Ennio Leanza/Keystone via AP
If you got a call from your bank over the weekend, you would be concerned. Banks aren’t supposed to be all that operative on weekends, after all. If you got a call from your bank over the weekend to say, “I don’t know what you’ve heard about us, but just to be clear, your money is fine,” you would be exponentially more concerned. It’s not like you were even wondering if your money was fine; you assumed so because it was in a bank.
This was the actual triggering event for global concern about Credit Suisse. Switzerland’s second-largest bank did hit a speed bump about a year ago when it lost $5.5 billion in the blowup of Archegos Capital, and it has consistently lost money this year while promising a restructuring to minimize risk. It was also one of the main banks left holding the bag in the Citrix mess the Prospect wrote about last week.
But more recently, it has experienced falling stock prices because the spread on its credit default swaps, which serve as protection against Credit Suisse defaulting on its debt, increased massively, to its highest levels of the year. So the scenario, approximately, was this: Someone or other got worried that Credit Suisse was going to default. That led to a key indicator of investors protecting against a Credit Suisse default to go haywire. That led to Credit Suisse telling clients that everything’s cool. That led to investors becoming even more pessimistic about Credit Suisse.
If this all sounds like a potentially consequential corporate collapse based on nothing more than a game of Whisper Down the Lane, welcome to the global financial system. It runs in much the same way as the old Monty Python sketch about a conjurer who spun up a block of flats with his mind. As long as all the tenants believed in the flats, they remained upright. As soon as they stopped believing in them, they began to collapse. This faith-based system mirrors financial markets to a certain degree, and people are losing faith in Credit Suisse.
This looming collapse has been followed by several market analysts huffing that nobody should lose faith in Credit Suisse, although if they did, it would be bad, and central banks would have to step in. The whole thing is rather unnerving. And it’s not limited to Credit Suisse. (In fact, one of the analysts minimized the potential of a Lehman Brothers–type event from Credit Suisse by noting that it was only the eighth-most vulnerable European bank according to short-sellers. This is not reassuring!)
It’s certainly possible, if not probable given that Credit Suisse is well capitalized, that this drama is self-created. There’s kind of a perpetual hunt for the next 2008 financial crisis that is misguided, as not only have capital standards changed, but the experience of 2008 and its various blunders militate against a replay. But faith is a tricky thing, and it can be sapped quickly. And that’s especially true in the environment the Federal Reserve is creating for the world.
As Lee Harris writes today, the Fed’s accelerated rate hikes have surged the dollar and exported pain to emerging markets. That’s true in financial markets as well, as higher interest rates heighten risk and create traps for those that get caught unable to refinance. This damage is being done to serve an inflation that has been relatively unmoved by monetary policy, because it’s being driven by at least some factors outside the control of central banks. Destroying demand to try to chip away at inflation has serious residual effects that pop up in unanticipated corners, even the sober confines of a venerable Swiss bank.
