Credit Suisse Default Swaps Show Bank Risks as ECB Raises Interest Rate

The cost of insuring against the defaults in the European financial sector keeps soaring due to swelling concerns about contagion risks from Credit Suisse Group AG’s troubles.

(Bloomberg) — The cost of insuring against the defaults in the European financial sector keeps soaring due to swelling concerns about contagion risks from Credit Suisse Group AG’s troubles.

That puts the European Central Bank in a bind as it tackles inflation. 

Spiking credit default swaps, used as the credit market’s barometer of risk in the financial sector, show investor concern after Credit Suisse’s top shareholder told Bloomberg they are “absolutely not” open to assisting the bank if there was another call for additional liquidity.

The embattled Swiss lender’s stock fell the most on record, hitting a new low. The bank’s one-year credit default swaps — the cost of insuring its bonds against default in the near-term — have surged past 800 basis points. The jump, not seen since at least 2003, is more than 14 times the 20-year average, dwarfing the swap’s levels during the Great Financial Crisis.

The widening of the financial sector’s swaps suggests that investors are becoming a lot more cautious about the potential for defaults and downgrades among banks and other financial institutions. This could lead to a more risk-averse investment climate, which could in turn limit the availability of credit and slow economic growth amid the ECB’s monetary tightening regiment to fight inflation.

The ECB is expected to stay the course and raise interest rates by 50 basis points when policy makers meet on Thursday.

“It’s a real rock and hard place for central bankers,” said Viraj Patel, a global macro strategist at Vanda Research in London. “Because the macro is telling them to keep on hiking – but rate-sensitive sectors are bearing the brunt.”

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