Good morning. If keeping the budget, unnerving airborne collisions, and the travails of Gary Lineker straight in your head feels like more than enough for a week, another story has been bubbling away that may be more consequential than any of them: the start of what some fear could be a global, slow-rolling banking crisis.
First, the collapse of Silicon Valley Bank in the US caused jitters in markets that spread across the world. SVB was supposed to be a regional player whose failure would be unlikely to have profound ramifications – but then a longstanding set of problems at Credit Suisse, a far more consequential institution, turned into an emergency. Its shares dropped 24.5% in a day, and £75bn was wiped off the FTSE 100. Premature though it might have been, people started saying “2008”, which is basically Voldemort for financial markets.
Yesterday, Credit Suisse secured a loan facility with the Swiss Central Bank, intended as a guarantee of its future stability, and the panic somewhat abated – and it’s important to say that we are a long way from a full-blown crisis. But there was more evidence of trouble in the US, where Wall Street giants agreed an unprecedented plan to deposit $30bn to prop up First Republic, another bank on the brink.
Credit Suisse’s problems have not vanished, and suddenly investors are looking hard at whether other European and US institutions might be in the same boat. Impenetrable though much of this is to a layperson, it’s unfortunately not going away.
Today’s newsletter is with the Guardian’s banking correspondent, Kalyeena Makortoff, and financial editor, Nils Pratley. Read all of what they have to say and my First Edition Guarantee™ to you is that, like me, you will understand what’s happening far better than you did before they explained it, when you thought a “liquid asset” was an expensive bottle of wine. Here are the headlines.
Five big stories
Strikes | Health unions celebrated on Thursday after the government made a significant new pay offer aimed at ending NHS strikes in England, in a climbdown that could embolden other unions. The government ditched its claim that this year’s pay deal could not be reopened, offering a one-off bonus worth up to 8.2% and a permanent 5% rise from April.
Policing | The Metropolitan police service is riddled with racism, sexism and homophobia and has failed to change despite decades of previous warnings, an official report will say. Louise Casey’s review – commissioned after the murder of Sarah Everard by a serving Met officer, Wayne Couzens - is due on Tuesday and is expected to make clear that the Met is in “last-chance saloon”.
France | Emmanuel Macron’s government has used controversial special constitutional powers to force through a rise in the pension age, amid chaotic scenes in parliament in which radical left MPs sang the Marseillaise at the top of their voices. Read an explainer on the pensions row.
Education | One in five pupils in England were classed as persistently absent during the last school year, with Covid and other illnesses the biggest contributors to classroom absence rates among children soaring compared with pre-pandemic years. The national absence rate was 7.6%, compared with 4%-5% seen before the pandemic.
US military | A remarkable video released by the Pentagon has shown the moments before a Russian fighter crashed into a $32m US Reaper drone after spraying it with jet fuel on Tuesday morning over the Black Sea. US officials briefed that the footage “absolutely confirms” there was a collision, which Russia had denied.
In depth: ‘At the moment it feels several degrees below a proper crisis’
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What happened at Silicon Valley Bank?
In a nutshell: it was very heavily invested in long-dated US government bonds, the value of which has slumped as interest rates have risen over the last year. With many of its tech industry customers in trouble of their own, they started to draw on their deposits – but SVB didn’t have the cash on hand to pay them. That meant it was forced to sell the bonds at steep losses, prompting serious fears over its liquidity among investors and customers, a run on the bank, and its sudden collapse. Here’s a useful explainer from Monday.
The hardest part of this to understand is probably the issue with long-dated government bonds – government debt that pays annual interest. Those bonds became unrealised losses: “Let’s say you buy your house for £500,000, but it falls in value to £450,000,” Nils said. “You have an unrealised loss of £50,000. If you intend to keep it for 30 years, that’s fine – you can ignore it. It’s the same with these bonds. If you plan to keep them for a long time, that’s OK, because they generate a flow of income in interest. But if you’re forced to sell them sooner than expected, you have to take the loss.”
So why did interest rates make the bonds less valuable? The bonds were issued when rates were much lower. “When rates go up, a bond paying a fixed income below general interest rates becomes less attractive to own. Its market price then falls to compensate,” Nils said.
SVB was particularly exposed, he added, “because it had very concentrated risk – its clients were really just in one part of the economy, the tech sector. That makes you more vulnerable to herd mentality. But it certainly should have been taking more precautions to hedge against the eventuality that interest rates would rise.”
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What happened at Credit Suisse?
“Credit Suisse’s problems are nothing new,” Kalyeena said: last year, it lost 7.3bn Swiss francs (£6.6bn). Reputational issues arising from a series of scandals in recent years have left it struggling to hold on to customers, and it is only a few months into a three-year restructuring plan. Last month, it said that 123bn Swiss francs (£109bn) had been withdrawn by customers in 2022.
But things got much worse this week after it admitted on Tuesday that it had found “material weaknesses” in its financial reporting controls. That added to jitters – and the next day, they turned into a full-blown panic, when Ammar Al Khudairy, the chairman of the company’s biggest shareholder, Saudi National Bank, said that it would “absolutely not” provide more liquidity if Credit Suisse needed it.
Al Khudairy’s comments were more nuanced than that top line suggests, Kalyeena noted. “He also said that he fully believes in Credit Suisse’s strategy, and he said that it was unlikely to need that money. But in this mood of uncertainty, people said – is it happening at another bank? The idea that they wouldn’t have this white knight investor to shore them up with more cash was enough to cause a crisis.”
As alarming as the collapse in Credit Suisse’s share price that resulted was, it is nonetheless in a very different place to SVB. “It’s important to differentiate their problems,” Kalyeena said. “Some experts note that Credit Suisse’s assets aren’t as sensitive to interest rate rises, for example. And they are more heavily regulated because they’re a much bigger bank: that means they are supposed to have more capital, more assets that could be sold off quickly if it came to a situation where depositors were demanding their money.”
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Why did the Swiss National Bank offer to loan Credit Suisse $54bn?
To shore up investor confidence and reduce the risk of the crisis spreading to other banks. “It’s a confidence-boosting exercise,” Kalyeena said. “As of Thursday afternoon, they have not yet taken advantage of the offer – but the fact that it’s available is saying, we have the confidence to be the lender of last resort if we have to. Central banks don’t lend to institutions that they don’t think will pay them back.”
“This has undoubtedly bought Credit Suisse some time,” Nils said (and he writes more about that here). “It’s calmed the markets and pushed the share price back up a bit. But Credit Suisse still has many of the same problems fundamentally. The exact shape of its turnaround plan is still unclear, and until that is clarified this sense of mistrust is going to persist – that we don’t quite know what this bank is going to look like at the end of it. These crises last longer than a day, and Credit Suisse is going to have to continue to calm the markets.”
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Why are there fears of contagion?
There are two main reasons for concern. The first is those aforementioned jitters, with the risk that rising interest rates may devalue banks’ assets now front of mind. “People start looking for where else this might be happening,” Kalyeena said. “If there are problems at Credit Suisse or Silicon Valley Bank, investors are going to want to know if they’ve got the same issues elsewhere.”
Meanwhile, depositors are likely to be thinking hard about whether they want to keep their money where it is, or move it somewhere safer. “Banking as a whole is to some degree a conjuring trick,” said Nils. “It does rely on everyone being confident.”
But the issue is more than simply the psychology of the marketplace. “Banks are very tightly linked with other banks,” Nils said. “That’s ‘counterparty risk’ – if your partner on a contract gets into trouble, it becomes your problem as well. That can spread through the system.” That’s part of what happened in 2008, and one of the key reasons that large banks are heavily regulated to ensure that if they do collapse, they don’t take the system down with them.
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So could this be 2008 all over again?
“Most analysts and experts say that we aren’t in the same position as 2008,” Kalyeena said. “The way that SVB and Credit Suisse have been handled very swiftly does suggest that central banks and regulators are alive to the risks.” However, in the UK, she noted, recent government proposals to relax regulation in the financial sector could increase the risks of similar problems here in the future. “This is not the time to start stripping back anything that was brought into place because of fears in 2008.”
Nils agreed that there are better protections today than during the last financial crisis: “There is a lot more capital in the banking system and so the system ought to be safer. Banks like Credit Suisse, which are ranked as globally systemically important, face a lot requirements to make sure that’s the case”. However, he adds that “on the other hand, it hasn’t actually been tested in a proper crisis yet”.
Could one be on its way? “It doesn’t feel like it yet – at the moment it feels several degrees below a proper crisis,” he said. “It does not yet feel like 2007 or 2008. But I reserve the right to change my mind depending on events.”
What else we’ve been reading
After last week’s piece on Guardian writers’ favourite childhood foods, now it’s the turn of readers to take a delicious trip down memory lane. My vote goes to reader Matt’s suggestion of Findus Crispy Pancakes, best served “grilled to death from frozen”. Hannah J Davies, deputy editor, newsletters
Ahead of the release of his gruesome new horror film Infinity Pool, Alexander Skarsgård (above) tells Ryan Gilbey why he keeps playing such brutes: he’s interested in “someone trying to function in modern society while also dealing with that atavistic primal question of who he is deep down … It’s incredibly cathartic.” Archie
20 yearts after the Iraq war began, Kevin Rawlinson speaks to three Britons whose lives it changed profoundly. One soldier who has suffered PTSD tells him: “All you could smell was thick oil. And that still affects me now. If I smell that it brings me back into that place.”
The New Yorker (£) speaks to Hannah Saidiner, who has made a rather lovely and hypnotic film about her parent Neal’s gender transition, which she says highlights her family’s joy. Hannah
Rhiannon Lucy Cosslett’s column takes a rigorous look at the government’s new childcare policy. She argues that it’s reason to celebrate, certainly – but there are serious issues attached, and a real risk that some nurseries could have to close because the plans are financially unviable for them. Archie
Sport
Europa League | Sporting Lisbon beat Arsenal on penalties after Pedro Gonçalves scored one of the goals of the season from 50 yards (above) to cancel out Granit Xhaka’s opener. Lisbon were joined by Manchester United in the last eight after they won 1-0, thanks to a goal from Marcus Rashford, to complete a 5-1 aggregate victory over Roma.
Football | Ivan Toney has been rewarded for his impressive season with Brentford by being recalled to the England squad, even though he is braced for a lengthy ban after accepting multiple charges of breaching the FA’s betting rules. Toney has been selected by Gareth Southgate in a squad that features no Raheem Sterling or Trent Alexander-Arnold.
Horse racing | At 6ft 4, Jack Andrews is used to towering over his fellow jockeys – who are usually a foot shorter. On Thursday, Esther Addley reports, the man known as “the tallest jockey in the world” was in pursuit of his first Cheltenham festival win. Sadly, he didn’t get it – but he did win £249,950 in the 2021-22 season, so don’t feel too bad for him.
The front pages
Our Guardian print edition splash this Friday morning is “Excoriating report condemns Met police over racist, sexist culture”. “Say yes to end strikes” – that’s the Metro on the hoped-for NHS pay deal that is being put to the vote. “Unions back ‘fair’ raise for a million NHS staff” says the Times. “Victory for common sense AND patients” says the Daily Express, which true to form gives itself some of the credit.
“Carry on nurse” says the Sun, continuing with “unions back 5% pay deal”. “Nurses deal at last” – the Daily Mirror calls it a “pay offer breakthrough”. The i does an explanatory job worthy of a Financial Times splash headline: “NHS pay deal signals end to wave of public sector strikes”. The FT itself has other things to explain, though: “Banks scramble to reassure investors and regulators after flight of deposits”. “Labour’s pension tax raid plain will ‘hit millions’” – well it wouldn’t, Daily Telegraph, if Jeremy Hunt hadn’t just handed them a big bung in the first place. “Beyond parody!” – the Daily Mail is angry about Oxfam’s new inclusivity guide for staff. “Beyond parity” might have worked better …
Something for the weekend
Our critics’ roundup of the best things to watch, read and listen to right now
TV
Ted Lasso (Apple TV+)
The tale of Ted (Jason Sudeikis), the idealistic college American football coach who knows nothing about soccer but ends up leading AFC Richmond to victory, is back for its third and – rumour has it – final season. It cuts its sweetness with just enough vinegary exchanges to prevent the whole from becoming sickening, keeping the main man just the right side of folksy. Go team! Lucy Mangan
Music
U2 – Songs of Surrender
Perhaps it’s unsurprising that what should theoretically be a low-key project – reworking their back catalogue in muted, largely acoustic style – has turned into an epic, 40-track undertaking for U2. Neither a disaster on the level of their iTunes launch, nor a triumph to match Zoo TV, it sits somewhere in the middle of that sliding scale of success. Alexis Petridis
Film
Pearl
Mia Goth (above) is fiendishly good in this outrageous shocker from director Ti West, an origin-myth prequel to his previous film X via golden-age movie pastiche and dashes of Psycho and The Wizard of Oz. Goth, who starred in X, is now a co-writer on the follow-up as she takes her performance to the next level as the Judy Garland of horror. Peter Bradshaw
Podcast
Pop Culture with Chanté Joseph
Widely available, episodes weekly
The Guardian’s chatty, insightful podcast about the hottest weekly topics in the world of pop culture returns for a second series. It’s the same engaging, informative look at what everyone’s talking about, with its first episode asking: “Have film awards become a bit rubbish and outdated?” Lots of irreverent fun. Alexi Duggins
Today in Focus
How one woman’s lies tore a town apart – and finally unravelled
Why did Eleanor Williams, a young woman from a remote coastal town in England, pretend she was a victim of a grooming gang?
Cartoon of the day | Ben Jennings
The Upside
A bit of good news to remind you that the world’s not all bad
A BBC journalist with family links to the transatlantic slave trade has quit the broadcaster to campaign on behalf of countries seeking reparations. Last month, Laura Trevelyan and her family publicly apologised for their family’s role in slavery in Grenada and announced a £100,000 donation to the University of the West Indies. Now the news presenter has quit her job to become a “roving advocate” and to work with other families in similar positions who aim to “make amends”.
It follows comments reportedly made last November by King Charles, who is said to be ready to have “active conversations” about Britain’s role in the slave trade. “The coronation of the king and his comments about being ready to talk about the legacy of slavery provide an opening for a wider discussion”, said Trevelyan.
Sign up here for a weekly roundup of The Upside, sent to you every Sunday
Bored at work?
And finally, the Guardian’s puzzles are here to keep you entertained throughout the day – with plenty more on the Guardian’s Puzzles app for iOS and Android. Until Monday.
