Credit Suisse Inches Closer to Triggering Another Global Financial Meltdown?

The Credit Suisse crisis is deepening. The embattled bank's shares plunged another 12 percent on Monday to hit an all-time low intra-day. Analysts believe that ahead of the October 27 deadline that the bank has set for unveiling a turnaround plan, investor confidence is tanking.

Monday's panic on the market showed Credit Suisse has fewer options on the table. The bank's credit default swap spread surged to a 14-year high and its stock has been nearly wiped out. Investors are increasingly concerned about the cost of the revival plan of the second largest Swiss bank, set to be unveiled on October 27.

Credit Suisse
Credit Suisse Twitter

On Monday, CEO Ulrich Korner said the market rout is not what the investors must be focused on. "I know it's not easy to remain focused amid the many stories you read in the media — in particular, given the many factually inaccurate statements being made. That said, I trust that you are not confusing our day-to-day stock price performance with the strong capital base and liquidity position of the bank."

However, there are fewer takers for the CEO's comforting arguments. According to Finshots, analysts and investors are pointing out that this was exactly the tone of Lehman Brothers CFO before the US investment bank went belly up and triggered the global financial crisis in 2008.

"Investors are worried about how the bank will cover such a plan's cost -- which many analysts have pegged at $4 billion -- and what that would mean for its core capital ratio of 13.5%, especially during a period when the investment bank has been suffering heavy losses... " says a Bloomberg analysis.

Credit Suisse had a market capitalization of $22.3 billion just a year ago. This has crashed to just $10.4 billion as of now, even as shares plunged 95 percent from their peak.

Credit Suisse CEO Ulrich Korner
Credit Suisse CEO Ulrich Korner Wikimedia Commons

The mood around Credit Suisse is of gloom. Employee morale is down, contract staff have not received their new job offers, and staff departures are happening at a brisk pace.

Challenges in Raising Capital

The worst-case scenario is for the bank to file for bankruptcy, but Credit Suisse is digging in and fighting it out. Another scenario is a merger with the larger Swiss rival UBS. Rosy outlook painted by the executives revolves around the plans to raise cash through disposals but this can be equally challenging.

"If one of the options includes a capital raise, it's always going to be tough for a stock to steady when the amount of potential issuance and dilution is unknown ...Tough markets increase the impatience," said Alison Williams, a banking analyst at Bloomberg Intelligence.