is being examined by the EU Parliament’s Economic Committee at four Finnish time (you will switch to another service). He is also the chairman of the European Systemic Risk Committee.
On Monday, the most common reference interest rates for mortgages remained approximately at their previous levels. For example, the interest rate on the German 2-year bond fell, which indicates that the market does not believe that the European Central Bank will raise policy rates much anymore.
The 12-month Euribor rate was 3.395 percent on Monday, which is slightly more than on Friday.
The story is updated.