What’s Going On Here?Extraordinary times call for extraordinary measures – and the weekend’s government-brokered deal between Swiss giants Credit Suisse and UBS was certainly out of the ordinary. What Does This Mean?A deal like this would have UBS shareholders licking their lips under normal circumstances: after all, it’s not every day you can snap up your biggest rival at a bargain-basement price. And the cozy bubble wrap of government guarantees – covering billions in potential losses and offering unlimited access to funds from the central bank – seriously sweetens the deal. But only time will tell whether Credit Suisse is really a bargain at $3 billion (tweet this). For one, UBS shareholders still don’t know if nasty surprises lurk within Credit Suisse’s balance sheet. And for another, stemming the flow of Credit Suisse’s clientele (and their money) might take more than just a new owner. No wonder, then, that UBS’s seesawing stock price suggests investors are between two minds. Why Should I Care?For markets: Capital structure.
Bond investors are freaking out about the Swiss mega-deal. See, bonds are normally repaid first when a firm goes belly-up – but this time around, private investors are taking some losses, ensuring the deal isn’t seen as a “bailout”. And in a highly unusual twist, the Swiss government has decided to wipe out some bond investors completely, while giving shareholders newly minted UBS shares. Sure, Swiss banks make their own rules, but this is bound to make anyone investing in European bank bonds break out in a cold sweat.
The bigger picture: Bazooka time.
The banking sector can normally count on a knight in shining armor to rescue it when trouble looms: last time Europe’s banks ran aground, the region’s central bank pulled out its so-called “big bazooka”, pumping billions of euros into the system and adopting a “whatever it takes” approach to restoring market confidence. That worked like a charm back then – and while banks aren’t as weak this time, a flash of that heavy weaponry would go some way to shoring up confidence. | 