Spreading bank crisis raises global recession fears

Credit Suisse has been reeling from years of mismanagement and poor risk control. PHOTO: REUTERS

NEW YORK - Fear about the unseen risks to the financial system rippled across the world on Wednesday, breaking the brief calm that had settled over markets the day before and deepening concerns about the potential for a banking crisis to threaten the global economy.

Wednesday’s turmoil was set off by a panic over the health of Credit Suisse, the 166-year-old Swiss bank that has been reeling from years of mismanagement and poor risk control. On Tuesday, the bank warned of problems in its accounting practices.

Although different to the woes of the US banks that collapsed in recent days, concern about Credit Suisse served only to add to a sense of dread that more problems could be lurking.

As the crisis convulsed global financial markets, the authorities in Switzerland sought to stem the damage, releasing a statement pledging to provide Credit Suisse with emergency financing of as much as 50 billion francs (S$73 billion) if needed.

Recession fears sent the price of oil tumbling below US$70 a barrel for the first time since 2021 in the United States.

Goldman Sachs on Wednesday lowered its forecast for fourth-quarter US economic growth, citing risks to the lending environment as smaller banks pull back on loans to preserve liquidity in the face of a banking crisis.

It now expects year-over-year growth of 1.2 per cent for the quarter, down 0.3 percentage point from its previous estimate.

“This is morphing into a bigger deal,” said Ms Priya Misra, head of global rates strategy at TD Securities, explaining the drastic moves in markets on Wednesday. “If this is not resolved quickly, we should talk about a deep recession as the base case – nobody was talking about a deep recession before.”

The moves dumbfounded some investors, who consider the economies in the US and elsewhere as more solid than the turmoil suggests. They attributed the chaotic trading to the fact that investors were worried that it might be difficult to spot risks lurking after an unusually fast increase in interest rates over the past year.

The moves also highlighted the fragility of the financial markets when investors lose their grasp of what could happen next.

Wednesday’s panic was sparked by a statement from Credit Suisse’s biggest shareholder, Saudi National Bank. When the bank’s chairman Ammar Al Khudairy was asked if he was willing to inject more cash into Credit Suisse, he responded: “Absolutely not.”

That was nothing new, really – the bank has maintained that position for a while now – but it was enough to unnerve investors already on edge after three regional US banks failed in a span of days. 

While Credit Suisse’s American depositary receipts pared losses after the announcement by the Swiss authorities, they were still down 14 per cent at the close of regular trading in New York.

The pain bled into the rest of the banking sector, with Morgan Stanley and Citigroup each tumbling more than 5 per cent, while JPMorgan Chase & Co, Goldman Sachs and Wells Fargo all sank more than 3 per cent.

Market angst

All of this underscores just how high angst now is – both surrounding the fate of Credit Suisse and, more broadly, a global economy that has been shaken by central bankers trying to rapidly quell an inflation outbreak.

Amid the tumult, broader concern about the outlook for the global banking system began to seep into dollar funding markets.

Rates on overnight repurchase agreements moved higher for a period, pointing to stronger demand and general jitteriness.

And a number of other market indicators, including the gap between forward-rate agreements and overnight index swaps, also indicated heightened tension.

Unlike the regional banks that fell in the US, “Credit Suisse is a global systemically important banking institution”, said Mr Scott Kimball, managing director of fixed income at Loop Capital Asset Management, which has a position in the lender’s bonds.

“The persistent problems at Credit Suisse carry bigger problems for the credit markets,” he added. “They can’t seem to get the ship right.”

Mr Dan Ivascyn, the chief investment officer of Pimco, the bond fund manager with roughly US$2 trillion (S$2.7 trillion) in assets, said 2023 was already going to be an unpredictable one for the economy and the markets, coming after a tumultuous 2022, but “that uncertainty has only gone higher”.

Rating agencies have noted that the European banks have less exposure to the same risks that took down small lenders in the US, while investors took some comfort from the swift action taken by the authorities around the world.

“We think there is a reasonable chance you see some stabilisation,” said Mr Ivascyn. “But there are going to be aftershocks. We think we are in a volatile environment for the next several months.”

Central bankers in the euro zone meet on Thursday to decide whether or not to keep raising interest rates in the light of the ensuing turmoil, and until recently had been expected to keep aggressively pushing rates higher. That meeting will be followed by the US Federal Reserve’s, which will happen next week.

Mr Andrew Brenner, the head of international fixed income at National Alliance Securities, said that the Fed “is nuts if they think they can tighten”. The central bank “will break the bank system if they keep thinking like this”, he added.

The yield on the two-year Treasury note, which is particularly sensitive to Fed policy, fell by about one-third of a percentage point to around 3.9 per cent.

Futures markets on Wednesday suggested investors were split on whether the Fed will raise rates by a quarter point at its next meeting or whether it will alter its previously expected course and keep interest rates where they are.

“They can and should entertain that possibility,” said Invesco chief global market strategist Kristina Hooper. “This is not a fait accompli. This does not have to end in a major financial crisis.”

Investors in futures markets also piled into bets that the Fed will begin cutting rates in the second half of 2023 – a clear sign that they think the escalating crisis may force the central bank’s hand.

The Fed had repeatedly said it had no plans to cut rates in 2023, though that was before the latest turmoil.

And in debt markets, where banks and other investors facilitate loans to companies across the world, investors’ fears were reflected in sliding bond and loan prices.

The moves amplified concerns about the potential knock-on effect from stress in the banking sector, and among some start-up tech companies, leading to some companies being unable to repay their debts. NYTIMES, BLOOMBERG

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