Owners, creditors, taxpayers: Who has to pay the billions for the Credit Suisse rescue

Owners, creditors, taxpayers
Who has to pay the billion bill for the Credit Suisse rescue

By Max Borowski

The rescue of the major Swiss bank Credit Suisse costs billions. The sums that creditors and investors are supposed to shoulder cause a dispute. How high the bill for the taxpayer will be in the end is not yet foreseeable.

The representatives of the Swiss government and authorities have repeatedly emphasized that it is not a question of a “bail-out”, ie a state bank rescue. The purchase of Credit Suisse, which is apparently on the verge of collapse, by local rival UBS is a transaction between two private economic players, explains Finance Minister Karin Keller-Sutter. What is clear, however, is that the alternatives to a last-minute takeover would be bankruptcy or nationalization. And: The “private-sector” deal with UBS only came about through massive state intervention. Because this rescue costs many billions, which nobody wants to pay voluntarily. Even if no tax money flows immediately, the campaign could still be expensive for Swiss taxpayers.

An overview of the costs of the Credit Suisse rescue and who pays them:

UBS and the CS shareholders

UBS wants to pay CHF 0.76 per Credit Suisse share. This corresponds to a total value of three billion Swiss francs (3.03 billion euros). In addition, UBS must also bear possible losses at CS of up to five billion francs. According to the conditions negotiated on Sunday, CS shareholders should not receive cash, but UBS shares of the corresponding value. Compared to the closing price of Credit Suisse shares of CHF 1.86, the shareholders have to accept a severe loss. The current largest shareholder, the state-owned Saudi National Bank, paid CHF 1.4 billion for its ten percent stake less than six months ago. Since yesterday it has been clear: 80 percent of it, more than one billion Swiss francs, has been lost.

Some observers consider the discount on the current stock market price at the time of the deal, which is imposed on the shareholders, to be too high. Fund manager Stephan Sola from Plutos Schweiz Fonds writes in a comment that the takeover price “can only be described as outrageous.” UBS radically exploited Credit Suisse’s position, saying that the individual parts were worth several times the asking price. Other experts are surprised, however, that the shareholders get anything at all. Because other investors of Credit Suisse get nothing.

bondholders

A crucial and unusual part of the bailout is that Credit Suisse is completely relieved of debt in the form of certain high-yield bonds. These so-called AT1 bonds with a volume of CHF 16 billion will be written down to zero on the instructions of the Swiss authorities. The holders of these papers lose everything. AT1 bonds were invented after the 2008 financial crisis to increase the capital buffer in the event of bankruptcy. That is exactly what is happening now, the CHF 16 billion will be added to Credit Suisse’s equity and do not have to be repaid. The excitement among the creditors is still great. After all, the bank is not formally insolvent, and the shareholders still receive UBS shares worth three billion francs. According to reports, creditors may seek to challenge the write-off of their bonds in court.

Swiss central bank

Last week, the Swiss National Bank (SNB) pumped huge sums of money into Credit Suisse in the form of liquidity support. These aids are lines of credit that are intended to bridge short-term liquidity bottlenecks, but are not intended to compensate for losses or gaps in the balance sheet. The SNB is providing a total of CHF 250 billion for CS and UBS together. It is unclear how much of this has already been used.

taxpayer

According to Finance Minister Keller-Sutter, the major advantage of the officially private deal between UBS and Credit Suisse over insolvency or nationalization is that the latter two options would have been much more expensive for taxpayers. However, the solution that has now been negotiated did not come about entirely without help from the Swiss federal budget. The government is liable with a guarantee to the SNB for 100 billion of the liquidity support provided by the central bank. In addition, the government provides a guarantee to UBS for possible losses at Credit Suisse in the amount of nine billion francs. This guarantee would come into play if a precisely defined part of the CS portfolio were to incur losses that exceeded the CHF 5 billion that UBS, as the new owner, would have to bear itself. However, what happens if losses are higher than these two sums added together remains open. This case is not excluded.

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