Swiss Government Sued for Unjustly Wiping Out Billion-Dollar Debt

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Credit Suisse Bondholders Sue Swiss Government Over AT1 Bond Wipeout

In a bold move, a group of Credit Suisse bondholders has filed a lawsuit against the Swiss government, demanding full compensation for the contentious decision that wiped out the value of their Additional Tier 1 (AT1) debt. This drastic action stems from the government-orchestrated emergency sale of Credit Suisse to UBS last year, during which the Swiss regulator Finma erased approximately billion worth of AT1s, effectively reducing them to zero.

Unprecedented U-Turn: Basel III Hierarchy Thrown Askew

The plaintiffs in this lawsuit argue that Switzerland’s decision violated the usual European hierarchy of restitution in the event of a bank failure under the Basel III framework, established after the financial crisis of 2008. The Basel III framework typically places AT1 bondholders above stockholders in the order of payout, yet in this instance, common shareholders received payments while bondholders suffered losses.

AT1 Bonds: A Risk-Reward Conundrum

AT1 bonds are a type of junior debt, meaning they are riskier than more senior forms of debt. These bonds were introduced after the 2008 crisis to encourage banks to hold more capital and reduce the reliance on taxpayer bailouts. One of their key features is their designed absorption of losses: when a bank’s capital ratio falls below a certain threshold, AT1s automatically convert into equity, effectively wiping out their value.

Lawsuit Details: Seeking Justice for Unfair Treatment

The lawsuit, filed in the U.S. District Court for the Southern District of New York, alleges that Switzerland’s decision to write down the plaintiffs’ AT1 value to zero was “an unlawful encroachment on the property rights of the AT1 Bondholders.” The face value of the AT1 bonds held by the plaintiffs in the suit exceeded million, according to Reuters.

Unwavering Defense: Finma Stands by Its Decision

Finma has previously defended its decision to have Credit Suisse wipe out its AT1 bonds in March last year, claiming it was a “viability event.” However, the plaintiffs’ lawsuit maintains that Switzerland’s actions were unnecessary and unjust, resulting in the violation of bondholder property rights.

The Credit Suisse bondholder lawsuit against the Swiss government raises critical questions about the balance between the protection of financial stability and the preservation of investor rights. As the case unfolds, it will be closely watched by legal experts, investors, and the financial industry alike.

Data sourced from: cnbc.com