Switzerland puts up 260 billion francs for Credit Suisse rescue

ZURICH: Credit Suisse and UBS could benefit from more than 260 billion Swiss francs ($280 billion) in state and central bank support, a third of the country's gross domestic product, as part of their merger to buffer Switzerland against global financial turmoil, documents outlining the deal show.

Swiss authorities announced on Sunday that UBS had agreed to buy rival Swiss bank Credit Suisse in a shotgun merger aimed at avoiding more market-shaking turmoil in global banking.

UBS said it will pay $3.2 billion for the 167-year-old flagship while the government said UBS would also take on the first $5.4 billion in losses from unwinding derivatives and other risky assets.

The deal, however, involves a large amount of public support, with three tranches of liquidity and loans, as well as a pledge from the Swiss government to absorb up to 9 billion francs in potential losses from the takeover.

The total of 259 billion francs of support is equivalent to a third of Switzerland's entire economic output, which stood at 771 billion francs last year.

"The government's going to have to say to voters why they are putting citizens' money, taxpayer money at risk to bail out a bank that was predominantly servicing the ultra-wealthy, doing some pretty extraordinary things with its investment bank and paying people crazy amounts of money relative to what the man in the street gets paid," one former global bank CEO, who did not wish to be identified, told Reuters.

In a memo seen by Reuters that was sent to staff on Sunday after the deal announcement, Credit Suisse reassured staff that their bonuses would be paid in full.

Public support for the bank comes in three ways.

Credit Suisse had already been drawing on the Swiss National Bank’s (SNB) emergency liquidity assistance scheme.

Credit Suisse said last Wednesday it would take 50 billion francs from the scheme, which provides funding secured against collateral such as mortgages and securities. As long as the bank has more collateral, it can draw down further such funding.

Central bank data on Monday indicated that Credit Suisse was likely already accessing the fund.