Concerns about Credit Suisse’s financial health are mounting — but that doesn’t mean markets are headed for a “Lehman moment,” Sri-Kumar Global Strategies president said.
“I think the Federal Reserve will have to face the consequences of a credit event,” if it does, Komal Sri-Kumar told CNBC’s Squawk Box Asia on Monday. “Something will break.”
“This may or may not be a Lehman moment,” he said, referring to the collapse of Lehman Brothers in 2008, which sparked a series of major Wall Street bailouts and a subsequent financial crisis.
Over the weekend, multiple media outlets reported that Credit Suisse was trying to allay investors’ concerns about its financial health – the Swiss bank reportedly contacted its largest clients after its credit default swaps soared.
CDS are essentially insurance bets against defaults, and a credit event refers to an adverse and sudden change in the borrower’s ability to repay its debt.
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Sri-Kumar, a longtime critic of the Fed’s approach to inflation, said recent events surrounding Credit Suisse show the “real danger of having miscalculated inflation for so long”.
“They’re trying to offset this by doing everything in a hurry,” he said, referring to the Fed’s continued tightening policy and promises to keep raising interest rates to curb inflation.
At the Fed’s last monetary policy meeting in September, the central bank raised interest rates by three-quarters of a percentage point and indicated that it would hike rates well above current levels.
Sri-Kumar said such attempts to control inflation are dangerous for markets worldwide.
“It poses a huge risk to the global system in terms of what the different central banks are doing,” he said.
Recent reports of Credit Suisse’s actions to calm worried investors could point to an eventual change in direction from the Fed, said John Vail, chief global strategist at Nikko Asset Management.
“The silver lining at the end of this period is the fact that at some point central banks are likely to start softening as both inflation has come down and financial conditions are deteriorating dramatically,” he said on CNBC’s Squawk Box Asia on Monday. .
“I don’t think it’s the end of the world, but it could be scary for the next quarter or so,” he said.