Insurance cost for Credit Suisse debt exceeds that of other banks by a huge margin.

Insurance cost for Credit Suisse debt exceeds that of other banks by a huge margin.

This week, the cost of credit default swaps for the Swiss lender reached an all-time high.

Get complimentary updates from Credit Suisse Group AG

Each morning, we will provide you with an email called myFT Daily Digest which will gather up-to-date Credit Suisse Group AG news.

This week, the price of purchasing insurance as a safeguard in the event of Credit Suisse failing to repay its debt reached an all-time high. This indicates that there is increasing anxiety regarding the financial stability of the company following the impact of two American bank collapses on the worldwide market.

Over the past few days, there has been significant fluctuation in the stock and bond prices of Credit Suisse. This has caused the prices of credit default swaps (CDS) linked to the bank to increase rapidly. CDS are financial instruments designed as a type of insurance and pay out when a company fails to make their scheduled loan payments. Specifically, the five-year US dollar CDS for the Swiss bank has now exceeded 1,000 basis points. This increase is substantial compared to early March, when it was less than 400 basis points. The CDS for contracts that use the euro have experienced similar growth.

The increase in the cost of insuring against the possibility of Credit Suisse defaulting comes after a string of obstacles that have negatively impacted the company's financial standing, leading to Credit Suisse seeking financial assistance from the Swiss National Bank in the amount of SFr50bn ($54bn) and initiating a debt buyback program worth SFr3bn.

According to portfolio manager John McClain from Brandywine Global Investment Management, Credit Suisse has been constantly appearing in headlines for almost five years now. He emphasized that there seems to be a never-ending string of issues that the company is facing.

Credit Suisse's CDS has been influenced by the downfall of Silicon Valley Bank and Signature in the US. Moody, a rating agency, downgraded the US banking system's overall outlook from "stable" to "negative" on Tuesday, blaming the "swift decline in the operating environment."

Several prominent banks have noticed a rise in their CDS prices, although Credit Suisse's contracts stand out due to their significant fluctuations. According to Bloomberg data, JPMorgan's five-year dollar CDS rose 15 basis points to 94 basis points as of Thursday. Citi's CDS experienced a similar increase, climbing up 20 basis points to 113 basis points.

The cost of insuring against the default of Deutsche Bank, a bank in Europe like Credit Suisse that has had its own issues in past years, has surged significantly. The five-year euro Credit Default Swap for Deutsche Bank experienced a significant rise in value, escalating more than 70 basis points to exceed 160 basis points.

Joost Beaumont, who leads bank research at ABN Amro, declared this week that the collapse of two US banks has affected the investors' confidence in the sector, leading them to scrutinize "problem" banks even more closely. According to Beaumont, the "CS situation" should be regarded as a special case and not indicative of general weakness in the banking industry.

Beaumont stated that the argument of a "unique situation" was shown by other banks' bond spreads widening by a smaller margin than Credit Suisse. This refers to the difference in interest rates between bonds issued by banks and those considered to be safer issued by governments.

CDS for a sole corporation are frequently traded in low volumes, causing market fluctuations to appear more drastic. An analyst specializing in bank credit at a major American financial institution expressed that in general, "when a company is struggling, the strain on their CDS is substantial, but this pressure becomes amplified due to the market's extremely shallow depth."

Similar news
This week's most popular news