10 years ago today, in the midst of US subprime mortgage market uncertainties and lingering ignorance, BNP Paribas blocked withdrawals from three hedge funds citing ‘The complete evaporation of liquidity in certain market segments of the US securitisation market has made it impossible to value certain assets fairly regardless of their quality or credit rating.’ Basically, we don’t know what these assets are worth, if anything. Many now see their move as the straw that broke market confidence, halted interbank lending and brought the extent of bad sub-prime assets hastily and plainly into sight. Also on the 9th August 2007, the ECB reacted to their concerns over the euro money markets launching a so called ‘fine-tuning’ operation injecting €95 billion into the banking system (followed by €61bn the next day, €358bn the next and so on). This and other central bank measures across the world clearly helped lessen the blow but weren’t enough to stop the snowball effect and within six weeks people were camping outside UK’s Northern Rock branches, fearful for their savings. We all know the rest of the story too well, which is perhaps not a bad thing.
Speaking to the BBC today, former chancellor Lord Darling, who took his position just two months before BNP Paribas threw him this curveball, warned of ‘massive uncertainty’ and ‘alarm bells’ given the high and rising level of consumer debt and growth reliant on such levels of consumer spending and low interest rates. Combining this with the risks of Brexit brings particular concern in the UK. The BBC reflected, ‘On 9 August 2007 we felt the first tremor of a full-blown financial earthquake, whose aftershocks we are still dealing with today - nationally, locally and personally.’ Lord Darling acknowledged that regulators are ‘more sharp and ready to intervene’ and banks are now much better capitalised. But other pockets of unidentified risks will always remain and ‘the biggest danger is complacency’ which when exposed, as 10 years ago, forces markets wake up to years’ of imprudence. So which areas of the market can we see excessive complacency even where data suggest we are far from historical norms or sustainable levels?
Of course there’s the need for global deleveraging which has yet to significantly rectify the massive imbalances between creditor and debtor nations that built up in preceding decades, the wide and accelerating inequality gap between the wealthy and less-wealthy and the potential civil ramifications of such, the piling into increasingly higher risk debt at increasingly low yields whilst facing rising rates and potential tightening lending conditions, and then there are the risks of ‘fire and fury’ and other things megalomaniacal.
In a pat-on-the-back communiqué today the European commission commended their actions during the crisis and the ongoing recovery stating, ‘Decisive action has paid off: today, the EU economy is expanding for the fifth year in a row. Unemployment is at its lowest since 2008, banks are stronger, investment is picking up, and public finances are in better shape. Recent economic developments are encouraging but a lot remains to be done to overcome the legacy of the crisis years.’ A lot certainly still remains to be done for as fast as the early reactions to the crisis were, the last 10 years has seen plenty of political ‘feet dragging’ in Europe and in the US, and perhaps even some relapsing.
Given the extraordinary and now prolonged measures undertaken to bolster the global financial system, growth (although improving) is still far from recent historical trendlines. This and the already ultra-low rates would make any potential shock far more problematic to deal with. Take US consumer credit card debt for example, which has risen to all-time highs. With little growth in wages and banks seemingly more keen than ever to provide easy access to consumer credit, US household debt has risen to $12.73 trillion, above the $12.68 trillion peak in 2008; over $1 trillion of this is in credit card debt. This can only go so far, and unless growth picks up and real wages rise consumer spending, one of the main drivers of growth, will dampen along with market optimism. Given the persistent vulnerabilities we continue to see opportunities in high grade value debt which still offer attractive yields and better protection from run-off risks.