(News Bulletin 247) – The CAC 40 rose 1.3% on Monday, the market finding comfort in the takeover of Credit Suisse by UBS. Even if risks remain on this operation.

Another very volatile session for the Paris Stock Exchange on Monday. After falling sharply at the opening, the CAC 40 recovered during the day and finally ended up 1.27%, returning above 7,000 points, to 7,013.14 points.

The takeover of Credit Suisse by UBS immediately eliminates the spread of risks to the entire sector, the first Swiss bank having agreed to buy the second in the country at a knockdown price, ie 3 billion Swiss francs. This, under the constraint of the Swiss authorities.

This rescue operation which does not fully say its name was coupled with the intervention of the major central banks which launched concerted action on Sunday to improve access to liquidity and try to reassure the markets. The institutions have decided to reinforce the “swap lines”, a device which facilitates the access of foreign central banks to dollars.

“The speed and decisiveness with which the authorities have acted over the past two weeks will reassure investors amid all this uncertainty,” said Craig Erlam of Oanda. “There really is no time to waste in this kind of situation and while it will be time to assess what could have been handled better in the future, the important thing now is that investors can go forward, even if it’s to figure out where the next vulnerability is.”

>> Access our exclusive graphic analyses, and enter into the confidence of the Trading Portfolio

Questions

Nevertheless, the takeover of Credit Suisse by UBS raises questions. The operation will be done without their consultation and shows a discount of 59% compared to the closing price on Friday. This explains why the Credit Suisse action once again found itself under pressure (-56% in Zurich), suffering the worst session in its history.

Even UBS suffered at the start of the session, because of the risks involved in this acquisition, in particular on the legal level, and the abandonment of its share buyback program. However, it should prove beneficial in the medium to long term, according to the bank’s management. After losing more than 10%, UBS stock turned around and gained 1.5%.

Moreover, this operation is carried out to the detriment of certain creditors, the holders of AT1 bonds, which can be converted into capital if the bank finds itself in a serious emergency situation. The Swiss authorities have decided that the intervention of the government, which provides guarantees to UBS in this operation, triggered a total loss on these debt securities, of a total of 16 billion Swiss francs. This calls into question the hierarchy of payments, the shareholders normally passing after the creditors in the order of reimbursement.

“The move is controversial given that common equity – which is generally considered junior to AT1s in the capital structure – has not been entirely wiped out,” Capital Economics points out. “This decision could lead to a revaluation of the price of AT1s and other bailout bonds from other banks,” the think tank continues.

This very specific point put all of the European banks under pressure before confidence returned and the banks even started a small rebound.

BNP Paribas gained 1.7% and Credit Agricole SA 0.7%. Societe Generale ends down 0.83%.

Christine Lagarde, the president of the European Central Bank, tried to reassure by saying that the exposure of eurozone banks to Credit Suisse was “very limited” and amounted to “millions” of euros. She also warned that the current tensions in the banking system could “accelerate” the current increase in the cost of credit.

Thales and Axa stand out

In the United States, banks are also showing slight signs of renewed confidence. First Republic Bank plummets 37% but this bank is penalized by a lowering of its credit rating by several notches from S&P Global Ratings, according to Marketwatch. PacWest Bancorp, another American regional bank in the viewfinder of the market, takes 7%.

On values, apart from banks, Thales gained 3.7% benefiting from an increase in recommendation to “overweight” from JPMorgan.

Axa also pulled up the CAC 40 with an increase of 2.5%. The insurer told AFP that it has limited exposure to Credit Suisse up to 600 million euros, with non-existent exposure to the capital of the Swiss bank as well as to its AT1 debt securities.

On the other markets, the euro recovered 0.4% against the dollar at 1.0716 dollar. Oil prices are trending down slightly. The North Sea Brent contract for May delivery fell 0.45% to $72.60 a barrel while the April contract for New York-listed WTI fell 0.5% to $66.27 a barrel .