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Credit Suisse in Trouble: Another Global Financial Crisis Incoming?

As you might have heard, Europe’s second-largest bank, Credit Suisse, is reportedly under severe financial distress. Many analysts are predicting a collapse of the entire global banking system as a result of its situation. In this article, we discuss the crisis brewing at Credit Suisse and its impact.

About Credit Suisse:

Credit Suisse Group AG was established in 1856 to fund the Swiss railway network. Headquartered in Zürich, Switzerland, the company provides private banking, asset management, and wealth management services. At the end of 2021, Credit Suisse reported over 1.6 trillion Swiss francs in assets and 50,000+ employees in the institution.

Why is it in Trouble?

Credit Suisse’s shares have declined nearly 60% since the beginning of 2022. Investor sentiment has fallen due to a series of losses and high-profile managerial malpractices! It made several risky bets and ended up losing a lot of investor money.

  • For example, Credit Suisse convinced customers to invest up to $10 billion in Greensill Capital, which acted as an intermediated between suppliers and clients. It paid suppliers cash upfront and took their place in waiting for the clients to pay. This business attracted a lot of attention and money in its initial stages. 
  • However, in March 2021, Credit Suisse announced that it was closing and liquidating several investor funds provided to Greensill Capital. Greensill filed for bankruptcy, and investors reportedly lost $3 billion!
  • During the same period, Credit Suisse lost nearly $5 billion when Archegoes Capital Management collapsed.
  • In another instance, a massive leak of over 30,000 of Credit Suisse’s clients in February 2022 revealed over $100 billion in wealth held by people who had profited from “torture, drug trafficking, money laundering, corruption, and other serious crimes”.
  • The bank has changed top leadership multiple times since 2019. They also paid nearly $275 million to settle legacy issues with regulators across the US, UK, and Switzerland last year!

The Issue With Credit Default Swaps

Currently, Credit Suisse’s corporate bonds are losing value. The premiums on their Credit Default Swaps (CDS) are very high. Let’s understand what this means:

Banks like Credit Suisse have to borrow large sums of money (via bonds) to conduct their regular operations. But lenders do not always automatically assume that they’ll get paid in full. So they use credit default swaps to limit their risk.

A CDS is a financial instrument that allows a firm to swap or offset its credit risk with another entity (similar to insurance). To swap the risk of default, the lender buys a CDS from a third party that agrees to reimburse them if the borrower defaults (or is not in a position to pay back). Since a CDS functions as a type of insurance, the buyer pays a premium to the seller (the third party).

So the premiums on Credit Suisse’s CDS have surged now, which indicates that the market feels these bonds are more likely of failing. If Credit Suisse can’t pay off its massive debts, its collapse could trigger a downfall of the global banking system as it’s all deeply interconnected.

What Next?

Earlier this week, Credit Suisse Group AG’s CEO Ulrich Koerner wrote a letter to the bank’s employees:

“I know it’s not easy to remain focused amid the many stories you read in the media— in particular, given the many factually inaccurate statements being made. That said, I trust that you are not confusing our day-to-day stock price performance with the strong capital base and liquidity position of the bank”. 

Unfortunately, many analysts have pointed out that this statement is similar to the one made by Lehman Brothers’ Chief Financial Officer (CFO) in 2008, right before the bank collapsed and led to a global economic recession. Credit Suisse is now trying to repair the damage by strengthening its wealth management business and transforming its investment banking division.

Coming to the Indian scenario, most analysts feel that the Indian banking system is quite resilient to such threats. We could see an impact on cash flows and sentiments, and that can bring high volatility in the stock markets. 

Let’s hope such a financial crisis doesn’t occur again. Do you have any views on the current situation of Credit Suisse? Let us know in the comments section of the marketfeed app.

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Ex NSE Cheif Chitra Ramkrishna Arrested By CBI – Top Indian Market News

Ex NSE Cheif Chitra Ramkrishna Arrested By CBI

The former National Stock Exchange (NSE) chief Chitra Ramkrishna has been taken into custody by the Central Bureau of Investigation(CBI). She has been arrested for taking huge decisions under the influence of a ‘Himalayan Yogi’. According to sources, the Himalayan Yogi was revealed to be Anand Subramanian, former Group Operating Officer (GOO), also arrested by the CBI. Moreover, sources say that Chitra refused to ‘recognise’ Anand Subramanian when the CBI interrogated the two together.


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As global oil prices surge, Indian Rupee hits lifetime low

The Indian Rupee has hit the lowest ever since the global oil prices have surged. The Indian National Rupee(INR) trades at Rs 76.96 per US Dollar(USD). Global oil prices have surged at an all-time high since the 2008 global financial crisis where Brent Crude was trading at $124 per barrel and WTI Crude at $123 per barrel. 

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PVR and Cinepolis in talks for a merger

According to an Economic Times report, Leading cinema chain PVR and the Indian unit of Mexican company Cinepolis are in advanced talks for a merger. According to a Business Today report, the merged entity will be valued at Rs 13,500 crore.

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NSE faces technical glitch, Investors complain

On March 07, the National Stock Exchange(NSE) faced a technical glitch in the early hours where it stopped reporting an issue with data feeds for NSE stocks. “There is an issue with data feeds for NSE stocks from the exchange across all members. Please check 20 market depth before placing orders or place orders on BSE” said India’s leading brokerage firm in a tweet. The glitch was resolved and Zerodha confirmed it in a tweet.


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JSW to supply 240MW hydropower to Haryana, signs PPA

JSW Steel Ltd has entered a Power Purchase Agreement(PPA) with the Haryana Power Purchase Centre (HPPC) to supply 240 MW from Hydro Power. The agreement is valid for 35 years (with further extension at mutually agreed terms), and signed at a levelised ceiling tariff of Rs 4.50 per kWh (kilowatt-hour).

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Zydus gets DCGI nod for drug to treat anemia associated with chronic kidney disease.

Pharma major Zydus Zydus Lifesciences has received approval for its New Drug Application (NDA) from the Drug Controller General of India for Oxemia (Desidustat), a first-of-its-kind oral treatment in India for anaemia associated with Chronic Kidney Disease (CKD).

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Noida-based India Exposition Mart Files DRHP for Rs 600 crore IPO. 

Noida-based India Exposition Mart had filed a Draft Red Herring Prospectus with SEBI for an IPO to raise Rs 600 crore. The issue shall consist of fresh issue of equity shares aggregating up to Rs 450 crore and an offer-for-sale (OFS) of up to 11,210,659 equity shares by existing shareholders.

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Agri and Processed Food Export Up 23% in Apr-Jan 2021-22

Exports of agricultural and processed food products have grown by 23% YoY to USD 19.7 billion during April-January 2021-22 according to Ministry of Commerce and Industry. Rice was the top forex earner that earned nearly USD 7.7 billion. Meat, dairy and poultry products exports grew over 13 per cent to $3.40 billion within 10 months in the current fiscal year

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Mumbai-based Suraj Estate Developers filed DRHP for Rs 500 crore IPO

Suraj Estate Developers has filed a draft red herring prospectus (DRHP) for an IPO to raise around Rs 500 crore. Suraj Estate Developers holds a 15.25 per cent share in terms of the number of units supplied in the suburban areas of Mumbai including Mahim, Matunga, Dadar, Prabhadevi and Parel region between CY2016-21. The company reported a net profit of Rs 11.9 crore with a total revenue of 109.62 crore in the seven months ended October 31, 2021.

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Editorial

Financial Crisis 2022: Supercycle, High Inflation Rates, and Scarcity. 

The world has been hit with scarcity of all sorts. Oil prices are hitting new highs. Gold and Silver prices are soaring. Global inflation is hitting records. Commodities are getting expensive. Every country is facing a financial crisis of its own. Some say that the crisis is a part of the continued ‘supercycle’ that took place after the pandemic year 2020. The Ukraine-Russia crisis is simply adding fuel to the fire. There is a plausible reason for a global economic crisis that could get more rancid with time. 

The Scenario

Ukraine-Russia Crisis

Russia is a major supplier of oil. It contributes to nearly ~11% of global oil production. Countries across the world have imposed hefty sanctions on Russia, even taking Russian banks off the global banking system SWIFT. The SWIFT ban applies to about 70% of Russia’s banking activities. The European Union has even banned RT and vaccine maker Sputnik. While Russia has assured that there shall be no hindrance in supply to its customers despite the war that it has waged against Ukraine. 

Boeing and Airbus have decided to stop supplying parts to Russia. Many western countries have decided to not let Russian aircraft or ships dock on their ports. Such sanctions can clearly hinder trade between countries that have had a cordial diplomatic relationship with Russia, India being one of them. 

Oil prices Break the Roof

Oil prices have touched the roof. While Brent Oil is trading at $124 per barrel, WTI Crude has touched $122 per barrel. The pressure continues to mount as OPEC+ has refused to increase oil output even as oil prices touched the roof after the Ukraine-Russia escalation. Oil prices touched such peaks last in 2008 and 2010 around the time of the subprime mortgage crisis. The primary reason behind such price shocks is a sudden spurt in demand with a broken supply chain. In the current scenario, oil-producing nations that are part of the OPEC+ simply refuse to increase oil output despite a mounting global supply crunch. A further increase in oil prices can push prices of commodities and attached costs to higher levels. 

Russia is also a major supplier of natural gas to Europe. While many European countries have decided to cut imports from Russia in the form of sanctions, it will eventually impact the already inflated natural gas prices, especially in Western Europe. 

Metals and Minerals in a Stir.

Aluminum prices have topped 26.99% followed by Nickel at 24.33% and Zinc at 17.78% in just about a month. In the same period, Gold and Silver prices are up by nearly ~8 and ~12% respectively.

Russia produces around 6% of the world’s aluminum and 7% of mined nickel. Ukraine exports nearly 80% of the steel it produces. Prices of other rare metals like neon, palladium, and platinum that are critical for the production of microchips, are also on the rise. With the already existing semiconductor crisis, a shortage of these metals could rupture the tech as well as the automotive industry. Even the aviation industry depends on Russian titanium. Boeing and Airbus get more than a third of their titanium requirements from VSMPO-AVISMA, a Russian company manufacturing Titanium. There have been no sanctions on VSMPO-AVISMA so far.

MetalMonthly Price Change %
Aluminum26.99%
Nickel24.33%
Zinc17.78%
Lead11.60%
Tin10.70%
Source: Trading Economics

Are we in a Supercycle? Or is it the Ukraine-Russia stir that is Causing a Global Crisis?

According to Fool.com, “A  supercycle is defined as a sustained period of expansion, usually driven by robust growth in demand for products and services”. In a supercycle, the sustained period of economic growth is so prompt, that supply isn’t able to meet the high demand. This leads to an increase in the prices of commodities and high inflation levels. The boom in commodities demand arises when there is excess liquidity in the market

After the COVID-19 pandemic, governments poured money into the system to boost infrastructure, employment, and stimulate demand in the economy. After a period of economic doldrum, demand suddenly gets boosted in a way where the supply couldn’t keep up.

Even if we are in a supercycle, the COVID-19 pandemic combined with the Ukraine-Russia crisis has multiplied its effect. Companies struggling with an already existing financial crisis are finding themselves in the middle of a stupor. If that was not enough, central banks across the globe have started tapering the liquidity in the system. Lesser money in the hands of the public could mean lesser buying power. As an individual investor, now is the time to diversify, derisk, and stay disciplined. 

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Editorial

The Evergrande Crisis Explained

evergrand crisis

One of the biggest real estate companies in China is on the brink of collapse. There is speculation whether it could lead to a similar crisis as that of the Lehman Brothers downfall in the US in 2008. Stock markets around the world have already registered significant corrections as a result of the news from China. In this article, we take a closer look into the Evergrande crisis and how it could cause a ripple effect across global economies.

The Story

The Evergrande Group is China’s second-largest real estate developer. The company employs nearly 1.2 lakh people and has a presence in more than 280 cities. It has reportedly established over 1,300 projects across the country. Evergrande also has an electric car unit and investments in the sports, tourism, insurance, and health sectors. It is a Fortune Global 500 group enterprise and is listed on the Stock Exchange of Hong Kong. The real estate company reported sales of $110 billion last year. It was a company that aimed at providing affordable housing to the Chinese working class.

Unfortunately, Evergrande has now become synonymous with an imminent global financial crisis. Trouble has been brewing at the company over the past few months. It has piled up more than $300 billion in debt. Their liabilities are equivalent to 2% of China’s gross domestic product (GDP)! The company is now scrambling to raise funds to pay its lenders and suppliers. Evergrande was downgraded multiple times by credit rating agencies due to poor cash flow. Its shares have plummeted more than 80% this year. Their offices are now swarmed with investors, employees, and suppliers that want to claim what is owed to them.

Evergrande made headlines last week when Chinese authorities reportedly told banks not to expect the company to clear its interest dues. The real estate developer is likely to default on all upcoming payment obligations. The company makes up ~4% of total property sales in China. However, it has been pointed out that a slowdown in sales is the primary reason behind its present troubles.

What Led to the Crisis?

Over the past decade or so, the Chinese government has facilitated easy financing options to support real estate groups across the country. Borrowing costs have declined considerably, which allowed these companies to acquire a large number of land parcels. However, with a limited land stock in China, the buying spree of real estate firms created artificial scarcity. This ultimately led to a significant rise in property prices. Chinese citizens are now finding it difficult to afford houses and apartments. Moreover, real estate firms such as Evergrande have collectively piled up hundreds of billions of dollars in debt.

Recently, China’s regulators imposed new limits on real-estate borrowing as part of the Communist Party’s campaign to reduce dependency on debt. This crackdown on real estate developers is what damaged liquidity from Evergrande’s bonds.

Various analysts have also attributed the crisis at Evergrande to its ambitious expansionary moves. Within a few years, the company had diversified into the electric vehicles, sports, theme parks, food and beverage, groceries, and dairy products segments. It borrowed billions to acquire assets and fund new projects. They even sold apartments at low margins to raise capital quickly.

How Will Evergrande’s Collapse Affect Markets?

Evergrande Group’s suppliers, bondholders, and banks are hoping to receive repayments. The company’s customers have been waiting for years to move into their new homes. The realty firm is sitting on top of nearly 800 unfinished residential projects. The collapse of Evergrande will cause a ripple effect across the entire real estate industry in China. This is because one in five of the largest property developers in the country has breached all debt limits imposed by Chinese regulators. Property prices could crash if these companies try to get rid of unsold homes. Nearly 70% of the total wealth of the Chinese population is held in real estate, and a sharp decline in prices will adversely affect them.  

The global economy will also be impacted as foreign financial institutions and businesses have exposure to Evergrande. The Indian metals, steel, iron ore, textiles, garments, chemicals, and tyres sectors are likely to be severely affected if the Chinese government is not too keen on a timely bailout of Evergrande, according to analysts. We saw that our metal stocks fell sharply on Monday (Sept 20) due to rising fears that the housing sector slowdown may hit commodity demand in China— the world’s largest consumer of metals.

Recent Updates

Experts state that the Communist Party of China has the necessary resources and political power to mitigate the collapse of its real estate industry. The Evergrande situation is unlikely to develop into a full-blown decline of the global markets. As per a BloombergQuint report, China’s central bank has infused nearly $17 billion in short-term liquidity (cash) into the country’s financial system. This move is aimed at calming the markets amidst the Evergrande crisis. Further, the company has offered to repay debt in the form of property and parking spaces. 

The focus will now turn to whether the developer can pay $83.5 million (~Rs 615 crore) of interest due Sept 23 (Thursday) on a five-year dollar bond. Interestingly, Evergrande’s shares jumped more than 30% today on reports that one of its subsidiaries has negotiated interest payments on yuan bonds. Let us look forward to seeing how the situation unfolds in the days to come. 

Stock markets around the world will continue to keep a close watch on the events that transpire in China. What are our views on the Evergrande crisis? Let us know in the comments section of the marketfeed app.