March 20, 2023

Solvency crisis turns into a liquidity crisis

Macro & Overnight

While Credit Suisse equity holders received $3.5bn, its preferred AT1 bondholders were wiped out. These bondholders were supposed to rank ahead of equity holders, but they now stand to lose $17bn. This news has shaken global funding markets.

The rolling financial crisis is moving from a solvency problem to a liquidity problem. The Fed’s decision to support other central banks with daily swap line facilities is now unmistakable evidence. We can see the vector able to tip the US and the world into a full-blown recession.

It almost seems irrelevant what the Fed decides to do with interest rates this week. The market is saying cuts are coming later this year, potentially large ones.

Banks’ shares fell sharply in Asia overnight. Oil prices and bond yields have both fallen sharply. As investors take stock of this crisis, US Treasuries, precious metals and cryptocurrencies are the preferred short-term safe-havens.



NB Prices are as at the previous day’s close.

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