14 years after the momentous bankruptcy of Lehman, the world is threatened by a new financial crisis. Only the lazy have not been alarmed about the crisis looming over the global economy in the past few months, so the latest stark warnings from the Economist and Morgan Stanley seems to change little.
According to various economists, the banking earthquake could be caused by Switzerland’s Credit Suisse, France’s BNP Paribas or Deutsche Bank. Big bank worries started over the weekend with rumors of Credit Suisse’s alleged impending bankruptcy. As a result, the bank’s share price fell by double digits at times on Monday.
There is no end to the downward spiral yet, according to the Economist: investors sold off huge shares of the crisis-hit bank on Tuesday and Wednesday. Shares in Switzerland’s second-largest bank fell more than eleven percent at times to a record low of 3.52 francs per share. At the same time, prices for credit insurance, which creditors use to protect themselves against bank failure, soared. Deutsche Bank faces similar problems. The bank’s stock was even one of the day’s losers on Thursday. The share value in XETRA trading fell by 0.8% to 7.87 euros per share.
“Big banks like Credit Suisse and Deutsche Bank have made high-risk financial bets in recent years,” explained Marc Chesney, professor of economics at the University of Zurich.
“Without government guarantees, they probably would have already gone bankrupt.”
The European Systemic Risk Board (ESRB) made clear just how dire the situation is on Thursday: For the first time since its establishment in 2011, the board issued a “general warning”. In other words, the ESSR is warning of a new financial crisis.
“BOOM!” soon from Morgan Stanley
As forbes writes, the stock market snapped off a historic two-day rally on Wednesday as analysts warned it was too early to celebrate given a range of looming risks, including incoming corporate reports that are likely to show just how badly deteriorating economic conditions are weighing on earnings.
“The main question on the minds of many investors now is not ‘Will the Fed turn around’ but ‘WHEN will the Fed turn around’,” writes Morgan Stanley strategist Michael Wilson in a recent analyst note, saying the economy has entered a “danger zone”, in which Fed policy has become so restrictive that financial and economic stress is inevitable.
Wilson says it’s “only a matter of time” before a “fast and furious” market event convinces the Fed to back off on interest rate hikes that help tame inflation by lowering demand, but he warns no one knows yet what that event will be.
A new bigger intervention than the one in 2008?
Morgan Stanley is not just a bank, but the bank of all banks, the second largest, as they modestly write, US multinational corporation and the brainchild of JP Morgan & Co., a slight division to comply with antitrust laws. Therefore, when such serious guys openly discuss such things as a recession, it already changes everything but not because these guys are so important and big, but for a completely different reason.
Morgan Stanley is now just like a compass showing the direction where everything is heading to reach even the dumb and lazy. And as we know from historical practice, bankers very well use the rule “use a wedge to knock out a wedge.” That is, when a big bad black hole hangs over the economy, the bankers come up with some kind of cool event that generates wind, sometimes even a storm, after which the black hole flies somewhere in another direction. And it looks like such an event will happen soon.