European markets suffer a ‘black Friday’ dragged down by the collapse of Deutsche Bank

Dragged down by the collapse of Deutsche Bank, European markets have suffered a ‘black Friday’.

Panic continues to grip the financial markets across Europe, with the ‘domino effect’ of the recent bankruptcies of institutions such as Silicon Valley Bank in the United States and Credit Suisse in Switzerland continuing to spread in the world markets. Deutsche Bank plummeted 8.53 per cent this Friday, March 24, dragging down the rest of the European markets.

The Spanish Ibex 35 fell by 1.98 per cent, while the FTSE Italy All-Share lost 2.16 per cent, on a ‘special’ day of ‘Euro Summit’ where Christine Lagarde and the EU-27 have not changed their plans. Instead, they continued to put out messages of strength, as already expected.

“Our banking sector is resilient, with strong capital and liquidity positions”, concluded the EU leaders without presenting much news.

Despite the continuous attempts of the different entities to call for calm, the figures do not lie. Days go by and the turmoil of the banks does not cease, giving rise to a scenario of uncertainty where the bankruptcy of SVB, Credit Suisse, and even Lehman Brothers are still in the minds of many.

In a desperate attempt to ‘save’ itself, Silicon Valley Bank starred in a black episode for the United States, showing the failure of its financial strategy. As a result, the regional banking institution, after several days of notice, was finally declared bankrupt, in what was the biggest fall of an institution since the financial crisis of 2008.

As a consequence of this dramatic fall, a ‘domino effect’ was unleashed, first affecting the American continent. The next to be affected was First Republic Bank, which needed an injection of $30 billion from large banks in order to stay afloat. Despite the bank’s relative recovery, it is still unable to claim a victory due to the volatility of banking.

In the face of the ECB’s refusal, Europe was severely affected as a consequence of this banking ‘dance’, with Credit Suisse, one of Switzerland’s largest banks, finally taken over by the other Swiss giant, UBS.

The latter paid €3 billion – 60 per cent of what the bank was worth a week ago – in a rescue move that took a heavy toll on its shareholders. Its share price was paid at 0.76 francs, well below the 1.86 francs of a week ago or the 4.64 francs from six months ago.

Despite this manoeuvre, the entity justified its move by pointing to the complexity of the situation that ‘beset’ them. “Given the recent extraordinary and unprecedented circumstances, the announced merger represents the best available outcome”, said Credit Suisse board chairman Axel P. Lehmann.

In a situation of such uncertainty, the intervention of the main banking institutions seems key for the future of the markets. As a result, the European Central Bank and the United States Federal Reserve have been ‘all hands on deck’.

Both entities have decided not to lift their foot off the accelerator, despite the delicate situation, where the echo of Lehman Brothers in 2008 still resonates. They have continued with their initial strategy to alleviate inflation, which in Europe is aimed at slowing down to 2 per cent.

Last Thursday, March 16, Lagarde’s European Central Bank decided to continue with its roadmap to contain inflation and raised interest rates by 0.5 per cent. In this way, the entity continues with its plan that aims to try to alleviate the increase in prices, which last month registered 8.5 per cent in the Eurozone.

Despite the financial instability, the entity affirmed that it has sufficient liquidity to respond to possible shocks. “The ECB has all the necessary monetary policy instruments to provide liquidity support to the euro area financial system if needed”, said the head of the ECB.

The U.S. Federal Reserve’s strategy decided to continue with its interest rate plan despite the uncertainty and financial instability generated by the collapse of Silicon Valley Bank and Signature Bank, a decision questioned by many.

On Wednesday, March 22, the Fed underpinned the ninth consecutive rate hike following a strategy very similar to that of the old continent. A 0.25 per cent increase was implemented, leaving rates between 4.75 per cent and 5 per cent. Even so, and despite having decided to continue with the hikes, the United States did not show as much ‘robustness’ as Europe.

Jerome Powell, chairman of the Federal Reserve, stated last Wednesday 22, that the situation will not lead to a financial crisis, describing the banking system as “healthy, resilient, with strong capital and liquidity”. In spite of his insistence, he also qualified that this measure may be effective to contain the current banking ‘swings’, although it may not be the most adequate to contain inflation.

Given the situation of fear and doubts, the Spanish stock market continued to register red numbers at the close of the day. This Friday was no different and closed with a new fall of 1.98 per cent, being dragged down by Deutsche Bank. The Ibex 35 fell 177.5 points (1.98 per cent) to 8,792.5 points, leaving yesterday’s gains of close to 3 per cent at only 0.8 per cent, leaving the annual increase at 6.85 per cent.

Today closed with new falls led by Bankinter, with a drop of 5.38 per cent, followed by BBVA (-4.43 per cent), Banco Sabadell (-4.28 per cent), Unicaja Banco (-4.06 per cent), Banco Santander (-3 per cent) and CaixaBank (-2.95 per cent).

Due to the context of doubts, and to the numbers that still have not improved notably, Nadia Calviño, the Minister of Economic Affairs, recall this Friday the ‘strength’ of Spanish banks in an extremely volatile environment, following the dynamic shown by the European Central Bank and the US Federal Reserve.

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