Vogon Today

Selected News from the Galaxy

Economic Scenarios

The Credit Suisse case: how Switzerland, and the West, are destroying the basis of their well-being

The cancellation of Credit Suisse's AT1 bonds, to the extent stipulated in the contract, was a serious blow to the seriousness of Switzerland and its credit system. For example Mark Dowding, chief investment officer at RBC BlueBay reported by Z erohedge, which held Credit Suisse AT1 bonds, said Switzerland was “increasingly looking like a banana republic” .

“ If this action is maintained, how can anyone trust any debt security issued in Switzerland, or in all of Europe, if governments can change the laws afterwards? David Tepper, the billionaire founder of Appaloosa Management, told the Financial Times. " Contracts are made to be respected ."

The Swiss authorities have tried to defend their actions, claiming that all contractual and legal obligations to be able to act unilaterally given the urgency of the situation had been met, but this is a very weak defence.

Louis-Vincent of Gavekal Research, as it became known how the rescue will take place, began to ask some fundamental questions about the seriousness of the intervention of the authorities:

  • Was the bank condemned for its borderline behavior once Switzerland abandoned its banking secrecy laws five years ago?
  • Has the negative yield curve applied by the Central Bank in Switzerland for over a decade prompted the bank to take excessive risks and accept wrong transactions (Greensill, Archegos, Wirecard)?
  • Its management was simply poor compared to its competitors, or it was selected not on the basis of professional qualities, but on other characteristics

    The director of Credit Suisse in his two versions: "Pippa" and "Philip"

Whatever the reasons, it's hard to see a historic institution disappear and not feel some sympathy. But with the Bank, the belief that the Swiss are a people who live by strictly following the rules and who have the utmost respect for the rights of citizens and property has also disappeared. All this myth disappeared. In fact, the episode creates two precedents:

  1. A bank can merge with another bank without shareholder approval. Logic dictates that if a bank is systemically important, the rights of minority shareholders must be overridden in the name of the "common good". This is an important precedent that minority shareholders of all systemically important banks will no doubt consider. At this point the rights of the shareholders of the large systemic banks can be canceled at will, exactly as happened in Italy for the shareholders of the Popolari Veneto;
  2. 2) Even if the Credit Suisse acquisition leaves shareholders a few cents, holders of contingent convertible bonds (known as CoCos or AT1s) are being wiped out. This is a worrying development given that even unsecured bondholders usually rank higher than shareholders in the capital structure. The fact that shareholders get “something” and CoCo bondholders “nothing” raises serious questions about the real value of CoCo bonds. This is important, as CoCos were used extensively by European banks to strengthen their balance sheets after the 2008 mortgage crisis and the 2011-2013 eurozone crisis. If it was such a dangerous instrument it should NOT have been authorized and the banks had to be forced to be "Correct" and make pure capital increases, at the cost of diluting the shares. In this way the problem has been circumvented, but the knots come home to roost.

Long story short, the terms of the Credit Suisse takeover are likely to kill the CoCo market. At this point who trusts these titles?

However, the blow to the image of Switzerland and the West deriving from the way the Credit Suisse case was handled is enormous and probably not repairable. Imagine you are the Saudi National Bank, which invested $1.5 billion for a 9.9% stake in Credit Suisse in October, no doubt on the premise that Switzerland is one of the safest jurisdictions for foreign investors. Yet, in less than six months, the Saudi bank's investment was merged into UBS, crystallizing a loss of around 80%, without a vote being cast on the matter, but only by an order from the authorities on behalf of a "greater good". How likely are Saudi institutions to invest more in Switzerland, or perhaps even in the Western world at large?

The Credit Suisse affair is perhaps the greatest example of Western decadence:

  • First, the West is destroying its greatest competitive advantage, which is respect for the law and property. If you can sell a bank without a shareholders' vote you have destroyed their rights. now both in the EU and in Switzerland there is more and more talk of "superior interests" which are nothing more than an excuse to cancel individual ones, but at this point perhaps a country in the Far East is better. We see this cancellation of individual rights in finance, but let's not forget what happened with Covid, where often absurd rules imposed from above were followed, or what is happening with "Climate Change", where rights and property are damaged private in the name of a mysterious "Greater Good" with a Soviet flavour
  • Secondly, Western politicians seem ready to sacrifice "individual rights" on the altar of the "common good", due to a bad influence resulting from the 2008 crisis, the development of social media and our current cultural predilection for the virtue signaling (see Politicians now have a very short time horizon, they only see the "here and now", and when this happens individual rights, which develop their own long-term utility, are set aside in favor of muscular attitudes. The government "must act now", even if this action is stupid, senseless and leads to damage in the medium and long term.

The consequences of this attitude will be profound and will be felt almost immediately in finance.

  1. Government interference has the effect of increasing regulatory uncertainty and thus making the financial sector more expensive, because uncertainty is a cost and an inefficiency;
  2. The breakdown of the CoCo bond market means that in the next crisis, banks will have to finance themselves in new ways, or else shareholders will simply face massive dilution. Game over AT1, but because the regulators wanted it;
  3. Capital from emerging markets will stay at home or go to NON-Western markets which, however, guarantee strict respect for rules and private property;
  4. This is perhaps the final step in the decadence of the West

However we are experiencing a moment of topical transition, 1700 years after the last similar moment for the West.


Telegram
Thanks to our Telegram channel you can stay updated on the publication of new articles from Economic Scenarios.

⇒ Register now


Minds

The article The Credit Suisse case: how Switzerland, and the West, are destroying the basis of their well-being comes from Scenari Economici .


This is a machine translation of a post published on Scenari Economici at the URL https://scenarieconomici.it/il-caso-credit-suisse-come-la-svizzera-e-loccidente-stanno-distruggendo-la-base-del-proprio-benessere/ on Sat, 25 Mar 2023 11:46:52 +0000.