The inevitability with which global markets would fall off their to-date unrealistic levels did nothing to mollify the depth and panic of the spasms. It has become a truism that nothing in the structure of international finance has changed, save that the losses of private banks had been socialised, leading to the great weight of legal activity falling on the side of the general populous who have been subjected to vicious cuts. The bad debts had not gone away, the global trade imbalances remained set against US domination, the complex products continued to be packaged and issued under new titles, the regulatory control remained minimal, if not laughable. As such, it has been quite apparent to all but governments that Global Financial Crisis 2 (GFC2) was a matter of ‘when’ not ‘if’.
So are this week’s stock exchange routs the sign of GFC2? Trying to judge fundamentals on the basis of share movements is like attempting to determine ocean currents through measuring sea spray. The remarkable similarity between what we are seeing today and the wild fluctuations of stock prices between the Summer of 2007 and the collapse of Lehman Bros. is to some extent superficial, though the subterranean tensions are building.
The first difference from 2007 was that in the earlier crisis stock instability was matched through into 2008 by credit market tightening. It was the inability of Lehman’s to refinance its debt in the credit market that caused a collapse in investor and creditor confidence. Today, overnight and 3 month sterling LIBOR remain stable and relatively low (0.834%). EURIBOR fell significantly following the ECB’s announcement yesterday that it would pump more money into markets. Jean-Claude Trichet stated that commercial banks would be allowed to borrow as much money as they need from the ECB until at least the end of this year, and unveiled a new offer to the banks of six-month money “given the renewed tensions in some financial markets”. The three-month EURIBOR dropped to 1.56% today from 1.6% yesterday. The six-month EURIBOR rate tumbled to 1.76% from 1.82%. EURIBOR futures show markets are not expecting further ECB rate hikes for at least the next year.1
However, there are two problems, one technical; one potential. Taking LIBOR for example, the technical problem is that the BBA’s statements as to LIBOR continue to suffer from their reliance on market participants’ claims as to the interest rates they charge the average bank, and are not linked to actual rates charged. In the 2008 crisis it was well-known that LIBOR bore no relation to real interest rates, as banks were refusing to lend out money save at exorbitant rates, with a view to bulking out their balance sheets with cash. Indeed, certain banks including Barclays are currently under U.S. and UK regulatory investigation for fraud on the basis of these misleading statements2. This links to the second problem: banks are now beginning to hoard cash and gold3. This apparently began as a prudential measure in view of the recent risk of U.S. Government default, but has accelerated as stock markets have tumbled. The credit supply is being squeezed, further hindered by inflows of cash into the U.S., Japan, and Switzerland as investors escape the ‘Emerging Markets’ and the Eurozone. As an indication, Bank of New York Mellon has taken the unusual step of charging for deposit taking of multi-million sums4.
The bond markets too indicate that any new crisis is still in its early stages, rather than as advanced as that of 2008 by August of that year. We are starting to see distortions in yield curves as investors buy U.S. bonds (the same ones which were about to default last week) at fire sale prices because these are considered safe5. Italian and Spanish spreads to German 10yr Bunds are also heading towards 7%. Italian default seems inevitable. Silvio Berlusconi, in a further unnecessary declaration of his country’s status as a prime example of neoliberal capture by authoritarian oligarchs, could only provide one concrete proposal to shore up Italy’s economy: buy shares in Mediaset – the main corporate in Berlusconi’s empire6. These constitute problems still to come, whereas bond markets in August 2008 were rendering economics textbooks obsolete, even by their own theological standards.
Yet the main difference with the first GFC is the nature of those who have been caught holding bad debts as the music has stopped. Whereas before these were banks of various sizes across the world, backed by shadow structures, private equity and venture capital funds, now much of the toxic debt is in the hands of states and related institutions. Shocking fact: 20% of Greek bonds are held by the European Central Bank7. The ECB seems to be the only player in the market for moribund Portuguese and Irish bonds. The Royal Bank of Scotland today reported a GBP733m hit on its Greek debt holdings8. RBS is owned by the British tax payer, in the sense that ‘owned’ means ‘liable for’ rather than ‘enjoy the benefits of’ (the benefits remain with Stephen Hester and his investment staff). Société Générale and BNP Paribas also announced massive losses this week due to Greek debt, and while private, benefit from an implicit tie-in with the French Government characteristic of Parisian revolving-door corporatism. It is to be noted that the differences in write downs by the three banks appear to be due to decisions on two issues characteristic of finance’s inherent sclerosis. As between SocGen and BNP, a difference in write-down value seems attributable to an interpretation of IFRS 157 and it’s three tiers of financial asset quality. In short, BNP used a set financial model to assess the value of their exposure to Greek Residential Mortgage-Backed Securities (tier II quality), whereas SocGen felt they could mark the assets to market directly (also tier II quality). The problem is that there is no market for such assets any more, suggesting the 2008 crisis tactic of marking-to-make-believe has returned in order to avoid accepting the downgrade of clearly illiquid assets9. Political issues complicate this: the RBS write-down was much greater compared to the French banks because the latter based their calculations on the assumption that the Eurozone rescue fund (EFSF) for Greece will work, whereas RBS assumed it will fail miserably; a conclusion that further spooked investors.
The direct holdings and explicit or implicit guarantees of toxic debt now lead straight to the doors of states, and banks’ exposure is to some degree indirect – they are exposed to states which are exposed to banks which are exposed to states etc. It is this facet of the current turmoil which more than any other complicates any augury of the future from 2007 premises. The official privatisation of states that took place in 2008-09 as banks simply took on national balance sheets for their own use means that we are all Lehmans Bros. employees now. We had better have cardboard boxes ready by our desks.
- http://www.guardian.co.uk/business/blog/2011/aug/05/stock-market-crisis-ftse-usa-europe at 12:40 ↩
- http://www.bloomberg.com/news/2011-03-25/barclays-said-to-be-investigated-by-regulators-in-libor-probe.html ↩
- Jennifer Hughes Financial Times 3 August 2011 – ECB sees lenders rush to hoard cash ↩
- Tom Braithwaite Financial Times 4 August 2011 BNY Mellon to charge on $50m+ deposits ↩
- http://www.reuters.com/article/2011/08/04/uk-investing-treasuries-safehaven-idUSTRE77353M20110804 ↩
- http://www.guardian.co.uk/business/blog/2011/aug/05/stock-market-crisis-ftse-usa-europe?INTCMP=SRCH ↩
- http://ftalphaville.ft.com/blog/2011/08/04/643476/scraping-the-bond-buying-barrel/(paywall) ↩
- http://www.channel4.com/news/rbs-in-red-after-greek-debt-crisis ↩
- FT Alphaville 3 August 2011 SocGen/BNP Paribas ↩