• Brady LaRoe

Investors Worry About Global Banks Ability to Repay Its Debts


Investors have grown concerned about Credit Suisse's ability to pay off its debt this week, as the price of credit default swaps for the company soared to 355 basis points. The stock price also dropped as low as 11.5% on Monday, and year to date the stock is down 51%. The market volatility occurred after the company began reassuring staff internally of the bank's financial security and strength.

Credit default swaps are essentially insurance in the event that the bank fails to repay its debts. In this case, the price of CDSs are going up because investors believe that there is now a higher likelihood that Credit Suisse will not be able to pay off its debts.

If Credit Suisse is unable to repay its debt obligations, it could have very negative implications for the economy. The bank is one of 30 "global systemically important banks", meaning it is core to the health of the global economy. Some have warned that if Credit Suisse defaults, it could be another Lehman Brothers moment, the bank that kicked off the 2008 great recession.

Others argue that this situation is unlikely. Bloomberg writer Paul Davis writes that “The bank has more than enough capital to run its business. It just isn’t making good enough returns”. Keith Horowitz, an analyst from Citigroup Inc. has said that what's happening now with Credit Suisse is “night and day” with what happened to other firms back in 2007.

Still, Credit Suisse finds itself in a difficult situation that it needs to get out of quickly in order to regain confidence. The longer the bank appears to be in a bad financial situation, the more it will cost to finance its restructuring. The bank announced Friday that it would be buying back $3 billion of debt in order to reassure investors of its financial strength.

And so whether or not its collapse is near, Credit Suisse will need to work on its finances fast if it wants to get out of this situation.