These 3 charts show why Brexit is not creating a credit crisis
Paramount / "Deep Impact"
Ever since Britain voted to leave the EU on Thursday, financial analysts have been worried about how the move could provoke a recession in the UK and even hit the global economy.
But Credit Suisse says that by looking at Credit Default Swaps (CDS), we can see if they give an indication of where the state of the banks is heading.
A CDS is effectively an insurance on bonds (debt security), offering protection against a default.
In other words, if lots of people are buying CDS's it suggests they think things are looking grim and we should be worried. People who bought lots of CDS's before the 2008 financial crisis got very rich, so an uptick in CDS purchases now would signal bad things to come.
But in a new note, entitled "Brexit: what's in the price now?," Credit Suisse says this is not happening - at least not yet, and there are currently no signs another credit crisis like 2008 is on the way.
In fact it says "bank CDS spreads and marginal funding costs have remained very well behaved, despite the sell-off in bank equity - both in Continental Europe and the UK."
Despite Credit Suisse's upbeat mood on the credit situation, it says it is still "gloomy" about the UK's economic outlook because it thinks a Brexit will create even more uncertainty (emphasis ours):
"It seems highly likely corporates will postpone investment decisions at a time when many lead indicators were already consistent with a mild recession, but less negative on Europe (where the direct effect of a UK recession should take c0.5% off pan-European growth at worst, in our view). Only when there is a general election in a euro area nation that has been turned into a proxy battle on EU/euro membership (which could conceivably be the case in next year's French Presidential election) would we expect corporates to postpone decisions and a similar loss of confidence."
Here is a look at three charts which demonstrate the difference between the banks sell-off and their marginal funding cost, which highlights the CDS spreads. The signs point to CDS purchases remaining stable, which suggests a Brexit is not creating a credit crisis:
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