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Credit Suisse (CS) share price fell below 2 francs again on Friday. Confidence in the big bank has not been restored. On the other hand, default insurance costs on bank bonds are rising rapidly.
So-called “Credit Default Swaps” (CDS) – considered warning lights in the financial market – Credit Suisse debt instruments rose sharply earlier in the week, now reaching a new record high of 1236 basis points. Meanwhile, on Tuesday it was still 480 basis points, up from 57 basis points at the start of 2022.
This means that CS’ bankruptcy insurance is almost four times more expensive than other crisis banks in Europe, currently Italian Banca Monte dei Paschi di Siena, Banco Comercial Portugues or Greek Eurobank Ergasias and National Bank of Greece. For further comparison: CDS for UBS Investment Bank is currently at 123 basis points.
An indicator for finance professionals
Basically, CDS is a financial tool as well as an indicator for professionals. Banks sell the default risk to an investor to minimize their risk when making a loan, and also pay the buyer an annual fee for the risk. Bank Vontobel analyst Andreas Venditti (50) explains: “While traditional investors look at share prices, professional market participants focus on credit markets, of which CDS trading is also a part.” The development of CDS is not directly related to the share price: for example, when the CS share price rose on Thursday, the CDS level in CS hardly moved.
However, the amount of CDS premium is determined by supply and demand, similar to the price of a share. According to Venditti, the skyrocketing price of CDS in CS means that it becomes more expensive to hedge against a possible default. However, there may also be a situation where hedge funds and short sellers (“short sellers”) are at work. The CDS sale is tempting “if nothing happens afterward”. Speculators bet on it. On the one hand, there is collateral for CS, such as an emergency loan from the Swiss National Bank (SNB) or the Financial Market Authority’s statement that the liquidity and capitalization of CS are secured.
But the markets are still not calm. According to Venditti, there are signs that various banks are advising their staff to exercise caution when trading with CS. Credit Suisse CDSs are still in demand. Venditti: “The persistently high CDS level makes CS’ condition worse.”
Source :Blick
I’m Tim David and I work as an author for 24 Instant News, covering the Market section. With a Bachelor’s Degree in Journalism, my mission is to provide accurate, timely and insightful news coverage that helps our readers stay informed about the latest trends in the market. My writing style is focused on making complex economic topics easy to understand for everyone.
