Credit Suisse Deal Halted Crisis 03/23 06:17
GENEVA (AP) -- The Swiss central bank hiked its key interest rate Thursday
and insisted 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, $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. It was done under
emergency measure by the executive branch 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 central 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
Jordan said 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
It said that 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 adverse
effects of the turmoil in the global financial sector.
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
"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
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.