CREDIT SUISSE CRISIS (CDS)
Source: indianexpress
Context:
Over the past few days, the share price of Credit Suisse, one of the oldest and historically one of the most influential banks in the world, has hit an all-time low. Since the beginning of 2022, Credit Suisse’s share price has fallen close to 60 per cent.
What are CDS?
CDS is an insurance instrument. If an investor who has lent money to a firm (say Credit Suisse) is unsure about the firm’s ability to repay, the investor can buy a CDS on Credit Suisse’s bond. A CDS promises that if Credit Suisse fails to pay back, the insurer would pay the amount.
In return, the insurance firm selling the CDS gets a certain interest. This interest is called the spread of CDS. When these spreads rise, they signal the rising probability that a particular bond will fail. For Credit Suisse bonds, CDS spreads have spiked to 14-year highs.
Concerns around Credit Susie
Reportedly, Credit Suisse had just over 50,000 employees and 1.6 trillion Swiss francs ($1.62 trillion) in assets under management at the end of 2021
However, it has been losing its market value since the 2008 global financial crisis (see chart). The share price has witnessed almost a secular decline. The reason for this is fairly straightforward
Credit Suisse has made several risky bets and ended up losing a lot of investor money. That, in turn, has hurt its profitability, eroded investor confidence, and has made raising fresh capital costlier
Such losses were punctuated by high-profile managerial malpractices and exits, further undermining investor confidence
| Example:In 2020, then CEO Tidjane Thiam had to quit after it became clear that he had been spying on Credit Suisse’s wealth management executive Iqbal Khan. |
How did it impact Credit Suisse?
- The secular decline in Credit Suisse’s share price is one good way to understand how investors have progressively shrugged away from the iconic bank.
- Further, Credit Suisse bonds have increasingly become cheaper because fewer people want to lend money to it and this has resulted in the yields rising quite sharply.
- Higher yields essentially imply that the bank would have to pay higher returns for every dollar or euro it borrows from the market.
- This becomes a problem, especially in the current scenario facing the developed economies, when growth prospects are tanking and central banks are raising interest rates to contain inflation
|
For Prelims: 1.Which of the following is correct about Credit Susie crisis? A. Angel investor B.Capital Investor C. Credit rating Agency D.Insurance instrument Answer (D) |
