According to authorities and regulators, until the weekend Credit Suisse was a solvent bank, but on Sunday it had to be rescued by resorting to gigantic guarantees from the Swiss State. German Chancellor Olaf Scholz has already said that Deutsche Bank was a profitable and solvent bank. We'll see.
What is happening these days is very reminiscent of what happened during the Great Recession of 2008. Investors distrust banks, they doubt each other, governments say they are solvent. But the markets punish the quotations until they are so low that they make the position of the attacked unsustainable.
It is true that there are many things that are different, although it remains to be seen if they are enough to rule out a serious financial crisis. In 2008, the financial bubble was embedded in the heart of the economy: the real estate sector. The dance on the edge of the abyss, until falling on the wrong side, between the finance and the brick caused the disaster. Now it might seem that financial ambition has danced only with itself if cryptocurrencies are excluded, almost a congenital prolongation, if it were not for the not inconsiderable case of public debt, which some have stockpiled to the point of indigestion.
The deep mistrust about the soundness of the banking system is repeated. But with a hypertrophied financial system, excessively large for the economy and dangerous enough that if any of its small links are dropped, starting with an average US bank, catastrophe can be unleashed.
Despite the promises of public officials, shadow banking - non-bank operators, from funds of all kinds to collective investors, parallel markets, insurers of financial products, credit intermediaries...– , largely unregulated and the product of banks' search for off-balance-sheet returns, has grown exponentially since the Great Recession of 2008. Then it totaled $100 trillion; by the end of 2021, it had already reached 240 billion. Banking is simply the tip of the iceberg.
Over the past few months, the crisis of confidence started with the UK's private pension funds, continued with the US's Silicon Valley Bank and reached new heights with Credit Suisse. On Friday it made another leap, not in size but in scale, with the contagion at Deutsche Bank. And we must remember, another disturbing similarity, that in 2008 the crisis reached Europe because of the doubts about the German bank, clouded by subprimes. Now, as then, it remains a cesspool of unknowns about its situation and solvency; Deutsche Bank may be the first piece.
Fear moves at dizzying, digital speed, higher than in 2008. Panics, withdrawals of money, are executed at the press of a key. Fast and without warning. As was proven in Catalonia, always a pioneer, in the week of October 1, 2017, when Caixabank and Sabadell had to change their headquarters at lightning speed to stop the bleeding. Is mobile a new headache for financial stability.
The current crisis of confidence no longer values the positive effect for the banks of rising rates and interest (they earn more money with each more expensive credit they grant). Investors and markets emphasize the credit restriction, already present. Banks contract their activity and the more expensive credit increases the possibility that the customer will have problems paying it back. The economic slowdown, partly due to these interest rate hikes, heralds future delinquencies.
The conclusion of the investors is that politicians like photography – the stillness offered by bank balance sheets – while they watch movies – in which the important thing is not the present moment, but the end of the story –. And they think that the bank will add to its current risk situation due to the rise in interest rates (which devalues the value of its assets, such as the public debt treasured during the years of negative rates, and makes its liabilities more expensive, and customers demand more to deposit their money) another credit, in which the health of their investments will worsen. perfect storm
It is not only the economy that suffers, reducing activity and generating more unemployment, when interest rates rise. The global financial system has profound difficulties in adapting to these increases. There were previous trials by central banks that ultimately failed. The big banks are entangled in a gigantic galaxy of speculative operations and cross-debts, which in case of problems bounce as unpaid in any economic sector and in the most remote parts of the planet.
Where will the current crisis of confidence evolve? If the tension continues, the banks will suffer a lot, even if according to legal and regulatory standards they are very solvent, as is the case with the Spanish. No bank can resist having the value of its share sprinkled, it will require urgent assistance.
If the pressure continues, the problem would shift from banking to the states. Switzerland, which had to change its most sacred laws to get out of the way, is leading the way. Deutsche Bank, despite its problems, is backed by the German state, the leading power in the eurozone, a world champion. Its public debt is around 70% of gross domestic product, what the economy produces in a year. Spain's is 116%.
How long will central banks keep raising interest rates? Difficult dilemma for the leadership of the European Central Bank (ECB), headed by Christine Lagarde and Luis de Guindos, but also by Joachim Nagel, president of the German Bundesbank, who wants to continue as if nothing happened. In the end, despite what Lagarde said, financial stability and monetary policy go through different channels and use different tools, until reality brings them to the same ground.
