Credit Suisse’s collapse puts pause on debt-for-nature swap market
Photo: A branch of Swiss banking giant Credit Suisse behind a window under the rain, in Basel. (Photo by FABRICE COFFRINI/AFP via Getty Images)
The fall of the 167-year-old Swiss banking giant will likely create a gap in the emerging debt-for-nature swap market, with several countries hoping to utilize the financial tool left in limbo.
by Marco Lopez
BELMOPAN, Thurs. Mar. 30, 2023
Before the collapse and buyout of Credit Suisse, the bank was in the process of pioneering a new debt market that could be critical for impoverished and developing countries seeking a way to repay debts and protect their natural resources. Belize engaged in what is, to date, the largest such financial instrument, the Belize Blue Bonds. This $364 million loan was coordinated in concert with The Nature Conservancy, and Credit Suisse, which served as the sole structurer of the loan.
This deal has been called “free money” for the bank, according to the United Nations Conference on Trade and Development representative, Daniel Munevar in an interview with Bloomberg News. While the fall of Credit Suisse will have no direct impact on existing debt-for-nature swaps—like the ones already finalized with Belize and Barbados—any new deal that may have been in the pipeline “will not happen anytime soon,” Munevar said.
Under its Blue Bonds for Conservation Program, Credit Suisse raised $364 million for TNC, which then sponsored the Blue Bond to Belize. Those funds are backed by political risk insurance from the US International Development Finance Corporation. The bank raised money for Belize from pension funds, followed by a transfer of blue bonds that was made on behalf of Belize by Platinum Securities Netherlands B.V, a Dutch issuer.
Credit Suisse’s fall came following years of expensive litigation and a rough 2022 which saw a major fall in investor confidence. The 167-year-old bank has operated globally, at one point seeing $1.3 trillion dollars in deposits in 2005. But a constant decline leading up to its buyout recently can be attributed to a host of litigation and scandals which marred the company’s reputation and investor confidence.
From laundering money for drug dealers from Bulgaria to pleading guilty to criminal charges for helping US citizens evade taxes, billions of dollars in lawsuits have been paid out by the company over recent years. Some of the bank’s executives were even the subjects of a regulatory investigation for a scandal pertaining to their hiring of private investigators to track outgoing executives. They had to settle billions with US authorities for misleading investors-backed residential mortgages sold in the run-up to the 2008 financial crisis.
Those repeated scandals between the early 2000s and 2021 were, however, not enough to prompt businesses to lose confidence in the bank; this is until two major fallouts which resulted in massive losses for Credit Suisse. Greensill Capital, a supply chain company, collapsed in 2021. Credit Suisse had tried to recover $10 billion linked to the company collapse; they were found in serious breach of supervisory obligation by the Swiss Financial Market Supervisory Authority. They took another $4.7 billion hit from the Archegos Capital scandal, a US hedge fund that abruptly liquidated. By the end of the fourth quarter of 2022, about $100 billion dollars was withdrawn from the bank following the international panic of investors.
These hits, caused largely by the host of scandals and inefficiency in the investment bank arm of the company, are one reason UBS was able to pay only $3.2 billion Swiss Francs for Credit Suisse despite the bank being worth nearly $8 billion. That bank has since announced that it will not move to downsize the investment arm of Credit Suisse and lean more on its conservative risk culture going forward.
The reputation of the “Banking Capital of the World” – Switzerland, is on the line following the collapse of one of its largest banks: Credit Suisse. The $3.2-billion government-backed bailout facilitated the takeover of the struggling bank by its rival, UBS. This absorption of the bank by its larger rival is the best chance of restoring stability in the banking sector globally and in the country, but this leaves Switzerland with a single massive banking institution, and an uncertain merger to still take place. The recent fall of Silicon Valley Bank, a US-based bank for tech companies, and now the collapse of Credit Suisse indicate a clear banking crisis in two of the world’s largest banking sector economies.
For developing countries like Belize and others who are still in need of innovative financial solutions like the debt-for-nature swaps, any additional deals of a nature similar to the Blue Bond are unlikely at this time. Belize’s Nationally Determined Contribution (NDC) under the Paris Agreement cites debt-for-nature swaps as critical in the fight against climate change and environmental degradation.