The governments of the Western world intervened massively last weekend and have reassured the financial markets. They seem to put an end to the spiral of the credit crunch which was down by banks since the collapse of Lehman Brothers in the United States.
The question now is how the financial system born of panic - which has nothing to do with those who preceded, in part because the entrance of the State in the major banks - will irrigate the global economy, while growth is already very affected by the cyclical downturn and that some countries are already in recession. It is largely that which will determine whether the crisis hits us in the headlines today will affect our lives concretely tomorrow with the same intensity, in the form of unemployment, poverty and lack of economic opportunities ...
Unfortunately, the expectations of experts are not very optimistic in this regard. "We are entering a difficult period two or three years, during which banks will be very shy, despite government incentives to continue to lend to individuals and businesses," said a banker. No question, as these professionals, an immediate return to a banking system that can irrigate the economy to grow by over 5% per year globally, as was the case previously.
For industry experts, despite injections of capital and guarantees of bank liabilities decided by governments, banks must continue to reduce the wings of their activities. In the jargon of the bank, says that financial institutions, including Western, must be "déleverager", the "leverage" being the ratio of their total assets (ie the outstanding loan customers and financial products they hold) and that of their equity. In other words, they are forced or reduce their assets, including loans, or impose interest rate or higher commissions. ( Finance Information City )
Financial innovation in recent years, coupled with plenty of cash coming in particular from China and Gulf countries, made the easy money in the United States and Europe. All financial institutions, hedge funds, but also banks, are therefore greatly indebted to fund acquisitions of assets and entrepreneurial initiatives.
The "leverage" of a huge bank like Bank of America despite the depreciation of assets in recent months and is still about 10. Banks like Morgan Stanley and Goldman Sachs are still "leveragées" 20 to 30 times. In major French banks, the ratio also reached 20 to 30. This does not mean they are riskier than banks to Wall Street because the assets they hold are commitments much more cautious and have been much better supervised by the regulator. But still, the pressure of the market is in the direction of reducing these ratios ...
Today, all actors of the economy that have money to invest no longer want to place on vehicles that liquid and least risky options. They entrust their money to banks based on the mattress thicker the capital compared to their commitments in the economy. Furthermore, bankers are now under the thumb of government and therefore subject to greater restrictions. States insist that banks do not close the tap loans to individuals and businesses in return for an injection of public money. But this order will face the ability of banks to lend without damaging their balance sheets, which were further weakened by the decline in the securitization called into question by the crisis (which will lead to a réintermédiation bank) and the repatriation to the balance outstanding so far placed in "off-balance sheet". Banks that have helped government will also pay the state so that taxpayers are not injured (priority dividends, cost of access to liquidity ...).
What still needs to depreciate in the banks after nearly 600 billion of assets related to real estate "subprime" written off, one might object. Much unfortunately, especially in the economic downturn that we know. Other real estate assets since house prices continue to fall. Similarly, consumer credit in the form of credit cards is a bubble waiting to deflate, we already feared the United States. Loans to small and medium-sized enterprises, including its securitized in America, could also suffer. The acquisition financing to be leveraged also ... The abundance of liquidity has not affected the subprime sector.
The problem is that banks must reduce their leverage at the time that the economy is slowing and that purchasing more assets or by transferring them, they accentuate the slowdown in the economy and the risk of bankruptcy .. . A balance should be struck soon, but it will be a high credit costs much higher than before both for business and individuals.
The cost of money will be higher than other players who irrigated system liquidity are much less active and for the same reasons. So hedge funds and investors in the non side (private equity) will finance more business as usual. Today hedge funds, an industry with 1000 to 2000 billion dollars but the purchasing power multiplied by the use of debt, are forced to sell their assets to meet redemptions of shares, which contributes of declining markets. What some economists call the banking system "of the shadows", ie not regulated, shrinks at high speed until better days.
A lifeline could be sent by emerging countries that still have abundant reserves and do not have to digest the excessive indebtedness of individuals and Western banks. The problem is that their main markets are in the West is to continue to sell to Americans with weak currencies to the dollar they financed the U.S. deficits. The slowdown will affect them, that reflects the sharp decline in their stock markets in recent weeks. And unfortunately for these countries and the West, encourage domestic growth will take time, given the lack of modern capital markets. So for Nouriel Roubini, an economist certainly known for his pessimism but in recent months very well anticipated the consequences of the crisis of "subprime", the U.S. will experience their worst recession in 40 years. Europe will not be immune, even if the decline in raw materials and oil fixes it, it like other countries importing such goods.
The bulk of the storm that hit the finance is spent, but the government must continue to ensure that the reduction of leverage in the banking system will occur in an orderly manner. Individuals and companies must fear for their restart difficult.
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