Rate pauses certain in wake of Credit Suisse bailout

The RBA was heading for a rate pause before the recent global banking turmoil kicked off but the bailout of Credit Suisse has made that all-but a certainty.

UBS has bailed out Credit Suisse in a weekend rescue deal. Picture: Fabrice COFFRINI / AFP

Rate hike pauses from both the Fed this week and the Reserve Bank in two weeks are now all-but certain in the wake of the Credit Suisse bailout.

That’s, at least.

Although I wouldn’t suggest the Fed would move immediately to a rate cut this week, how the ripples from the CS implosion, and also their home-grown Silicon Valley Bank collapse, play out could see rate cuts from it in the not too distant future. It’s a different story locally. The RBA was heading for a rate pause - for purely domestic reasons, as I’ve argued – before any of this happened.

Neither bank collapse, on the opposite sides of the Atlantic, either individually or in combination were going to seriously impact our banks, except via the general disruption in global wholesale markets where they raise a minority but still significant part of their funding.

So, they certainly weren’t going to help; so all that reinforces a decision that the RBA had all-but already taken. Now, a rate pause not only gives the RBA time to assess what’s happening with inflation (and the economy more generally), but also global – and local – financial conditions more broadly.

As to the core issue of CS, there are two obvious questions: was the world headed for GFC Version 2.0 if CS had been allowed to collapse, Lehman-style; and has its absorption by UBS averted such an outcome?

Again, as I’ve argued, I didn’t see CS as another Lehman.

Yes, certainly, its collapse would have caused massive financial disruption, especially in Europe. A collapse would have caused massive losses and loss of confidence, requiring central banks around the world to provide liquidity support to their banks.

But looked at brutally and calmly, CS really was not “too big to fail”; it’s around two-thirds the size of our CBA and slightly smaller than the other three big banks as well.

But again on balance, the semi-rescue by UBS was the most sensible all-round outcome; especially when you have to make these decisions through a weekend.

UBS shareholders, appropriately, have lost all but a token proportion of their investments. That’s supposed to be how these things work.

Holders of CS so-called ‘hybrid’ securities – a mix of debt and equity – lose 100 per cent. Again, appropriate.

UBS becomes the dominant bank in Switzerland and an even bigger player in the European market. Yes, the Swiss taxpayer assumes a multi-billion Swiss franc and US dollar risk; but that’s a matter for Swiss politics.

Yes, we can ponder why once again the rich get bailed out; a generosity never bestowed on especially SME’s that go broke and so on their creditors.

They have to fight over the carcass.

But the bail out could have been more generous; and the counterfactual would have seen bigger losses and more turmoil.

Again, we shall have to see how it all plays out, most critically through the rest of this week (and the Fed meeting) in global equity and sovereign debt markets, along with global capital markets.

Investor confidence and confidence directly in banks has been battered.

But I’m reminded of a reality that played out through the OPEC oil crisis of the early 1970s.

The Arab exporting countries of OPEC moved to take their money out of American banks because of US support of Israel.

But they had to put the billions somewhere; they did – into European banks. So the money just went round in a circle in the overall global market, filtering back via Europe to those very same US banks.

Exactly the same reality applies in 2023. You take your money out of SVB or CS; you put it back into another bank or US treasuries or other sovereign debt.

Or, it seems, Bitcoin.

Originally published as Rate pauses certain in wake of Credit Suisse bailout