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Switzerland's Corporate Rescue: A Costly Solution with a Limited Risk
"Switzerland's Costly Corporate Rescue: 5 Key Points You Need to Know"
Switzerland's government has pledged to make up to 109 billion Swiss francs available to backstop the emergency sale of Credit Suisse Group AG to its Zurich rival UBS Group AG.
In addition to the government's pledge, the Swiss National Bank has guaranteed 100 billion francs, which is not backed by the government.
The combined sum of 209 billion francs is equivalent to about a quarter of Switzerland's gross domestic product and exceeds total European defence spending in 2021.
The government's decision to bypass shareholder approval and wipe out about 16 billion francs worth of Credit Suisse bonds to increase the bank's core capital has raised concerns about the lack of trust in the country's financial regulations.
Financial experts caution that the final price tag may not reach the limits set by the government, and the cost of doing nothing could have been much higher.
Switzerland's financial reputation has taken a hit once again as the government steps in to shore up the country's largest-ever corporate rescue. To rescue Credit Suisse Group AG from financial collapse, the government has pledged to make up to 109 billion Swiss francs available, which is equivalent to about a quarter of the country's GDP. In addition, the Swiss National Bank has guaranteed 100 billion francs, which is not backed by the government.
The hefty burden of 209 billion francs for a country of 8.7 million people has sparked protests, with many questioning the fairness of rescuing well-paid bankers. Despite the frustration, financial experts believe that the final price tag may not reach the limits set by the government, and the cost of doing nothing could have been much higher.
However, the government's decision to bypass shareholder approval and wipe out about 16 billion francs worth of Credit Suisse bonds to increase the bank's core capital has raised concerns about the lack of trust in the country's financial regulations. The legislation failed to counter the steady run of scandals and management upheaval that ultimately destroyed investor trust in Credit Suisse.
While the government's guarantee to the Swiss National Bank has a limited risk, liability for the government-backed 100 billion francs would only materialize if there was a bankruptcy of the merged entity. The government's decision not to implement the legislation and instead push for the merger could prove costly for the image of one of the world's premier financial centers.
The renewed rescue for well-paid bankers has sparked protests, with many questioning the fairness of rescuing Credit Suisse. Despite the frustration, financial experts believe that the final price tag may not reach the limits set by the government, and the cost of doing nothing could have been much higher.
Switzerland's track record during the global financial crisis is a bumpy one. UBS received 6 billion francs from the government and split off 54 billion francs of risky assets into a fund backed by the central bank. Although the government imposed new "too big to fail" regulations for banks after the 2008 crisis, the legislation failed to counter the steady run of scandals and management upheaval that ultimately destroyed investor trust in Credit Suisse.
In conclusion, Switzerland's corporate rescue may be a costly solution with limited risk. The lack of trust in the country's financial regulations could prove costly for the image of one of the world's premier financial centres. However, financial experts caution that the cost of doing nothing could have been much higher.
"5 Key Risks Associated with Switzerland's Corporate Rescue Deal"
The risk of the final cost exceeding the limits set by the government: While financial experts believe that the final cost of the corporate rescue may not reach the government's pledge, there is still a risk that unforeseen factors could push the cost beyond what has been pledged.
The risk of a lack of trust in Switzerland's financial regulations: The government's decision to bypass shareholder approval and wipe out Credit Suisse bonds to increase the bank's core capital has raised concerns about the lack of trust in the country's financial regulations.
The risk of negative public perception and reputation damage: The renewed rescue for well-paid bankers has sparked protests, and there is a risk of further negative public perception and reputation damage for Switzerland's financial sector.
The risk of future financial instability: While the rescue may prevent immediate financial collapse, there is a risk of future financial instability if the underlying issues within Credit Suisse and the wider financial sector in Switzerland are not addressed.
The risk of potential bankruptcy: While the government's guarantee to the Swiss National Bank has a limited risk, there is still a risk of potential bankruptcy of the merged entity, which could result in the liability of the government-backed 100 billion francs.
