A history of 166 years will not end without consequences. This weekend Credit Suisse collapsed, the second most important bank in Switzerland, a benchmark for global capital and one of the 20 systemic banks on the planet; that is, one of the most important institutions for the stability of the world economy.
The fall of Credit Suisse is not just another anecdote or a chapter in the global banking crisis that broke out two weeks ago and of which, we must say, there were few signs.
Swiss bank collapse opens deep cracks in fragile global financial stabilityHere are some of its consequences for the medium and long term.
1. Credit crunch
Global banking systems have entered a phase of broad caution in which one of their primary tasks, if not their primary, will be affected. The credit will necessarily be reduced, depending on each country and region, depending on the circumstances, but it will be unavoidable.
Credit caution will be a natural consequence of the fragility of the world banking system, even though there are institutions and entire banking systems (apparently the case of Mexico), which are not infected and can carry out their activity without any problem.
How deep will this contraction be and what will its effects be? History is yet to be written, although there are some signs. If the recent bank collapses have shown anything, it is that any bank can be wiped off the face of the earth in a matter of weeksdays and even hours (in the latter case, Signature Bank could be a good example).
2. The recession will come from the credit crunch, bad news
The recession was expected in the world, the only thing missing from the specialists was to agree on when it would happen. Some expected it by the middle of this year; that is, within a few months; others considered that it would start at the end of the present 2023; while others expected it to happen at the beginning of the following year.
What is gaining ground now is the cause of the recession. Central banks have done very well to prevent the general collapse of banking systemsbut they will not be able to avoid the widespread distrust from and towards the banks. The natural consequence will be a contraction of credit, inevitable in fact.
This contraction of credit will result in a more damaging recession for the world economy, compared to one generated by the monetary policy of the central banks.
Adjustment of interest rates has more immediate effects than credit mistrust, which recovers more slowly, sometimes taking years.
3. Economic stagnation
Some economists point to the possibility of a period of global economic stagnation due to the recessive period, product of the credit contraction.
For Gabriela Siller, Banco Base’s director of analysis, there will be better availability of resources in the coming months, and more expensive ones, given the increase in mistrust.
This has the potential to undermine growth and could lead the world economy into economic stagnation.
Stagnation does not mean that there is no economic growth, but it can be very low, as it already is. The call “growth trap” it would be maintained with all its unfavorable balances.
4. Persistently high inflation
The fall in credit will generate pressure on production and value chains. Manufacture products and generate services, promote productive projects in an environment of credit restriction not the most favorable scenario.
High inflation could be a constant, and we already know that central banks have limits to increase interest rates, at the risk that bank collapses also become corporate, which could then be catastrophic.
Although central banks will persist in their fight against inflation, this week the Fed is expected to raise its rate by 25 basis points, price pressures could become a chronic illness. We will see that in the coming months, it will not be something that takes time to notice.
5. Restructuring of the banking sector, thousands of jobs lost:
The situation for bank employees in the coming months and years might not be the best.
In Switzerland, Credit Suisse has been wiped off the map and the directors of UBS, the purchasing entity, accepted that the situation for the employees of the disappeared bank is “delicate”, this word means that all or almost all Credit Suisse employees in the world will be liquidated in the coming months.
This is how it will be in any bank consolidation process, thousands of jobs will surely be lost. As if that were not enough, the banks, in order to reduce more costs, will continue to bet on digitization, which will erase thousands of more jobs, even in entities that remain and are viable.
The collapse of the century-old Credit Suisse will not go unnoticed
The world’s central banks designed a strategy to prevent the planet’s banking systems and markets in general from getting infected. But, these are just the first days of a crisis that, like almost all, was not expected and that adds to those that the world has registered only in this decade.
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