LONDON, March 19 (Reuters) – Financial markets braced for relief on Monday after UBS Group AG ( UBSG.S ) agreed to buy Credit Suisse Group AG ( CSGN.S ) in a bailout orchestrated by the state and major central banks banks announced a coordinated move to strengthen liquidity in the financial system.
In an early sign that risk appetite is set to soar, the euro, sterling and Australian dollar rose, data from trading platform EBS and Reuters Dealing showed. Cryptocurrency bitcoin rose by more than 5%.
UBS will buy rival Swiss bank Credit Suisse for 3 billion Swiss francs ($3.23 billion) and agreed to absorb losses of up to $5.4 billion as it shuts down the smaller investment bank following a shotgun merger masterminded by Swiss authorities.
In a coordinated global response, central banks including the Federal Reserve, the European Central Bank and the Bank of Japan said they would improve dollar swap lines, helping to calm investors jittery about the turmoil in the banking sector.
The euro was last up 0.2% at $1.0684.
“It seems like a very big and decisive intervention. Provided the markets don’t smell other lingering issues, I think this should be quite positive,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments.
“Governments intend to extinguish the spark of infection before the flames get out of control.”
The failure of two US banks and a drop in Credit Suisse’s stock have sent shockwaves through markets over the past week, rekindling memories of the 2008 financial crisis.
European banks fell nearly 12% last week, their biggest weekly decline in just over a year (.SX7P), Japanese banks fell nearly 11% – their biggest weekly drop since the market turmoil caused by COVID-19 in March 2020 (.IBNKS.T) – and US bank stocks posted double-digit losses for two weeks in a row (.SPXBK).
Without the Swiss intervention on Sunday, the risk of further stress on the market looked likely.
At least two major banks in Europe are examining scenarios of possible contagion in the region’s banking sector, two senior executives familiar with the deliberations told Reuters earlier on Sunday, before the Credit Suisse deal was announced.
The central banks of the US, Great Britain and Switzerland are due to meet next week.
BIG STAKES
The stakes are high for central banks and policymakers who have highlighted the resilience of their banking sectors but are also mindful of the need to stem a crisis of confidence that could destabilize financial markets.
Even after Sunday’s news, analysts’ optimism was tempered by caution and skepticism.
“Switzerland’s position as a financial center has been broken – the country will now be seen as a financial banana republic,” said Octavio Marenzi, chief executive of Opimas in Vienna.
Others pointed to the losses likely to be suffered by Credit Suisse’s junior bondholders.
The decision to reduce the value of Credit Suisse’s ( CSGN.S ) additional bonds to zero under the deal was “stunning and difficult to understand,” bondholder Axiom said.
“CS shareholders are essentially wiped out and some (AT1) bondholders will be wiped out, but the basic functioning of the banking system is protected,” said Michael Rosen, chief investment officer at Angeles Investments.
Reporting by Dhara Ranasinghe and Amanda Cooper in London Additional reporting by Caroline Mandl, Lawrence Delevigne and Tom Sims Editing by Matthew Lewis
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