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World markets set for relief after Credit Suisse buyout, central banks action

By Dhara Ranasinghe, Amanda Cooper and Davide Barbuscia

LONDON (Reuters) - Financial markets were poised for relief on Monday after UBS Group AG agreed to buy Credit Suisse Group AG in a rescue orchestrated by the state, while major central banks announced a co-ordinated move to shore up liquidity in the financial system.

In an early sign that risk appetite was set for a bounce, the euro, sterling and the Australian dollar all edged up, data from trading platform EBS and Reuters Dealing showed. Crypto currency bitcoin rose over 5%.

UBS will buy rival Swiss bank Credit Suisse for 3 billion Swiss francs ($3.23 billion) and agreed to assume up to $5.4 billion in losses as it winds down the smaller peer's investment bank after a shotgun merger engineered by Swiss authorities.

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Meanwhile, in a coordinated global response, central banks including the Federal Reserve said they would enhance dollar swap lines, helping calm investors rattled by turmoil in the banking sector.

"To improve the swap lines’ effectiveness in providing U.S. dollar funding, the central banks currently offering U.S. dollar operations have agreed to increase the frequency of seven-day maturity operations from weekly to daily," the Fed said in a statement issued alongside announcements from the Bank of Canada, Bank of England, Bank of Japan, European Central Bank and Swiss National Bank.

S&P 500 futures rose 0.2% in bumpy early trade in Asia. The safe-haven yen was steady.

"Given the timing and sequence of events this move to offer overseas USD liquidity is less of a bad signal and more like an effort to instill confidence with the added benefit of watching the situation for USD demand on a daily basis," said George Goncalves, head of U.S. macro strategy at MUFG.

The failure of two U.S. banks and a rout in Credit Suisse shares have sent shock waves through markets over the past week, reviving memories of the 2008 financial crisis.

European banks slid almost 12% last week, their biggest weekly drop in just over a year, Japanese banks fell almost 11% - their biggest weekly drop since the March 2020 COVID-induced market turmoil - and U.S. bank shares have notched double-digit losses for two straight weeks.

Without Sunday's Swiss intervention, the risk of further market stress had appeared likely.

At least two major banks in Europe were examining scenarios of contagion possibly spreading in the region's banking sector, two senior executives with knowledge of the deliberations told Reuters earlier on Sunday, before the Credit Suisse deal was announced.

The U.S., UK and Swiss central banks are all scheduled to meet in the week ahead.

"The global financial system is still at great risk, and central bankers are showing they learned lessons from the global financial crisis and are trying to get in front of this," said Edward Moya, senior market analyst at OANDA. "More banks are at danger and coordinated action might buy some banks some time."

HIGH STAKES

The stakes are high for central banks and policymakers who have highlighted resilience of their banking sectors but are also mindful of the need to stem a crisis of confidence that could destabilise financial markets.

"There’s too much more opportunity for your money in either money market funds or Treasury bills … more and more money is going to leave the banking system and then if you add all this lack of confidence … then you have a full blown crisis," said Andrew Brenner, head of international fixed income at National Alliance Securities.

Even after Sunday's news on Credit Suisse, optimism from analysts was laced with caution and some scepticism.

"Switzerland’s standing as a financial centre is shattered - the country will now be viewed as a financial banana republic," said Octavio Marenzi, CEO of Opimas in Vienna.

Others drew attention to the losses likely to be suffered by Credit Suisse junior bondholders.

The decision to write down the value of Credit Suisse's Additional Tier 1 bonds to zero under the deal was "stunning and hard to understand," bondholder Axiom said.

"CS shareholders are essentially wiped out, and some (AT1) bondholders will be wiped out, but the basic functioning of the banking system was protected," said Michael Rosen, chief investment officer at Angeles Investments.

(Reporting by Dhara Ranasinghe, Amanda Cooper in London, Davide Barbuscia in New York; Additional reporting Carolina Mandl, Lawrence Delevigne and Tom Sims; Editing by Matthew Lewis and Anna Driver)