UBS-Credit Suisse deal puts Switzerland’s reputation on the line

The demise of giant Credit Suisse has sent shock waves through financial markets and appears to have dealt a blow to Switzerland’s reputation for stability, with one executive suggesting investors will now view the mountainous central European country as a “financial banana republic”.

UBS, Switzerland’s largest bank, agreed on Sunday to buy local rival Credit Suisse for 3 billion Swiss francs ($3.2 billion) as part of a government-backed discount deal.

Swiss authorities and regulators helped orchestrate the agreement, which came amid fears of a contagion to the global banking system after the collapse of two smaller US banks in recent weeks.

The bailout deal means Switzerland, a country that relies heavily on financing for its economy, is on track to see its two largest and most well-known banks merge into just one financial giant.

“Switzerland’s position as a financial center has been shattered,” Obemas CEO Octavio Marenzi said in a research note. “The country will now be seen as a financial banana republic.”

“The Credit Suisse debacle will have serious repercussions for other Swiss financial institutions. A nationwide reputation for prudent financial management, sound regulatory oversight and, frankly, for being somewhat ruthless and dull with regard to investments, has been decimated,” Marenzi said. .

Shares of UBS were up nearly 4% on Tuesday by 10:15 AM London time (6:15 AM ET), extending gains after closing higher the previous session.

Credit Suisse, meanwhile, was trading down 0.6% in the morning trade after ending Monday’s session down 55%.

“One of the features of this whole banking squeeze that we’ve seen over the last week or two is that we’ve already seen high volatility in the equity markets and significant volatility in the fixed income and commodity markets, but very little volatility in the foreign exchange markets,” said Bob Barker, senior advisor at International Capital. Markets Association, for “Squawk Box Europe” on CNBC on Tuesday.

Asked how investors might now think of Switzerland’s reputation for stability, Parker replied, “When I was in Zurich last week, it was actually a hot topic.”

There has been “some very modest weakness” in the Swiss Franc against the Euro in recent days, he said, noting that this is the currency pair that the SNB is focusing on.

The euro was seen trading at 0.9961 Swiss Francs on Tuesday morning, down from 0.9810 when compared to March 14th.

“We’re back near parity between the Swiss franc and the euro. So, I think the answer to your question is, yes, the Swiss franc has somewhat lost some of its appeal as a safe-haven currency. There’s no question about that,” Parker said.

He added, “Will that be restored? Probably yes, I would argue that this is some kind of short-term effect.”

— CNBC’s Elliott Smith contributed to this report.