Avoiding the financial crisis

Financial crisis
  • Jonathan Rowe
  • 18.03.2023

The financial authorities learned the lessons from the 2008 financial crisis and announced a series of measures to stabilise the banking system and allow SVB depositors access to their deposits last Monday.

These steps came after authorities took over New York-based Signature Bank SBNY.O, the second bank to go bankrupt in a matter of days.

To avoid a domino effect, the Fed announced that it would provide funds through a term bank financing programme, which would provide depository institutions with loans of up to one year, guaranteed by treasury bills and other assets owned by those institutions. And so that banks don't sell the bonds at a loss, they are accepted at face value by the Fed as collateral.

As a result of this crisis, the prospect of a 0.50% Fed rate hike has receded into the background and even, according to Goldman Sachs, the Fed should no longer hike rates, given the volatility in the financial markets.

As a result, 2-year Treasury yields made a famous re-entry curve and the dollar fell very sharply.

Solid savings

Still, labour market figures confirmed that the economy remains stable, but this is all masked by the risks of a full-blown financial crisis.

Job creation was higher than expected at 311,000 after last month's figure of 504,000, which was revised down slightly. The figure remains well above the average job creation rate seen from 2010 to 2019.

The unemployment rate rose slightly from 3.4% to 3.6% and the participation rate from 62.4% to 62.5%.

Average hourly earnings rose 0.2% on the previous month and the annual rate fell from 4.4% to 4.6%, giving the impression that a 0.25% Fed rate hike seems more appropriate. But that was before the authorities announced measures to protect the financial system.

Ensure stability

Even if the announcement has absolutely nothing to do with the turmoil in the US banking system, Xi Jinping has left the central bank governor and finance minister in their posts.

While he has placed his allies in all other posts, he has announced that he is keeping Yi Gang, 65, as governor of the People's Bank of China, and Liu Kun, 66, as finance minister, even though the official retirement age is set at 65.

The decision was probably dictated by the need to ensure a certain continuity, especially as the economic challenges are considerable and require experienced people. And it came as a surprise because Yi Gang had been head of the NBK since 2018, and his departure was widely reported after he was ousted from the ruling Communist Party Central Committee at the party's five-year congress in October.

This, however, did not stop Xi Jinping from appointing Li Qiang as prime minister , as planned .

Appeasement

The measures announced last weekend give the feeling that a domino effect has been avoided. The VIX index, which measures volatility, has certainly improved, but remains far from the levels reached during other turbulent periods. Stock exchanges in Europe are expected to rise and bitcoin has recovered this morning.

Warning

Fitch announced on Friday that it was lowering its outlook on Belgium from "stable" to "negative".

The decision was justified by the fact that there are large and persistent budget deficits, with the political world unable to take the necessary measures.

Fitch forecasts that Belgium's budget balance will increase to 5.2% in 2023 from 4.0% in 2022, and notes that "in our view, the government is unlikely to adopt consolidation measures which could reduce the deficit while legislative elections are held in 2024. Because of the fractured political landscape and the very long negotiations in the past to form a coalition, we anticipate the risk of a significant delay in consolidating public finances."

The interest rate differential between the Belgian bond and the 10-year Bund has not reacted to this announcement, but be careful that statements of warning rejection do not accentuate the latter.

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