Sunday, March 19, 2023

UBS To Buy Credit Suisse With Guarantees From Swiss Government (but its not a bail out OK?)

After two days of playing table tennis with clients' savings and investments held by failed bank Credit Suisse, the price for acquisition by UBS (formerly Union Bank of Switzerland,) has been agreed at  CHF 3BN (US$3.25 billion), or 0.76 per share, meaning shareholders of Credit Suisse will receive 1 share in UBS for 22.48 shares in Credit Suisse. As part of the deal, the Swiss National Bank is offering a 100 billion-franc liquidity assistance to UBS while the government is granting a 9 billion-franc guarantee for likely losses on dodgy assets that are part of the deal. In effect this is a taxpayer-funded bailout (but don't call it that.)

Most significantly, however, the bank's entire AT1 tranche - some CHF16BN of Additioanal Tier 1 (AT1) bonds, a $275BN market - will be bailed in and written down to zero, to wit: "FINMA has determined that Credit Suisse’s Additional Tier 1 Capital (deriving from the issuance of Tier 1 Capital Notes) in the aggregate nominal amount of approximately CHF 16 billion will be written off to zero."

This wipe out bail-in will be the biggest loss yet for Europe’s $275 billion AT1 market, far eclipsing the approximately €1.35 billion loss suffered by junior bondholders of Spanish lender Banco Popular SA back in 2017, when it was absorbed by Banco Santander SA to avoid a collapse.

AT1 bonds were introduced in Europe in the wake of the 2014 global financial crisis to serve as a backstop when banks start to fail. They are designed to shift losses to bondholders or be converted into equity if a bank’s capital ratios fall below a viable level, effectively padding its balance sheet and allowing it to stay in business.

The bonds were by Friday already trading at levels usually reserved for companies about to go bust. A slice of the bank’s $1.65 billion note, issued less than a year ago, changed hands at about 35 cents on the dollar, according to trade reporting system Trace.

And while it may be counterintuitive, according to the Swiss bail-in regime, AT1 debt is above equity in the loss absorption waterfall.

All this is very vague and technical but what it means is that while the takeover is agreed in principle, the  deal may yet fall apart is, as banking industry insiders have warned, more nasties emerge as UBS auditors scrutinise the accounts of Credit Suisse. Once a paragon of banking integrity, Credit Suisse has been known to be in trouble for over a decade and has only stayed afloat this long due to certain creative accounting practices of dubious legality disguising the black holes in its balance sheet.

What is truly frightening is that many more banks are rumoured to be in similar or even worse trouble due to reckless lending during the years of insanely low interest rates.



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India Takes A Leading Role In De-Dollarization


19 March 2023

Reuters reported last Wednesday that “India’s Oil Deals With Russia Dent Decades-Old Dollar Dominance”, which highlighted the growing tendency of those and many other nations using national or or third-party currencies to settle cross border trades thus sidelining the US$ which has dominated international trade since the 1970s. 

The dollar was adopted as the primary reserve currency for international trade in 1945, and the petrodollar was established became the medium for oil trades as a result of an agreement in 1971 between the USA and Saudi Arabia.

The growing use of national or third part currencies is something significant that everyone involved i  international trade or finance should pay attention to. We reported in our currency wars feature soon after Russia’s (ahem,) special military operation began that the West’s sanctions, imposed with the aim of destroying the Russian economy, “could erode the dollar’s dominance”. Naturally we were written off as crazy conspiracy theorists for holding such an opinion but ...

Lo and behold, that’s precisely what happened, with India of all countries accelerating de-dollarization through its non-dollar-denominated energy deals with Russia. 

Since India decided that supporting US / EU sanctions was not in its best interests, Russia has become India’s largest supplier of oil and over the past year has provided a whopping 35% of that country’s needs. India is also the world’s third-largest oil importer and fifth-largest economy. having recently overtaken the UK to occupy that spot. Their new energy ties, and particularly the growing de-dollarization dimension of their deals thus must have effects all around the world.

This refusal to support sanctions or openly demonstrate support for Ukraine does not signify any anti-American sentiment on India’s part since everything is purely motivated by the pursuit of that country’s objective national interests. Delhi had no choice but to distance itself from dollar-denominated energy trades  with Moscow due to Washington’s illegal sanctions on nations that trade with Russia. Its leaders were not going to plunge the world’s most populous country into an economic crisis just to please the Dementia Joe and his whacko administration by eschewing the import of discounted oil from Russia or sacrificing the revenue earned from its exports to Russia.

By defying American pressure upon it to unilaterally concede on those aforementioned objective national interests, India’s economy ended up growing at twice the pace of China’s, which contributed to catapulting that country to the forefront of the  global systemic transition to multipolarity. India is now well placed to establish itself as the de facto leader the Global Global South in helping fellow developing countries balance between U.S. hegemony  and the  Sino-Russo Entente. However, in spite of claims made by Dementia Joe, Boris Johnson when he was Prme Minister, Emmanuel Macron and leaders of other NATO / EU member states that the world was closing ranks around Ukraine, emboldened by the stances of Russia and China (which has its own little contretemps with the Biden administration over Taiwan, while the EU's 27 member states, the USA, UK, Canada, Australia, Japan and New Zealand (for what its worth), are supporting Zelensky's futile war, the rest of the world seems happy with a 'business as usual' relationship with Russia.

Had India complied with the US’ illegal sanctions, then the New York Times wouldn’t have recently admitted that their sanctions failed as the West’s efforts to “isolate” Russia politically also had. It was largely due to India's truly independent grand strategy that this latest phase of the New Cold War didn’t end in the collapse of Russia's economy and the restoration of unipolarity, which would have been detrimental to India and every other developing country’s interests while you could have safely bet your life savings that the Americans would have taken advantage of the loss of Russian oil and gas exports to EU member states to well and truly shaft the major European economies.


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