Cost of insuring against Credit Suisse defaulting reaches record high

Investors rush to buy credit default swaps as worries grow over solidity of bank’s balance sheet

The cost of buying insurance against Credit Suisse defaulting on its debt soared to a record high on Monday, amid fears on markets about the solidity of the balance sheet at the globally significant Swiss bank.

There was a sell-off in the bank’s shares and bonds while investors rushed instead to buy credit default swaps (CDS) – insurance against the bank failing to meet its debts.

Credit Suisse CDS soared to 355 basis points at one point on Monday, a record measure of its risk of defaulting, while its shares fell by as much as 11.5%, although losses eased throughout the day and it closed just slightly down.

The gyrations came after the chief executive issued a memo to staff attempting to reassure them about the bank’s financial position. Ulrich Körner wrote that there were “many factually inaccurate statements being made” in media coverage of the bank’s crisis, as its share price plunged by 60% this year.

Credit Suisse is preparing to reveal a plan to get itself out of its financial hole, which may include job cuts, selling assets and asking investors for a fresh infusion of cash, on 27 October.

“I trust that you are not confusing our day-to-day stock price performance with the strong capital base and liquidity position of the bank,” Körner said in the staff memo on Friday.

“We are in the process of reshaping Credit Suisse for a long-term, sustainable future – with significant potential for value creation.

“Given the deep franchise we have, with a longstanding focus on serving some of the world’s most successful entrepreneurs, I am confident we have what it takes to succeed.”

Credit Suisse is among 30 “globally significant banks” listed by the central banks’ bank, the Bank for International Settlements, that are required to set aside extra capital to absorb potential losses because of their importance to the international financial system.

The bank plunged from a profit of 2.7bn francs in 2020 to a loss of 1.65bn francs last year, driven mostly by big losses on its investments in the failed supply chain finance group Greensill and hedge fund Archegos – where US authorities have charged founder Bill Hwang and three others with racketeering and fraud offences after its collapse.

And the red ink continued flowing into 2022, with an additional 1.8bn francs in losses recorded in the first six months of the year.

Credit Suisse has also paid large fines after admitting to fraud over bonds it issued that were supposed to be used to fund tuna fishing in Mozambique but where some of the proceeds were diverted to pay kickbacks, including to bankers at Credit Suisse.

And its private banking division – traditionally a cornerstone of Swiss banking – has been put under pressure after the Suisse secrets investigation, conducted by a consortium including the Guardian, exposed the hidden wealth of clients involved in torture, drug trafficking, money laundering, corruption and other serious crimes.


Ben Butler and agencies

The GuardianTramp

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