Credit Suisse deal averted crisis, Swiss central bank says
The Swiss central bank hiked its key interest rate Thursday and declared that a government-orchestrated takeover of troubled Credit Suisse by rival bank UBS ended the financial turmoil.
In a statement, the Swiss National Bank said it is providing large amounts of support for the deal to merge Switzerland's biggest banks and that the late Sunday announcement by the federal government, financial regulators and the central bank "put a halt to the crisis."
"An insolvency of Credit Suisse would have had severe consequences for national and international financial stability and for the Swiss economy," said Thomas Jordan, chairman of the Swiss central bank's governing board. "Taking this risk would have been irresponsible."
The hastily arranged, US$3.25 billion deal aimed to stem the upheaval in the global financial system after the collapse of two U.S. banks and jitters about long-running troubles at Credit Suisse led shares of Switzerland's second-largest bank to tank and customers to pull out their money.
Swiss authorities urged UBS to take over its smaller rival after the central bank's plan for Credit Suisse to borrow up to 50 billion francs ($54 billion) last week failed to reassure investors and customers. The deal was done after the country's executive branch passed emergency measures to bypass shareholder approval.
"The extensive liquidity assistance provided the time needed to find a solution to safeguard financial stability," the central bank said in a statement. "This solution had to be worked out under considerable time pressure in order to be ready before the Asian markets opened this week."
To support the deal announced late Sunday, the Swiss National Bank has said it is providing a loan of up to 100 billion francs ($109 billion) and that the government is providing another 100 billion francs of support as a backstop if needed.
Jordan said Thursday that the loans are "not gifts" but are backed by collateral and subject to interest.
The central bank hiked its key interest rate by half a percentage point to counter inflation that has risen since the beginning of the year, to 3.4% last month. It said more hikes "cannot be ruled out."
The bank said inflation was "above the range the SNB equates with price stability" and that economic growth is expected to be modest this year, forecasting a 1% increase in gross domestic product. The SNB said the global economic outlook was uncertain, with the main risks being an economic downturn and fallout from the global financial turmoil.
It comes as central banks around the world are pressing ahead with their fight against inflation even as banking sector chaos has created a global crisis of confidence in the financial system.
The U.S. Federal Reserve went ahead with a quarter-point rate hike Wednesday, Norway's central bank did the same Thursday and the Bank of England is expected to approve a increase after inflation unexpectedly grew last month. The European Central Bank raised rates by a half-point last week.
The ECB and Fed chiefs both voiced assurances that the financial system is resilient and that money is safe in banks.
Adrian Prettejohn, a Europe economist at Capital Economics, said the Swiss National Bank "was clearly keen to try to draw a line under the Credit Suisse saga."
"They seem relaxed about any hit to macroeconomic activity from the Credit Suisse debacle," he said in a note, pointing to the upgraded forecast for economic growth this year.
Meanwhile, Swiss financial regulators defended how the deal wiped out about 16 billion francs ($17.3 billion) in higher-risk Credit Suisse bonds, which left investors with hefty losses.
Typically, shareholders face losses before those holding bonds if a bank goes under -- a hierarchy that the European Central Bank and Bank of England reiterated in statements this week.
The Swiss Financial Market Supervisory Authority, or FINMA, said Thursday that contracts for the higher-risk bonds show that they can be written down in a "viability event," particularly if the government offers extraordinary support.
That happened under the executive branch's emergency measures Sunday, which also allowed regulators to order a writedown of the bonds, FINMA said.
Global law firm Quinn Emanuel says it has put together an international team of lawyers from Switzerland, the U.S. and the United Kingdom that is in discussions about possible legal action with bondholders representing "a significant percentage" of the total amount that was issued. The firm convened a call for bondholders Wednesday that drew more than 600 participants.
When it comes to interest rates, the Swiss National Bank has hiked three times over the last six months. A year ago, Switzerland drew international headlines for its unusual policy of maintaining negative interest rates -- at negative 0.75%. That policy aimed to help depress a highly valued Swiss franc and meant that some investors actually had to pay interest for the privilege to keep their money in Switzerland, not reap interest from it.
McHugh reported from Frankfurt, Germany
MORE Business News
opinion | Find out how much contribution room is left in your RESP to avoid penalties
Opening a Registered Education Savings Plan (RESP) is a great way to fund your child’s future education. Personal finance contributor Christopher Liew outlines the contribution rules for RESPs and explains how to find out how much contribution room you have left so that you can avoid penalties.
opinion | Is it a good time to buy a new vehicle?
If you're like many would-be vehicle shoppers, you may be wondering when prices will finally drop. The good news is that the vehicle market seems to be finally stabilizing, says personal finance contributor Christopher Liew.
opinion | How to get the most out of your grocery rebate
Personal finance contributor Christoper Liew shares the latest information about who’s eligible for the grocery rebate, when they can expect their payments, and some helpful tips on making the most of your grocery rebate.
opinion | Dos and don'ts of money while travelling
As a former financial advisor, I’ve always been fascinated by how the 'culture' around money differs from one region of the world to another,' writes personal finance commentator Christopher Liew. 'Today, I’ll outline some of the interesting money habits that I’ve noticed while travelling the globe, starting with some of our own!'
opinion | How much of a raise should you ask for in a time of high inflation?
With the rising cost of food and living expenses, you might be considering asking for a raise. On CTVNews.ca, personal finance contributer Christopher Liew explains how inflation could determine the extent of your raise, as well as other key factors.
opinion | Top sources of passive income for Canadians looking to earn more
On CTVNews.ca, personal finance contributor Christopher Liew explores some of the top sources of passive income in Canada, for those looking to increase their earnings.
Owe money to the CRA? Here are some repayment options
Getting an income tax refund can be a happy bonus for your household budget, but an unexpected tax bill can be an unpleasant surprise, especially if you don't have the cash on hand to pay it.
Canadians with celiac disease especially hard hit by grocery price pain, group says
Those prices have been increasing even more along with the rising cost of groceries overall. Celiac Canada says gluten-free products cost between 150 and 500 per cent more than their regular gluten-containing equivalents.