Billions of pounds were wiped off UK shares and pension funds yesterday as Deutsche Bank became the latest financial giant to get dragged into the mess.
Shares in the German behemoth fell almost 15 percent at one point on Friday, sending a shockwave through global markets, including London’s FTSE 100.
Investors dumped Deutsche’s stock after its credit default swaps, which insure debt against the risk of default, spiked to a four-year high.
Other European banks also sold off, include France’s BNP Paribas and Sociéte Générale, with the Euro Stoxx banks index plunging almost five per cent at one point.
LPL Financial’s chief global strategist Quincy Krosby said: “It’s sell first, ask questions later.”
London’s blue-chip index dived 2.1 percent before recovering slightly, while major US banks also slipped when Wall Street opened.
Chris Beauchamp, chief market analyst at online trading platform IG, said: “This renewed bout of selling shows that the takeover of Credit Suisse hasn’t put a lid on the crisis.”
Amid the chaos, EU leaders are desperately trying to convince markets that all will be well.
They could hardly do otherwise. The merest blink, pause or hesitation at this critical moment could trigger outright panic, and they know it.
European Central Bank (ECB) president Christine Lagarde assured EU leaders yesterday that the euro-area banking sector remains strong.
The ECB’s governing council pledged to respond “as necessary” to preserve financial stability. “The euro area banking sector is resilient, with strong capital and liquidity positions,” it says.
I’m glad to hear it.
Let’s hope the ECB doesn’t mess up like it did in July 2008, when it triggered meltdown by hiking interest rates to 4.25 percent when it should have been slashing them instead.
German Chancellor Olaf Scholz insists the European banking system is “stable” and Deutsche is “a very profitable bank”.
I’m also glad to hear that, although investors won’t be happy having seen its shares crash by almost a quarter this year.
Bondholders at Swiss bank Credit Suisse aren’t happy at all. In fact, they’re hopping mad.
The banking crisis started in the US, where Silicon Valley Bank and Signature Bank went bust within days.
The moment the news broke I started casting glances at Swiss banking giant Credit Suisse, which came within a whisker of a bank run last year.
When trouble struck its biggest backer, Saudi National Bank, refused to help. It lost $1billion.
Credit Suisse grabbed a £44billion emergency loan from the Swiss National Bank in a desperate bid to stay afloat, but even that mighty sum wasn’t enough.
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Within days, Swiss financial watchdog FINMA forced a merger with deadly rival UBS for £2.6billion, a fraction of its former value.
The rule is when a bank goes bust is that shareholders take the hit first, bondholders next.
Not this time.
Bondholders lost an estimated £14billion and are lining up legal action as I write this.
This is happening in Switzerland, remember, supposedly the most secure banking system in the world.
It gets worse.
Yesterday, shares in UBS crashed as investors fretted over the Credit Suisse merger and credit ratings companies lowered their outlook on its debt.
In a further twist, the US Justice Department is said to be investigating both Credit Suisse and UBS to see if they helped Russian oligarchs evade sanctions.
Switzerland isn’t in the EU but contagion could spread as waves of bad news strike the European banking sector, said Susannah Streeter, head of money and markets at Hargreaves Lansdown. “Investors fear fresh problems could be lurking.”
So far, the well-capitalised UK banks have stood firm. Europe looks shakier by the day.
Next week will be interesting.
