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Speaker 1: This is Bloomberg Daybreak Europe for this Monday, the twentieth

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Speaker 1: of March in London. Coming up today credit to UBS,

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Speaker 1: Swiss government brokers an historic takeover deal to end a

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Speaker 1: crisis of confidence. Three point two billion dollars troubled Glender

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Speaker 1: Credit Sweets is sold to rival for less than half.

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Speaker 1: It's Friday closing price plus taking the strain. The fair

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Speaker 1: leads are moved by global central banks to boost dollar funding.

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Speaker 1: That's all straight ahead on Bloomberg Daybreak Europe. The business

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Speaker 1: news you need to start your day in just one

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Speaker 1: fifteen minute podcast on Apple, Spotify, the Bloomberg Business App

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Speaker 1: and everywhere you get your podcasts. Good morning, I'm Stephen

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Speaker 1: Carroll and I'm Lizzie Burden. Here are the stories we're

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Speaker 1: following today. UBS has agreed to buy Credit Sweeten, an

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Speaker 1: historic three point two billion dollar deal. It's hope the

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Speaker 1: government backed ye up will contain a crisis of confidence

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Speaker 1: that started to spread across for financial markets. Speaking on

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Speaker 1: an analyst call held by UBS chairman Colm kelleher sort

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Speaker 1: to smooth concerns about the takeover, It's a historic day

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Speaker 1: in Switzerland and a day frankly we hoped would not come.

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Speaker 1: I would like to make it clear that while we

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Speaker 1: could not initiate discussions, we believe that this transaction is

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Speaker 1: financially attractive for UBS shareholders, protects UBS from additional downside

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Speaker 1: and should support earning his growth over time. UBS chairman

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Speaker 1: Comb Kelleher spoke to analysts after tying up the all

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Speaker 1: stock deal. The Swiss national banks offering one hundred billion

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Speaker 1: francs of liquidity assistance to UBS, while the government is

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Speaker 1: granting a nine billion frank guarantee for potential losses. Even

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Speaker 1: before the takeover, credit Squeeze was in the process of

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Speaker 1: cutting nine thousand jobs. However, the merger creates significant overlaps

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Speaker 1: that at the end of last year the two lenders

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Speaker 1: employed almost one hundred and twenty five thousand people. Alianza's

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Speaker 1: chief economic advisor and Bloomberg opinion columnist Muhammadhlarian says the

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Speaker 1: rushed deal was the only viable option. This was not

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Speaker 1: the best solution, but it dominated the other two, which

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Speaker 1: was either nationalization or trying to wind down the bank.

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Speaker 1: But it's full of contradictions. It's a private sector solution

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Speaker 1: but has a government intervention. You know, it's not clean.

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Speaker 1: But of the available options. This was the best one

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Speaker 1: that they could have had. The Muhammolarian was speaking to

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Speaker 1: Bloomberg Television as Ubs said it was too soon to

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Speaker 1: know how many jobs would go, but indicated it will

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Speaker 1: be significant. The takeover looks to address client outflows and

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Speaker 1: a massive routing credit sueezes, stock and bonds over the

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Speaker 1: past week. The fourth sale means seventeen point three billion

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Speaker 1: dollars of credit squeezes riskiest bonds are now worthless. The

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Speaker 1: Swiss Financial regulator says the deal triggers a complete write

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Speaker 1: down of the bank's additional Tier one bonds in order

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Speaker 1: to increase core capital. Unlest further move could send the

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Speaker 1: entire two hundred and seventy billion dollar market for bank

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Speaker 1: funding into a tailspin. PJIM Fixed Income Managing Director Gregory

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Speaker 1: Peters says the whole market needs reprice. They definitely have

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Speaker 1: to be repriced right. The issue that we've always had

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Speaker 1: that that market is that it's really hard to value.

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Speaker 1: So we thought it was miss priced too much equity

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Speaker 1: risk relative to what you're actually getting paid in terms

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Speaker 1: of coupon and yield. So I think first order is

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Speaker 1: that those yields have to go higher. Those prices have

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Speaker 1: to go lower as that equity option totally gets restruck,

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Speaker 1: and I think that changes the whole dynamics at one.

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Speaker 1: Bonds were introduced after the global financial crisis to serve

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Speaker 1: as shock absorbers when banks start to fail, but those

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Speaker 1: who hold them say it's shareholders that should be taking

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Speaker 1: the biggest hit. The Federal Reserve and five other central

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Speaker 1: banks are boosting liquidity in their standing US dollar swap arrangements.

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Speaker 1: Center banks involved in the dollar swaps will increase the

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Speaker 1: will boost the frequency of seven day maturity operations from

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Speaker 1: weekly to daily. The FED, the Bank of Canada, the

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Speaker 1: Bank of England, the Bank of Japan, the European Central Bank,

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Speaker 1: and the Swiss Nation Banks that this step will help

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Speaker 1: to shield economies from funding strain. Then he was coming

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Speaker 1: and made heightened tension that began with the collapse of

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Speaker 1: three US lenders about a week ago. The space high

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Speaker 1: upcaps the past fortnight of global banking meltdowns. First in

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Speaker 1: the US, crypto friendly banks, Silver Gates said it would shutter.

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Speaker 1: Then the startup focused Silicon Valley Bank failed after venture

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Speaker 1: capital investors urged founders to pull their money from The

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Speaker 1: Californian lender, causing the second biggest bank failure in US history.

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Speaker 1: Signature Bank was also seized by regulators, and last Thursday,

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Speaker 1: the largest US banks, including JP, Morgan, Bank of America,

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Speaker 1: and Wells Fargo, propped up First Back First Republic a

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Speaker 1: thirty billion dollar lifeline. Bain Capital senior adviser Steve Pagliuca says,

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Speaker 1: we're dealing with a different crisis though to two thousand

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Speaker 1: and eight. Well, we've had a recognition that the inverted

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Speaker 1: yield curve has hampered in the balance sheet on a

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Speaker 1: paper basis of some niche banks. And when the first

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Speaker 1: crisis happened in two thousand and eight, and the Holy

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Speaker 1: Who was systemic collapse. We don't have a systemic collapse. Now.

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Speaker 1: We have a crisis of confidence, and that crisis of

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Speaker 1: confidence can ratchet into a bad economy. But Pagliuca added

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Speaker 1: that this wave of contagion has only so far hit risky,

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Speaker 1: poorly managed banks. Those are our top stories this morning.

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Speaker 1: Just to update you on those opening prints from the

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Speaker 1: Swiss market that we've gotten. Ubs shares down eight point

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Speaker 1: eight percent this morning, Credit sweet shares down sixty two

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Speaker 1: percent as well. In those trading, of course, after the

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Speaker 1: announcement of that deal, the Eurostos Bank index down by

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Speaker 1: three and a half percent now and we're seeing that

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Speaker 1: effect across European banks this morning. The overall stock six

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Speaker 1: hundred now just eight minutes into the trading day, down

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Speaker 1: by nine tenths of one percent. The Swiss market is

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Speaker 1: one point three percent lower. Valerie title, our market supporter

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Speaker 1: has been watching all of these opening moves very closely,

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Speaker 1: and you've also been looking at the credit markets, Valerie

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Speaker 1: and the sort of the knock on effect that we've

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Speaker 1: seen there. Yeah, I mean, the big question is in

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Speaker 1: trying to solve this credit sweet situation, did they end

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Speaker 1: up opening up another can of worms, that being higher

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Speaker 1: cost of bank funding due to these bond losses that

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Speaker 1: they're imposing on the credit sweee bondholders. It's a scary

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Speaker 1: precedent to walk into. You know, wiping out bondholders while

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Speaker 1: still paying a substantial amount of shareholders goes against a

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Speaker 1: lot of hierarchy of claims when it comes to a

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Speaker 1: situation like this. But you know, some are saying that

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Speaker 1: this is not a bankruptcy proceeding, so the seniority of

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Speaker 1: bondholders other over shareholders isn't implied, but look, the equity

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Speaker 1: markets have just opened. The fall in European bank stocks

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Speaker 1: is reflecting the sentiment around what they've done around these

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Speaker 1: bond losses. It's going to be reflective of a higher

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Speaker 1: cost of funding for banks going forward and potentially a

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Speaker 1: major freeze of the current at one market as you know,

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Speaker 1: issuance and investors back away from these instruments and just

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Speaker 1: thinking about what it means for the FED and the

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Speaker 1: Bank of England this week, We've already had the ECB's

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Speaker 1: Vial Roy speaking in an interview this morning defending that

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Speaker 1: fifty basis point hikes, saying that it showed confidence in

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Speaker 1: European banks that they need to pay attention to underlying inflation.

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Speaker 1: Will the FED in the Bank of England play the

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Speaker 1: same move. It's gonna be a very close one. I mean,

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Speaker 1: we have never in the last fifteen years been three

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Speaker 1: days away from a FED decision and the market pricing

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Speaker 1: fifty fifty in between a hiker pause. It's now been

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Speaker 1: two Sundays in a row that the Fed has had

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Speaker 1: to announce some extraordinary measures late on a Sunday evening,

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Speaker 1: that being the most recent announcement of the seven day

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Speaker 1: swap lines. But the Fed's calculus is all going to

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Speaker 1: come down to how does the regional banking crisis in

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Speaker 1: the US cause a tightening of financial conditions. Goldman wrote

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Speaker 1: a really good note last week that said eighty percent

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Speaker 1: of the commercial real estate lending is done by small

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Speaker 1: banks in the US, by banks with less than two

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Speaker 1: hundred and fifty billion dollars of assets. So, you know,

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Speaker 1: what does the FED think about the inflationary or i

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Speaker 1: should say, the deflationary impulse that will come from regional

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Speaker 1: banks seeing deposit flight. I'm sure they were very busy

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Speaker 1: this weekend on the phone with regional banks trying to

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Speaker 1: understand the picture of what they're struggling with, not only

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Speaker 1: the deposit flow to the larger institutions that they're dealing with,

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Speaker 1: but also deposit flow into money markets. And let's be honest,

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Speaker 1: the FED hiking another twenty five is only going to

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Speaker 1: make that deposit flight into money markets worse. Yeah, I mean,

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Speaker 1: it's interesting to note, of course, the development is happenings

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Speaker 1: away from the credit suite story as well, as you

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Speaker 1: mentioned their valerie. Just to bring our listeners up to

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Speaker 1: date as well, shares and commerce Bank on UBS Group

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Speaker 1: have both been suspended due to volatility this morning. So

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Speaker 1: Commerce Bank down six and a half percent four it

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Speaker 1: was suspended, the Ubas down by eight point eight percent.

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Speaker 1: Deutsche Bank was also briefly suspended there earlier to an

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Speaker 1: eight point six percent. I want to bring in our

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Speaker 1: Bloomberg opinion columnist Paul Davies has joins us in studio

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Speaker 1: as well. Paul, I wonder when when you look at

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Speaker 1: the European banking sector this morning, how different does it

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Speaker 1: look compared to Friday when we were sort of waiting

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Speaker 1: to see what would happen. Well, I guess it's one

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Speaker 1: gisip less to start with, But I mean apart from that,

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Speaker 1: I guess there is there's still a lot of reassessment

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Speaker 1: of risk going on. People will be looking around and

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Speaker 1: thinking very carefully about, you know, who else has very battered,

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Speaker 1: very lowly valued stock prices. Who else has maybe a

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Speaker 1: lot of flier potentially fly to your deposits, so deposits

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Speaker 1: that are put there by large corporations or you know

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Speaker 1: other very large depositors, And who else maybe also has

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Speaker 1: a lot of you know, derivatives, counterparty exposure where counterparties

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Speaker 1: might be you know, thinking about the risk of facing

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Speaker 1: off against each other and whether or not they need

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Speaker 1: to hedge that risk or pare down their exposures to

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Speaker 1: you know, some some of the other banks that they

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Speaker 1: work with. I mean, I bring up all of these

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Speaker 1: three things because all of these two things of course

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Speaker 1: of things that made credit sweez vulnerable. So so that's

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Speaker 1: one thing or that's a you know, a set of

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Speaker 1: things to be looking at very carefully this morning. I

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Speaker 1: would say, well, in your analysis, who are they? Who

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Speaker 1: are the wobbly teeth? Well, I'd rather not kind of

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Speaker 1: dig into a into a list of names because I haven't,

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Speaker 1: you know, fully done the work myself yet, and I

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Speaker 1: wouldn't want to call out a banking anyway. Yeah, exactly.

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Speaker 1: But I mean, if we're we're talking about the landscape

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Speaker 1: as a whole, you know, it is there a potential

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Speaker 1: that there are other credit Sweezes out there because this

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Speaker 1: was essentially a crisis of confidence, and maybe look at

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Speaker 1: things like the CT one ratios. They were pretty healthy

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Speaker 1: for credit sweez Yet CT one ratios were healthy, you know,

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Speaker 1: liquidity ratios were very healthy, and there was also the

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Speaker 1: SMB backstop, you know, liquidity support line, of course brought

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Speaker 1: in Wednesday last week. None of those things helped credit

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Speaker 1: suits in the end. I think the crisis of faith

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Speaker 1: in its the strength of its business, it's it's you

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Speaker 1: know what it was going to become, its profitability. All

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Speaker 1: of those things just kind of were too undermined it

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Speaker 1: too much in the end, in the eyes of depositors

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Speaker 1: and counterparties. You've described UBS as a reluctant rescuer. Is

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Speaker 1: there an upside though for UBS in this Yeah? Absolutely.

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Speaker 1: I mean they get a huge international sort of wealth

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Speaker 1: management and private banking division, which they'll be very happy

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Speaker 1: to have as long as they can keep most of

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Speaker 1: the assets. And they also get the very big and

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Speaker 1: very profitable, you know, domestic Swiss business, which is I mean,

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Speaker 1: you know that they said yesterday and the authorities in

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Speaker 1: Switzerland said yesterday the competition authorities were fine with that

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Speaker 1: and they were going to let UBS take it over,

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Speaker 1: which is probably one of the more surprising things out

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Speaker 1: of this whole deal. I think they end up with

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Speaker 1: something like twenty five percent of the entire more gage

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Speaker 1: market in Switzerland. You know, they're by far, you know,

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Speaker 1: the biggest bank in Switzerland. I think the assets on

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Speaker 1: their balance sheet are like, you know, more than double

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Speaker 1: Switzerland's GDP or something I can't remember, and all the

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Speaker 1: guarantees to boot and all the guarantees to boot. So

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Speaker 1: it's like it's you know, there's definitely stuff to be

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Speaker 1: had out of there that long term is going to be,

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Speaker 1: could be, should be very positive for UBS, but there's

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Speaker 1: an awful lot of stuff to get done, and there's

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Speaker 1: an awful lot of risks in getting that stuff done

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Speaker 1: along the way. I mean, it was something that Swiss

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Speaker 1: Finance Minister pointed out during the press conference. She said

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Speaker 1: that she had her bank accounts on her mortgage at

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Speaker 1: Credit Suee, but her in her words, like every Swiss

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Speaker 1: person I also have a bank account at UBS. So

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Speaker 1: it gives you an idea of their centrality within the

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Speaker 1: domestic banking market as well. Look, are there other banks

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Speaker 1: who'll actually be worried looking at the new Credit Suite

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Speaker 1: thinking about this, is you know, potentially a powerful new

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Speaker 1: bank creators I mean internationally, yes, I should think so.

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Speaker 1: I mean it's again, in terms of wealth and private banking,

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Speaker 1: they're going to be a very formidable competitor. I think

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Speaker 1: the second in the world now only to Morgan st Annally,

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Speaker 1: the chairman com Keller has former employer, you know, and

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Speaker 1: in a sense this is kind of this is the

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Speaker 1: sort of deal that UBS wanted to do. Ultimately they

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Speaker 1: ditched this deal for this small kind of US you know,

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Speaker 1: sort of digital wealth gatherer wealth front last year, and

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Speaker 1: I think you know, if they were looking longer term

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Speaker 1: at what they might want to do, it would have

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Speaker 1: been to buy a very large kind of international wealth

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Speaker 1: and asset management business. They wouldn't have wanted to do

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Speaker 1: it quite like this, but it still gives them the

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Speaker 1: kind of you know, leap forward that they want in

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Speaker 1: those markets. So let's say that the Fed of the

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Speaker 1: Bank of England do actually follow the ECB by hiking,

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Speaker 1: maybe not as as aggressively as the ECB. Where does

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Speaker 1: that leave the European banking sector. Well, what we have

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Speaker 1: seen so find the European banking sector, I think is

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Speaker 1: is not anything like the same sort of or even

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Speaker 1: the start of, you know, the sort of deposit shifts

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Speaker 1: around the system that we saw in the US, which

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Speaker 1: made a lot of those smaller banks you know, vulnerable

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Speaker 1: in terms of what the FED, in terms of what

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Speaker 1: the rate hikes do I wrote another piece ended last

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Speaker 1: week that was published on Sunday about how we're seeing

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Speaker 1: all of these rate hikes arrive at once, because you know,

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Speaker 1: the way in which they're they're working through the system

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Speaker 1: is there's this sudden kind of you know, a sudden

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Speaker 1: realization of risk in the banking system, and that's causing

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Speaker 1: you know, credit conditions to tighten dramatically as you know,

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Speaker 1: a lot of the banks reassess their own sort of

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Speaker 1: risk appetite and look at their own sort of stock prices,

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Speaker 1: in their own bond valuations, and that's and that's kind

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Speaker 1: of how you know, a loss of the interest rate

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Speaker 1: rises that have been done already hit the system and

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Speaker 1: hit the economy through the provision of credit. So I

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Speaker 1: think we're going to see, you know, a rapid arrival

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Speaker 1: of all of the monetary tightening that we've seen so far,

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Speaker 1: and that's going to affect the economy and that's going

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Speaker 1: to kind of lead to, I mean, it ought to

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Speaker 1: in many ways, leads to some sort of reassessment of

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Speaker 1: where your major central banks go next. I think this

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