There is a broad consensus that an economic slowdown is shaping up, with the possibility of a genuine downturn on the horizon. Some governments may resist the data, pushing for growth through the coming year, but even officials from prominent institutions like the Bank of Spain forecast only modest expansion, projecting a GDP increase of around 1.3% in 2023.
There is little room for doubt: a financial storm is gathering. In practical terms, the economy will show a recession only if two consecutive quarters reveal shrinking activity, a canonical yardstick that many observers are watching closely. Yet the warning signs can appear long before that routine threshold is hit, and the mood in markets signals that trouble might be closer than people expect.
Predicting doom has become a familiar storytelling arc. The term “doom-and-gloom” seems marketable, and some analysts lean on alarming scenarios to capture attention. A few voices have argued that a systemic flaw lay hidden in the financial architecture back in 2005 or 2006, yet those warnings rarely materialize into immediate reality. Figures like Burry or Roubini are cited as prophetic, though their presence in the current discourse is far from ubiquitous.
This week attention has focused on European banks. A straightforward approach would examine their resilience against a potential downturn, yet the market’s anxiety has been riveted by Credit Suisse and Deutsche Bank. Could a fresh shock—a revived Lehman Brothers moment or a crisis at Credit Suisse—spark a broader European setback?
The declines in the stock prices of these institutions have been pronounced, underscoring investor concerns about solvency and feeding a wave of unease. A key instrument in this narrative is the CDS, or credit default swap, often described as insurance against defaults. While CDS can be complex to define precisely, they essentially reflect the cost of hedging against the risk of bankruptcy. When perceived risk climbs, the price of protection climbs as well. Recent movements show CDS prices rising for Credit Suisse and, to a lesser extent, Deutsche Bank, echoing patterns seen during Lehman’s collapse.
Does this mean the banks are on the brink of failure? Not necessarily. What it signals is a shift in trust: insurers demand higher premiums to cover the risk of default, and CDSs also play a speculative role in the markets beyond simple hedging. The current situation speaks to rising risk perception rather than imminent catastrophe.
That said, the European banking sector should not be dismissed out of hand. The sector had already faced notable declines in value over the year due to high-profile lawsuits affecting both institutions. These actions and their potential financial consequences—whether from Archegos-related funding questions, evolving control standards, or investigations into business practices in various jurisdictions—have contributed to a cloud of uncertainty. At times, public inquiries in significant economies raise questions about governance and the influence of legal exposure on balance sheets.
Nevertheless, there is a clear counterpoint: European banks are not the same as they were in 2008. Regulatory discipline, particularly the capital requirements reinforced by the European Central Bank under the Draghi era, has bolstered the sector’s resilience. Markets are vigilant, and credit conditions are calibrated to withstand a rise in non-performing loans and a surge in toxic assets. The path forward involves balancing credit supply with the demand for funding, ensuring that loan volumes do not shrink as measures tighten.
In short, a full-blown crisis is not on the immediate horizon. There is no liquidity crisis at present, though attention remains on the cost of funding for governments and the overall financial sustainability of European economies. Those funds and fiscal health will continue to shape the trajectory of credit and investment across the region, and they warrant careful watching from investors in North America as well as Europe. The current landscape calls for continued vigilance and prudent risk management, rather than panic or complacency.