Credit Suisse Spirals As Bank Crisis Threatens To Claim A SIFI

I’m the last person to yell “Fire!” in a crowded theater.

I’m also instinctually averse to hyperbole for the sake of it. Longtime readers might fairly note that I regularly trafficked in various sorts of bombast during my earliest days writing for public consumption, but anyone who took the time to actually read the articles quickly discovered that most of my embellishment was tongue-in-cheek.

With those caveats, let me say unequivocally that if Credit Suisse were to run into any real trouble, let alone fail, that’d be bad. And, as discussed at some length first thing Wednesday morning, the current bout of angst plaguing the embattled Swiss mainstay feels considerably more ominous than the social media-fueled speculation that triggered outflows in October.

Read more: Let’s Hope We Don’t Have To Worry About Credit Suisse

The shares closed at a record low Wednesday after the Saudis emphatically dispensed with the idea of upping their stake.

The soundbites from Saudi National Bank Chairman Ammar Al Khudairy were the proximate cause of the rout, but in my view, an FT report which suggested Credit Suisse asked the SNB and Finma for public statements of support was even more disconcerting.

If true, the bank thinks sentiment is so poor that absent government assurances, the market could push things to the brink — or beyond.

As one analyst told the FT, SNB intervention, verbal or otherwise, now looks “inevitable.”

The Swiss can’t afford for Credit Suisse to fail, and the reputational damage from any depositor losses would be catastrophic given Switzerland’s storied history as a safe haven for wealth.

I think it’s fair to say this isn’t a drill. The ECB reportedly contacted lenders to check their exposure to Credit Suisse, and according to the same linked FT piece, Christine Lagarde considered issuing a statement, but decided against it because it might’ve made things even worse.

This raises the stakes for Thursday’s ECB meeting, and materially so. It’d be risky to go ahead with the planned 50bps rate hike, but it’d also be risky not to given that the ECB pre-committed to the move last month. Lagarde will face very tough questions either way, and many of those questions will relate specifically to Credit Suisse.

Meanwhile, Janet Yellen and friends were “actively reviewing” US banks’ exposure, according to Bloomberg’s sources, who said US government officials “are working closely with European regulators” on the matter. “Treasury is monitoring this situation and has been in touch with global counterparts,” a US government spokesperson told FT.

Plainly, the widening in one-year CDS (and the attendant deep inversion of Credit Suisse’s CDS curve) was indicative of counterparty unease. The problems at Credit Suisse are the furthest thing from new, so banks have surely hedged their exposure on a rolling basis, but those hedging needs are now considerably more acute.

Out of four people I spoke to Wednesday, nobody evidenced a sense of panic, but as more than a few commentators were keen to emphasize, Credit Suisse isn’t SVB. A meltdown in Zurich would be a serious event, even if it “doesn’t look like anything resembling 2008” yet, as someone at another SIFI told me on Wednesday afternoon.

The bank’s dollar bonds plunged as much as 40 cents. “Credit Suisse has about $20 billion of bonds in the US high-grade index — much of it trading like distressed junk,” as Bloomberg’s James Crombie indelicately put it. The drop in the stock was the largest decline ever and volume, at 280 million, was a record.