The Bank of England was holding emergency talks with international counterparts on Wednesday night after shares in Credit Suisse plunged as much as 30 per cent, spreading fear through the City of London that overshadowed Jeremy Hunt’s maiden Budget.
Growing fears of a new banking crisis have led financial experts to begin reassessing forecasts for economic growth, with some predicting that central banks will soon have to start cutting interest rates.
In a statement, Credit Suisse said it was taking "decisive action" to "deliver value to our clients and other stakeholders".
Bank of England officials were in talks with counterparts, as they all raced to assess the potential impact of the problems at Credit Suisse, a “systemically important” institution that is enmeshed in the global financial system.
Experts predicted that it will require a bailout to prevent a collapse that would rock banks and pension funds around the world.
The FTSE 100 sank nearly 4pc, as British banks and asset managers were dumped by investors. The insurer Prudential lost more than 12pc of its valuation while Barclays fell by 9pc.
Meanwhile Shell and BP both declined by more than 8pc. Oil itself prices fell more than 5pc as memories of the 2008 financial crisis and its aftermath stoked fears of a global economic downturn.
The crisis was in contrast to the improving picture that the Chancellor attempted to paint as he unveiled forecasts from the Office for Budget Responsibility that the UK will avoid a recession this year.
The Chancellor said the brighter outlook was “proving the doubters wrong” as the latest projections showed inflation falling to 2.9 per cent by the end of the year.
Mr Hunt said the economy was now “on the right track” after the Office for Budget Responsibility (OBR), the government's tax and spending watchdog, said any downturn would be “shorter and shallower” than predicted just four months ago.
However, senior economists warned that the collapse of Credit Suisse had the potential to upend a recovery from the twin shocks of pandemic and war in Ukraine.
Nouriel Roubini, dubbed Dr Doom for correctly predicting the financial crisis, described the crisis surrounding Credit Suisse as a “Lehman moment” for European and global markets.
He said the bank was “too big to fail and too big to be saved”.
“An economic and financial hard landing has been my baseline for over a year now. Now it is clearly unavoidable,” he added.
While the economy is still expected to shrink by 0.2pc this year, the OBR no longer believes it will enter a technical recession – defined as two straight quarters of economic decline.
Its previous forecast showed a 1.4pc drop and predicted a recession lasting more than a year.
However, the OBR said Britain's tax burden remained on course to hit a new post-war record.
Almost six million people expected to be pushed into higher tax bands by the decision to freeze income tax thresholds until 2028. Andy King, a member of the OBR's executive committee, described Mr Hunt's tax raid as “fiscal drag on turbo chargers”.
The OBR also warned that households still faced the biggest two-year squeeze in living standards on record.
Tory MPs warned the party risked losing the next election.
Simon Clarke, former chief secretary to the Treasury and co-chair of the influential Conservative Growth Group, said: “I don’t think it is a good place for a Conservative Government to have the highest tax burden since the Second World War.
“Everyone knows the country has been through difficult times, with the Government spending huge amounts of money on first Covid and then the Ukraine invasion.
“But we urgently need to have a more Conservative position on tax. There is a risk voters will not understand how a Conservative Government will make their lives better.”
Investors have become increasingly worried about the global banking sector following the collapse of Silicon Valley Bank (SVB) and Signature Bank in the US last week.
Credit Suisse has lurched from crisis to crisis over the last two years but its problems intensified on Wednesday when its biggest shareholder ruled out injecting any more cash into the embattled bank.
Ammar Al Khudairy, chairman of the Saudi National Bank (SNB), said his company will not invest any more capital into Credit Suisse for regulatory reasons.
Bets that the scandal-hit lender would default on its loans jumped to a fresh record high following the comments.
Earlier this week, Credit Suisse added to concerns swirling around the sector after admitting it had found weaknesses in its financial reporting controls.
It also said customers continued to pull funds from the bank after a series of costly and damaging scandals.
Ulrich Körner, the bank’s chief executive, told Swiss media on Wednesday: “We are a strong bank. We are a global bank, under Swiss regulation. We fulfil and basically overshoot all regulatory requirements. Our capital, our liquidity basis is very strong.”
