Local fund managers expressed relief that the bailout of troubled Swiss bank Credit Suisse will stem the immediate panic running through the global financial system, but in the next breath voiced concerns that long-term structural weaknesses remain embedded in the sector that could cause a fresh crisis soon.
For a sector where confidence is everything, they witnessed a “relief rally” in Monday morning trade when markets heard a bailout deal between UBS and Credit Suisse had been finalised but worry that investor nerves might soon focus on the next possible bank victim to kickstart a whole new round of anxiety. “What we are talking about with this process is always a call for confidence. I guess it is a short-term boost to confidence but generally they are very short term these relief rallies you get when you have a banking sector under pressure because generally what happens is the market searches for the next weakest link now,” said WAM Leaders portfolio manager Matthew Haupt.
“What we could see over the next week or two, is another bank under funding stress, so this is short-term relief but ultimately we need some sort of system-wide policy put in place like the FDIC in the US saying they are going to secure all deposits for a two-year time frame.
“You basically have got to stop the run on deposits and funding issues with these banks.”
Mr Haupt said the market would be “sniffing for some more weakest links”. “To get full-blown confidence back we need to see the US guarantee some of the deposits in these regional banks.”
Hugh Dive, chief investment officer at Atlas Funds Management, said the lingering concern was the derivative links Credit Suisse had with other banks and the contagion that could have spread through the system.
“What the concerns were that we had last week was the sort of derivatives linkages Credit Suisse had with the big banks, particularly credit derivatives. That was a bit of a concern, so in terms of the Australian market elsewhere it was causing some weakening in the banks, particularly in the US, but a lot of this was from self-inflicted wounds (by Credit Suisse).”
Armytage Private portfolio manager Bradley King said the bailout of Credit Suisse is “what had to happen” and although the spreads on credit default swaps fell when the deal was unveiled that spread soon started to widen again. “So the market is still not confident the UBS bailout was the panacea that would solve all the problems. After the deal was done they spread again, so the market is still looking for the contagion to spread.”
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