Credit Suisse’s wayward debt is a bet for the bold

Switzerland's national flag flies in front of the headquarters of Swiss bank Credit Suisse in Zurich, Switzerland July 27, 2022. REUTERS/Arnd Wiegmann/File Photo - RC2EKV9CEMGV

LONDON, Oct 6 (Reuters Breakingviews) - Credit Suisse’s (CSGN.S) debt derivatives are still sending spooky signals, even though its equity is not.

The $11 billion Swiss bank’s share price has more than recovered from a selloff on Monday, which followed a weekend during which executives sought to reassure counterparties over its financial health. Yet its credit default swaps (CDS), contracts used to speculate on a company defaulting on its debt, are still bizarrely elevated, despite the absence of any bad news. Five-year swaps were trading at roughly 360 basis points on Thursday, compared with around 200 basis points in mid-September, according to Refinitiv data. The latest price is more than double the level during the 2020 pandemic. Credit Suisse’s one-year CDSs, meanwhile, were quoted at around 600 basis points on Thursday morning, according to one trader.

There are several explanations. Trading counterparties may be using swaps to hedge their exposure to the bank. Thin volumes in the CDS market mean small trades can trigger big moves. Yet the longer CDS levels flash red, the more likely Chair Axel Lehmann will have to raise capital. That could dispel fears over the bank’s health and see its CDS calm down. Investors willing to bet that Credit Suisse can survive would make handsome gains. (By Neil Unmack)

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(The author is a Reuters Breakingviews columnist. The opinions expressed are their own.)

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Editing by Liam Proud and Oliver Taslic

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