Deprcon warning

Stress is becoming visible

Information is pouring in on the deepening troubles of the distressed Swiss banking giant and its effect on the interbank markets.

First, several credible reports state that the $54 billion life-line to Credit Suisse (CS) from Swiss National Bank has not stop the deposit ‘exodus’ from the bank. In the last quarter of past year, CS witnessed net outflows of astonishing $119 billion, and several reports cite that this has eased only marginally. Moreover, it was also reported that “at least four major banks including Societe Generale and  Deutsche Bank have placed restrictions on their trades involving Credit Suisse or its securities", per Reuters. Another source has reportedly stated that “their bank had started asking the Swiss lender to gross settle“ and another bank has reduced its unsecured exposure to CS.

These are first clear reports and signs of a ‘silent bank run’ commencing, which means that other financial counterparties “run” from the liabilities of the bank. This is also visible on the price of hedging against the exposure to CS (credit default swaps), which keeps skyrocketing. If such runs accelerates further, it’s are very difficult to stop without massive capital injections and/or takeover of the bank by the government, This all means that the collapse of Credit Suisse is close and that there’s a risk of devastating contagion leading to runs on the liabilities many major European banks.

Rumors are circling that the Swiss bank UBS would be taking over (buying) at least some parts of CS. Like we noted on Wednesday, this is the only plausible option for CS (due to the general nature of the threat, we decided to make our analysis public late-Friday).

We estimate that the Swiss and European authorities have till Monday or at max till next week to reach a solution. If that is not achieved, we are likely to see a serious financial market turmoil and silent bank runs in Europe commencing.

Owner of a one restaurant, in central-Helsinki, told our CEO Tuomas Malinen today that the interest rate of their (open) corporate loan offer had doubled in little over a week. This implies that stress is already relatively high in the interbank markets, which is usually first reflected in corporate loans. Rates on consumer loans tend to ‘lag’, because they are longer-term and because banks do not want to scare their main depositor base.

We urge continue taking precautionary measures. That is, to raise cash and diminish exposure to all bank debt.

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Disclaimer:

The information contained herein is current as at the date of this entry.  The information presented here is considered reliable, but its accuracy is not guaranteed.  Changes may occur in the circumstances after the date of this entry and the information contained in this post may not hold true in the future.

No information contained in this entry should be construed as investment advice.  Readers should always consult their own personal financial or investment advisor before making any investment decision, and readers using this post do so solely at their own risk. 

Readers must make an independent assessment of the risks involved and of the legal, tax, business, financial or other consequences of their actions. GnS Economics nor Tuomas Malinen cannot be held i) responsible for any decision taken, act or omission; or ii) liable for damages caused by such measures.