Macro Digest:  Implications of the UBS takeover of Credit Suisse. Macro Digest:  Implications of the UBS takeover of Credit Suisse. Macro Digest:  Implications of the UBS takeover of Credit Suisse.

Macro Digest: Implications of the UBS takeover of Credit Suisse.

Macro
Picture of Steen Jakobsen
Steen Jakobsen

Chief Investment Officer

Summary:  The UBS takeover of Credit Suisse at the weekend is rewriting the history of corporate bonds on the huge write-off of some of Credit Suisse debt. This non-solution could stoke broadening concerns.


Overnight, as you all know, UBS bought CS for $3 billion, but in the process Credit Suisse’s $17 billion risky bonds was left worthless - story from Bloomberg.

This is a 250 billion bond market which was introduced post the GFC to help under-capitalized banks in Europe to reach a sound Tier-1 capital. Its actually called Additional-Tier-1, AT1, in common speech. Tier-1 capital is the highest ranked capital available to offset bad loans or other financial industry stress. Tier 1 is retained earnings, common stock and in many European banks also AT1.

This is probably a bad tracker, but WisdomTree has an ETF that tracks this market specifically (and note this chart is from Friday’s close) … Credit Suisse constituted just above 7% of the Index which is now valued at ZERO

20_03_2023_SJN_Digest_00
Source: Bloomberg

The accelerating concern in the market was crystallized at the weekend with the Credit Suisse takeover deal: the Swiss National Bank, single handed, has put every investor in AT1 on notice. In a bail-out, AT1 bonds will be written down to zero. This forces rerating and probably massive repricing of CoCo bonds on the market open in Europe tomorrow.

This to me is once again short-term and short-sighted policy response to an essential problem. The banking  system has been diluted from accountability as crisis by crisis has left regulators and central banks accepting more accrued losses and left capital requirements weak, insufficient and worst of all based on internal models designed by the banks themselves.

The 3-6-3 banking model (borrow at 3%, lend at 6% and hit the golf course at 3 p.m.) died in 2008 and was replaced by ‘Financial Engineering’ as both the main earner with clients but also the sharpest tool in risk management of the banks.  Financial engineering squared was never a good idea and it really risking a failure of the whole banking model itself.

Update on market 00:20 CET:

20_03_2023_SJN_Digest_01

The market opened up in early trading, driven by liquidity swaps from central banks and the non-solution on CS-UBS. This mini-rally may last an hour, a day or a week, but ultimately we will need to revisit the fact that policy makers have lost credibility and when investors are losing faith in the system, money will flow to assets which are tangible and guaranteed, for example:

  • Gold
  • Short-term government bonds
  • Japanese Yen (JPY)

These are the high probability winners…… tomorrow if I am right about the “new stress” in AT1, then the EUR could start to sell off. The large European (and UK) banks have large outstanding Tier1-linked corporate bonds.

THE data point to monitor tomorrow is this underlying index for the Wisdomtree CoCo ETF noted above:  The Ibox Contingent Convertible Liquid Index.

20_03_2023_SJN_Digest_03
Source: Bloomberg
Update early European morning (near 8 a.m). The best proxy for pre-Europe is perhaps Japanese financials and HSBC (which has the largest weigh in Iboxx's AT1 index).

HSBC is down -3.85% as of this writing

Japanese Banks:
Mizuho: -2.3%
Sumitomo: -1.67%
Mitsubishi: -1.84%

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