Australia's sharemarket slumps after Credit Suisse turmoil
Australia's sharemarket has followed international markets lower following fears one of Europe's biggest banks was treading on thin ice.
Shares in the Swiss Bank Credit Suisse dropped by 24 per cent after its biggest shareholder – the Saudi National Bank – refused to pump more funds into saving the bank which has been beset by problems for months.
It comes after major US services Silicon Valley Bank and Signature Bank collapsed this week in the most significant banking collapse since the Global Financial crisis.
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The Australian sharemarket was not exempt from the global slump after shares on the S&P/ASX 200 dived 1.9 per cent at early trading.
It seemed to stabilise at 1.4 per cent at midday.
The All Ords has recovered ever so slightly now to be trading down 1.52 per cent, and it's also being battered by miners.
Rio Tinto tumbled by 4 per cent and BHP by 3.9 per cent.
It comes after the Dow Jones plunged by 600 points in the US amid fears of a banking crisis from the latest crisis.
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Why is the finance world holding its breath?
It is seen as a major tipping point for the powerhouse European Bank which will either regain its footing or analysts have flagged another global crisis could ensue.
It all started when Credit Suisse said in its annual report that it had "material weaknesses" in its financial reporting.
Saudi National Bank then ruled out increasing its stake causing other investors to panic.
Then in one night Credit Suisse shares crashed as much as 30 per cent before being halted.
It means the bank that was worth almost $50 billion two years ago is now worth $10 billion.
This collapse has led the bank to ask for help from the Swiss National Bank to stay afloat.
"Credit Suisse has a lot of links to the financial sectors of other countries, so it has operations in the US, in other parts of Europe and more widely around the world and it will have a lot of creditors and subsidiaries elsewhere who potentially could get into difficulties," Capital Economics Chief Europe Economist Andrew Kenningham said.
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But the problem is when there is concern around banks, investors get nervous and pull more funds out therefore making the already struggling bank even weaker – like the SVB.
Then the next problem is interest rates which all central banks are using as a primary tool to fight inflation.
But as interest rates rise, bonds become less valuable within the central banks which means they're unable to bail out struggling corporate banks.
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In Australia, interest rates are flagged to pause mid-year as the Reserve Bank of Australia sees inflation beginning to respond to the fiscal tightening. However, it is a different story in the US.
"Certainly, people are forecasting that the Fed will raise rates by 25 basis points or one-quarter of 1 per cent, down from the expected one-half of 1 per cent just a few days ago," Kenningham said.
"Some are saying they'll be no increase.
"They'll wait until May to do that.
"Others are saying that the Fed will cut interest rates.
"So in a sense, nobody really knows."
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