Credit Suisse might default in the near future, but its failure would be unlikely to cause a global financial meltdown


Credit Suisse might default in the near future, but its failure would be unlikely to cause a global financial meltdown

Plus: Extreme poverty increased during the pandemic

Hi there Intriguer. One of the most exciting weeks of the year is here… for the brown bears at Alaska’s Katmai National Park. That’s right, ‘Fat Bear Week 2022’ kicked off on Wednesday meaning you can live-stream giant grizzly bears as they devour up to 40 salmon in a single sitting. Don’t forget to vote for who you think will be the chunkiest chap or chappette by the end of the feeding frenzy – the plumpest Paddington will be crowned on 11 October.

Today’s briefing is a ~5.0 min read:

  • 🏦 Credit Suisse: is the bank about to collapse?
  • ➕ Plus: The pandemic increased extreme poverty, Uganda’s Twitter general threatens to invade Kenya, and promising signs for peace in Ethiopia.
📰 GLOBAL HEADLINES
🤿 DEEP DIVE

Credit Suisse isn’t Lehman; 2022 isn’t 2008 (we hope)

In brief:

  • Rumours of an impending Credit Suisse default have been making the rounds on financial Twitter over the past few weeks.
  • We looked into the rumours, and while the bank’s performance is subpar, most analysts think concerns about a 2008 Lehman Brothers-style crash are a little premature.

We’re not in 2008 financial crisis territory, yet. Source: The Big Short via Tenor.

Rumours in the schoolyard financial Twitterverse

If someone tells you the most gossipy people on earth are teenagers, they’re wrong; nobody spreads rumours as quickly as finance folk.

  • Over the past few weeks, speculation that Swiss bank Credit Suisse is facing a Lehman Brothers-style implosion has spread like wildfire on social media and in the markets.

It all started with a memo: Last Friday, CEO Ulrich Körner sent an email to reassure the bank’s staff that everything was fine and the bank was secure.

Understandably, the market took the email as an indication that everything was very much not fine.

  • Investors scrambled to sell their shares, and the bank’s credit default swaps – a financial tool that offers protection against a company defaulting – rose sharply.

Do the default rumours have any basis?

In short, yes. Credit Suisse isn’t doing well.

  • Its return on equity (a measure of the company’s profitability) is in the negative double-digits, and the bank plans to announce a restructuring at the end of the month.
  • Its stock has fallen by more than 40% over the past six months.
  • But that’s not all – earlier this year, the bank was found guilty of turning a blind eye to suspicious cash payments made by a Bulgarian drug gang.

In addition, the Guardian reported yesterday that Credit Suisse was looking to sell its last remaining ‘trophy asset’, the Hotel Mandarin Oriental Savoy Zurich, a move that analysts have called “a king-sized distress signal”.

  • Still, most market experts say that while Credit Suisse is in trouble from a business perspective, it’s unlikely to kickstart the kind of financial contagion the world saw in 2008.

The ghosts of crises past

The killer combo of falling share prices, rising credit default swaps, and a worsening global economic outlook is making anyone who survived the market crash in 2008 extremely jittery.

But there are reasons to believe we’re not back there (at least not yet):

  1. Most of Credit Suisse’s problems are related to bad management, not systemic, market-wide issues. As financial analyst Alex Good put it: “Is it Lehman? No. Lehman was the cause, [Credit Suisse] is a casualty”. 
  2. Credit Suisse has reserves of cash and other assets that can be liquidated in times of extreme need.
  3. Regulators are more vigilant these days. According to economist Holger Schmieding “regulators and central banks are far better equipped to nip any such problem in the bud”. 

Unfortunately, bank failures are often self-fulfilling doom loops – the more people that believe a bank will fail, the likelier it is that said bank will fail.

  • Concerns that Credit Suisse’s troubles could spread are affecting another Swiss bank, UBS – its five-year credit default swaps rose to their highest level since 2013.

The bottom line: While it’s possible that Credit Suisse could default in the near future, most analysts agree that its failure would be unlikely to trigger a sector-wide meltdown. Phew.

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🔦 REGIONAL SPOTLIGHT

Africa & the Middle East

🇪🇬 Egypt

Preparations for the upcoming Cairo COP27 Summit are in full swing even as the host country weathers criticism of its human rights and environmental records.

  • According to NGO Human Rights Watch, Egypt might “try to use its role as the COP27 presidency to promote an image of openness and tolerance”, even though political oppression there has worsened under President Abdel Fattah al-Sisi.
  • Activists flagged that while Egypt pledged to produce 42% of its electricity from renewable sources by 2035, it’s also scaling up investments in fossil fuels.

🇪🇹 Ethiopia

The Ethiopian government and Tigray rebel leaders have accepted the African Union’s invitation to participate in peace talks to end the two-year conflict.

  • The talks scheduled for this weekend will be the first formal peace negotiations since the start of the war.
  • A successful peace agreement would do wonders for the African Union’s reputation and help cement the organisation as the continent’s foremost multilateral body.

🇮🇱 Israel

On Monday, Israel and the EU held their first high-level talks in 10 years as the bloc seeks to push for a “two-state solution and a comprehensive regional peace”.

  • EU foreign policy Chief Josep Borrell told Israeli Prime Minister Yair Lapid the EU was “concerned about the continued tensions and violence […] and the continuation of unilateral measures, such as [Israeli] settlement expansion”.
  • The meeting is unlikely to result in any tangible progress as the Israeli government remains divided internally about the future of the two-state solution.

🇲🇦 Morocco

Morocco issued its first ten cannabis permits this week, allowing farmers to process and manufacture the plant legally.

  • Morocco has a huge illicit cannabis industry and is a major supplier to Europe.
  • To curb illegal cannabis production and reassert state control, Morocco legalised the plant for medical, cosmetic, and industrial purposes last year.

🇺🇬 Uganda

Uganda’s President Yoweri Museveni has removed his son General Muhoozi Kainerugaba as the chief of Ugandan land forces after the latter went on a Twitter tirade and threatened to invade Kenya.

  • ‘The Tweeting General’ is no stranger to internet drama: recently, he proposed to Italy’s far-right incoming Prime Minister Giorgia Meloni and voiced support for Russia’s war in Ukraine.
  • Kainerugaba’s comments crossed a line for many who are worried the unpredictable general is preparing to take over from his father as Uganda’s leader.
🗞 IN OTHER NEWS…

Extreme poverty is increasing for the first time in decades

Source: World Bank.

Poverty reduction off track: According to a newly-released report by the World Bank, we’re unlikely to meet a long-standing goal of eradicating extreme poverty by the end of the decade.

  • The report defines a person as ‘living in extreme poverty’ if they rely on less than $2.15 a day.

The good news is that extreme poverty has fallen dramatically worldwide since 1990.

  • The bad news is that the Covid-19 pandemic ended that trend by triggering the first increase in extreme poverty rates this century.

Why it matters: Eradicating extreme poverty is first and foremost an ethical imperative, but as World Bank Chief Economist Indermit Gill explains, a more prosperous world benefits everyone:

“In several developed countries such as the US, more than half of exports go to developing countries. […] These are not tomorrow’s markets – they are today’s customers. The problems facing developing countries – such as climate change, violence, instability, and disease – do not need passports to enter other countries.”

What’s next? The report offers three pieces of advice for governments:

  1. Concentrate resources on targeted cash transfers rather than broad subsidies.
  2. Focus on long-term growth by investing in education, infrastructure and research.
  3. Avoid tax regimes that hurt the poor and instead target property and corporate revenue.
🍸 GAME TIME!

Who am I?

Can you figure out the identity of this famous 20th-century diplomat?

Answer: Henry Kissinger (Hen + Tree – T, Kiss + In + Germany – many)

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