Few now doubt that we are facing an economic slowdown with the appearance of a serious “slowdown”. Perhaps there is only one government left determined to reject the evidence and ensure growth for the country over the next year. Something even rejected by a Bank of Spain, which predicts a low growth rate of 1.3% of GDP by 2023.
No, there is absolutely no room for hesitation: We are facing a financial storm. Technically, we need to know when we’re going into a recession (a limit marked by two consecutive quarters of falling activity by the definition of “canonical”). But not beyond the corner.
This type of scenario, of course, replicates the appearance of heralds of doom. “Doomsday business”, as I said, sells well. Some authors say that the great financial crisis accident Nearly every year he has used no greater argument than some indication that theoretically an economic shipwreck is a guarantee. Others, from the misuse of self-prophecies. The truth is, there are those who try to play the role of a few visionaries who looked at the system in 2005 or 2006 and found that no one else saw it: the systemic flaws. But Burry or Roubini is not plentiful.
This week all your attention has been on European banking. The logical approach would be to analyze the banks’ resilience to a possible recession horizon. However, the concern about the financial health of CreditSuisse and Deutsche Bank, two related institutions in the markets, attracted all the attention. Could a new economic shock, a resurgent Lehman Brothers “canary in the mine” or CreditSuisse be the trigger for a collapse in the European economy?
The sharp decline in the prices of both institutions has been significant throughout the week, demonstrating investors’ distrust of the institutions’ solvency. Enough to spread panic. The focus is on one of the most common tools in the financial industry: CDS (Credit Default Swaps, in English abbreviation). CDS is complex and avoids a simple explanation of its operation. We can absorb these as “insurance against defaults” for investors. They serve to cover certain possibilities when taking a position such as bankruptcy. Therefore, the higher the risk or the more likely it will happen, the higher the cost of coverage will be. CDS prices are rising, and that’s exactly what’s on the hedges against CreditSuisse (and to a lesser extent Deutsche Bank). Just like what happened at Lehman.
Does this mean that these banks are close to bankruptcy? No. What he’s saying is that insurers trust less and therefore charge a higher price to respond. In addition to its hedging component, CDS is a speculative instrument in the markets.
Of course, this is not a sign of strength, but it does not mean that the suspicion can be extended entirely to the European banking system. Both businesses had seen valuation declines since the start of the year. A decline due to the multimillion-dollar lawsuits the two institutions have faced recently, and the uncertainty of the impact the legal costs of the processes have on their outcomes (for different reasons: the Swiss bank for the Archegos funding scandals, the control standards, or the Georgian prime minister’s accusation of dishonest practices The Germans, with a long tradition of reputational earthquakes, have a they are in the middle of a money laundering investigation).
The noise is increasing, but that should not change the fact: European banking is much stronger than it was in 2008. The continued vigilance and increased capital requirements imposed by the ECB (especially in the Draghi “stage”) have given European banking greater capacity. Respond to scenarios where there is a rise in non-performing loans and a growth in toxic loans. We should not be faced with a scenario of contraction in the supply of credit (demand, of course).
No, we are not currently facing a crisis. Not liquidity. At least until government bond costs soar. Or the same thing: the financial sustainability of European countries. This is a point to be noted.