Echoes of 2008: Here we go again

Written on October 10, 2011 by Ángeles Figueroa-Alcorta in Europe, Globalization & International Trade, Political Economy

The Europeans are pushing the global banking system to the edge

You know something bad is going to happen in a horror film when someone decides to take a late-night stroll in a forest. The equivalent in finance is a bank boss insisting that his institution is completely solid.

European bankers have been saying things are fine for weeks now, even as their exposure to indebted euro-zone countries strangles their access to funding. The amount of money parked at the European Central Bank (ECB) has risen to 15-month highs as banks hold back from lending to each other. Fears of contagion from Europe have now infected America (see article). Banks there led the S&P500 into official bear-market territory this week, as the index briefly dipped more than 20% below a high set in April. The chief executive of one embattled institution, Morgan Stanley, sent a memo to employees reassuring them that the bank’s balance-sheet was dramatically stronger than it was in 2008, when Lehman Brothers collapsed.

Europe is not the only problem facing Western banks, of course. A long list of woes also includes anaemic economic growth, piles of new regulation and waves of litigation related to America’s housing bust. An ill-conceived congressional bill to punish China for manipulating its currency is yet another sign that America has little to be proud of in terms of economic policy. But the central reason to worry is the euro zone: a series of defaults there would unleash devastation, sparking big losses on European banks’ government-bond holdings, and in turn threatening anyone exposed to those banks.

Earlier this year, the prospect of another Lehman moment seemed remote. Thanks to the abject failure of Europe’s leaders since then, the similarities with 2008 are disturbingly real. Governments are once again having to step in to support their banks. France and Belgium this week said that they would guarantee the debts of Dexia, a lender that was bailed out three years ago but which is weighed down by lots of peripheral euro-zone debt. In another throwback, plans are afoot to create a “bad bank” for Dexia’s worst assets. The cost of buying insurance against bank defaults has surged: credit-default-swap spreads for Morgan Stanley and Goldman Sachs hit their highest levels since October 2008 this week. Rumours are rife: that banks cannot pledge collateral at central banks, that hedge funds are pulling their money from prime brokers. Read more…

As published in www.economist.com on October  8, 2011.


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