Switzerland, a country that relies heavily on financing for its economy, is on track to see its two largest and best-known banks merge into one financial giant.
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The demise of banking giant Credit Suisse sent shockwaves through financial markets and appears to have dealt a blow to Switzerland’s reputation for stability, with one executive suggesting that investors will now view the mountainous Central European country as “a financial banana republic”.
UBS, Switzerland’s largest bank, agreed on Sunday to buy its embattled domestic rival Credit Suisse for 3 billion Swiss francs ($3.2 billion) as part of a government-backed deal at cut prices.
Swiss authorities and regulators helped regulate the deal, which came amid fears of contagion to the global banking system after two smaller US banks collapsed in recent weeks.
The bailout means Switzerland, a country that relies heavily on financing for its economy, is on track to see its two largest and best-known banks merge into one financial giant.
“Switzerland’s stature as a financial center has been shattered,” Octavio Marenzi, CEO of Opimas, said in a research note. “The country will now be seen as a financial banana republic.”
“The Credit Suisse debacle will have a serious impact on other Swiss financial institutions. A nationwide reputation for prudent financial management, good regulatory oversight and, frankly, being a bit stodgy and boring about investments has been wiped out,” Marenzi said. .
Shares of UBS were up nearly 4% around 10:15 a.m. London time (6:15 a.m. ET) on Tuesday, extending gains after finishing higher in the previous session.
Credit Suisse, meanwhile, was trading 0.6% lower during morning deals after closing Monday’s session down as much as 55%.
What about the Swiss franc as a safe haven?
One feature of this whole bench press that we’ve seen over the past two weeks is that we’ve seen great volatility in the equity markets indeed, great volatility in fixed income markets and also commodities markets, but very little volatility in currency markets,” said Bob Parker, Sr. advisor at International Capital Markets Association, Tuesday to CNBC’s “Squawk Box Europe.”
When asked how investors would feel about Switzerland’s reputation for stability now, Parker replied, “When I was in Zurich last week, this topic was actually a hot topic.”
He said there was “a very modest” weakness in the Swiss Franc in return for the euro in recent days, pointing out that this is the currency pair targeted by the Swiss National Bank.
“We’ve come close to parity on the Swiss franc-euro again. So, I think to answer your question, yes, to some extent the Swiss franc has lost some of its allure as a safe haven currency. There’s no doubt about that. ,” said Parker.
“Will that be recovered? Probably yes, I would say this is kind of a short-term effect,” he added.
— CNBC’s Elliot Smith contributed to this report.