GENEVA — The Swiss central bank hiked its key rate of interest Thursday and insisted {that a} government-orchestrated takeover of Credit Suisse by means of rival bank UBS ended the monetary turmoil.
In a observation, the Swiss National Bank stated it’s offering huge quantities of toughen for the deal to merge Switzerland’s largest banks and that the overdue Sunday announcement by means of the government, monetary regulators and the central bank “put a halt to the crisis.”
“An insolvency of Credit Suisse would have had severe consequences for national and international financial stability and for the Swiss economy,” stated Thomas Jordan, chairman of the Swiss central bank’s governing board. “Taking this risk would have been irresponsible.”
The abruptly organized, $3.25 billion deal aimed to stem the upheaval within the international monetary machine after the cave in of 2 U.S. banks and jitters about long-running troubles at Credit Suisse led stocks of Switzerland’s second-largest bank to tank and shoppers to drag out their cash.
Swiss government suggested UBS to take over its smaller rival after the central bank’s plan for Credit Suisse to borrow as much as 50 billion francs ($54 billion) remaining week did not reassure traders and shoppers. It used to be performed underneath emergency measure by means of the manager department to circumvent shareholder approval.
“The extensive liquidity assistance provided the time needed to find a solution to safeguard financial stability,” the central bank stated in a observation. “This solution had to be worked out under considerable time pressure in order to be ready before the Asian markets opened this week.”
To toughen the deal introduced overdue Sunday, the Swiss central bank has stated it’s offering a mortgage of as much as 100 billion francs ($109 billion) and that the federal government is offering some other 100 billion francs of toughen as a backstop if wanted.
Jordan stated the loans are “not gifts“ but are backed by collateral and subject to interest.
The central bank hiked its key interest rate by half a percentage point to counter inflation that has risen since the beginning of the year, to 3.4% last month.
It said that was “above the range the SNB equates with price stability” and that economic growth is expected to be modest this year, forecasting a 1% increase in gross domestic product. The SNB said the global economic outlook was uncertain, with the main risks being an economic downturn and adverse effects of the turmoil in the global financial sector.
It comes as central banks around the world are pressing ahead with their fight against inflation even as banking sector chaos has created a global crisis of confidence in the financial system.
The U.S. Federal Reserve went ahead with a quarter-point rate hike Wednesday, Norway’s central bank did the same Thursday and the Bank of England is expected to approve a increase after inflation unexpectedly grew last month. The European Central Bank raised rates by a half-point last week.
The ECB and Fed chiefs both voiced assurances that the financial system is resilient and that money is safe in banks.
Adrian Prettejohn, a Europe economist at Capital Economics, said the Swiss National Bank “was clearly keen to try to draw a line under the Credit Suisse saga.”
“They seem relaxed about any hit to macroeconomic activity from the Credit Suisse debacle,” he said in a note, pointing to the upgraded forecast for economic growth this year.
Meanwhile, Swiss financial regulators defended how the deal wiped out about 16 billion francs ($17.3 billion) in higher-risk Credit Suisse bonds, which left investors with hefty losses.
Typically, shareholders face losses before those holding bonds if a bank goes under — a hierarchy that the European Central Bank and Bank of England reiterated in statements this week.
The Swiss Financial Market Supervisory Authority, or FINMA, said Thursday that contracts for the higher-risk bonds show that they can be written down in a “viability event,” particularly if the government offers extraordinary support.
That happened under the executive branch’s emergency measures Sunday, which also allowed regulators to order a writedown of the bonds, FINMA said.
Global law firm Quinn Emanuel says it has put together an international team of lawyers from Switzerland, the U.S. and the United Kingdom that is in discussions about possible legal action with bondholders representing “a significant percentage” of the total amount that was issued. The firm convened a call for bondholders Wednesday that drew more than 600 participants.
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McHugh reported from Frankfurt, Germany.
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