The odds of a Credit Suisse default

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SIMON BROWN: I’m chatting now with Anthea Gardner from Cartesian Capital. Anthea, I appreciate the early morning time. We were chatting earlier in the week about all sorts of craziness happening out there in the market – implied policy rate cuts and hikes, Credit Suisse pricing in the odds of default and collapse. The beauty of it is we are able to kind of look at the market and get these implied odds. The market is telling us very much what they think. There’s never certainty, but it’s maths and maths can be fun.

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ANTHEA GARDNER: Good morning, Simon. Maths can be fun, yes. That’s exactly what it is, really. What we’re looking at when it comes to Credit Suisse … you would’ve heard so many market commentators and regulators saying Credit Suisse has nothing to do with SVB [Silicon Valley Bank]. And yet what you are seeing is the CDS [credit default swap] completely blowing out and the credit default swap, the CDS, is basically insurance, right? So if I’m a bond holder of Credit Suisse and I think they’re going to default, I can actually buy insurance, a credit default swap, from an insurance company in case of a default. The insurance company will pay me what the company is not paying me on the bond, and then I can go and trade these CDSs in the market. I think this is where it’s all going.

The truth almost lies, because the one-year CDS going to over a thousand (basis points) is implying when it normally trades probably actually below a hundred or close to a hundred – for normal companies, I should say – is that the market is very scared.

I guess the question we keep asking ourselves is what is this correlation between SVB, First Republic [Bank], all those, and Credit Suisse? I think we must remember that the banking system is very interrelated, so everybody holds everybody’s paper.

If there is one precarious bank or one fragile bank, they will feel the impact of any small bank even going into default. And Credit Suisse definitely is a fragile bank.

We had the same happen with a CDS last year. You’ve seen the CEOs leave, the chairman leave. The Saudi National Bank is the biggest owner (of Credit Suisse), almost 10%, saying that they are actually not going to support this bank any further. And because I think, one, there is regulation on how much shareholding they can actually have and, two, I’m not sure they want to throw good money after bad.

So the CDS is really blowing up. As you say, the mathematical part of all of this, by the way, is fun, because if you use the CDS, you can actually calculate the probability of default. We’ve done that, and we’ve seen that the one-year CDS is showing probability of default close to 50%.

So there’s a 50:50 chance that Credit Suisse in the next year is not going to pay their bondholders the full amount.

SIMON BROWN: It comes down to this. And of course, the point with 50:50 is it’s like the weather – it can go either way. But it’s just staggering. And now the Swiss government is essentially saying, ‘We won’t let it happen. We like our big bank’ – although, as you say, Credit Suisse has been a problem for an age.

The other [note] you sent me is about the speed at which things happen. Markets can do almost nothing, and then suddenly they move. The implied policy rates, the number of cuts, the chart you sent me on 8/9 March – and then like on March 10:00 am, March pm, just the uncertainty. And that, perhaps more than anything, is literally [that] from hour to hour things are moving at alarmingly rapid rates, and just [because] markets are uncertain.

ANTHEA GARDNER: Sure. Simon, it feels a little bit to me like there are a whole lot of market participants and investors who, like me, were around in 2008/2009 when we saw Lehman Brothers [implode]. Everything was kind of fine and then there were rumours and talks of things going bust. And then suddenly one Sunday there was drama – on Monday morning Lehman went bust, and from that kind of the global financial crisis.

As far as I can remember, it happened so quickly. I was working at Morgan Stanley at the time and remember watching the share price and thinking: Lehman has gone bust, and what’s going on with our share price at Morgan Stanley? I think that memory of things happening so quickly and the contagion is really scary. And why .. so I hope, and I must count my words here, I hope it’s different this time, but it never is, right?

The financial system is really based on confidence and trust. And if that breaks down – even if it is a tiny little Silicon Valley Bank, compared to other big banks – if that confidence is lost that’s where it really falls apart.

I think that’s what the market is looking at at the moment and saying, from one day to the next, ‘we’ve got banks falling 50%, climbing 7% or 10% the next day, and then falling 15% again the following day’. The market really is uncertain and you know we hate uncertainty.

SIMON BROWN: We hate uncertainty – that’s the key point. Banks impart of confidence and trust, and as soon as that goes, things go crazy and fair. Anthea Gardner from Cartesian Capital, I really appreciate the early morning time.

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