European bank shares pared losses at the open on Monday, as Credit Suisse stock fell by two-thirds after the troubled lender was sold to rival UBS for $3.2bn as the wider marker rebounded into the green following a volatile start.
The pan-European Stoxx 600 was up 0.37% by 1145 GMT, having been down more than 1% in morning deals. UBS shares were down 12% after the deal. Others in the red included Deutsche Bank, ING and Standard Chartered.
While the deal has prompted relief that the scandal-ridden bank was not allowed to fail, sentiment has been battered by the fact that some Credit Suisse bondholders will see their investment wiped out. Prices on Additional Tier 1 (AT1) bonds from European banks fell sharply in response.
Credit Suisse on Sunday said 16bn Swiss francs of its AT1 debt will be written down to zero on the orders of the Swiss regulator as part of its rescue merger. Investors are now fretting about the wisdom of investing in such debt at other institutions.
There are also fears that banks may tighten lending, stifling an already anaemic economic recovery post-Covid pandemic and struggling amid the cost of living crisis and Ukraine war.
“Worries are rattling investors about what repercussions a potential lending squeeze will have on the global economy. The weaker oil price reflects this, with Brent Crude dropping more than 2% to $71 a barrel, its weakest level since December 2021,” said Hargreaves Lansdown analyst Susannah Streeter.
Eyes will be on the US Federal Reserve and the Bank of England, both under pressure over whether to push ahead with interest rates rises this week.
The Federal will make a decision on Wednesday and the BoE a day later. The European Central Bank decided to push ahead with a planned 50 basis point increase last week, taking its deposit rate to 3%.
Reporting by Frank Prenesti for Sharecast.com
