Ten years after Lehman, spotting the next crisis: McGeever

LONDON (Reuters) – As financial market participants ponder the 10th anniversary of the collapse of Lehman Brothers, the consensus is that there will be no repeat of the impending death experience, largely because the authorities will not allow it.

The financial collapse and the economic catastrophe of a generation have been so serious that, to borrow from the head of the ECB, Mario Draghi, they will do everything in their power so that it does not happen again. Painful lessons have been learned.

But the idea that a financial crisis at the level of a decade ago could not happen again is far from being a naive idea. In fact, many of the roots of the explosion of 10 years ago are still alive today.

All we can say with some degree of certainty, is that the next crash will probably germinate in a different corner of the financial ecosystem before spreading. Familiar warning signs may flash, but what triggers a crisis may not trigger another.

Financial accidents generally result from one or more of the following factors: high leverage and leverage, in all sectors of households or firms; increased risk taking; excessive complacency of investors, greed and exuberance fueled by low volatility; rising interest rates; lower corporate profits.

There are signs that, to varying degrees, these conditions are in place today. Levels of debt are higher than before the big financial crisis. According to McKinsey, total global debt has risen from $ 97 billion in 2007 to $ 169 trillion last year.

Leverage in the banking system is now lower, but a decade of near-zero interest rates and ultra-low volatility has fueled speculation and risk-taking across the board. the financial ecosystem. Remember, just a year ago, Argentina launched a 100-year engagement with fanfare.

The global economy, markets and policy-making, both fiscal and especially monetary, have changed dramatically since the financial crisis, symbolized by the implosion of US investment banking giant Lehman on September 15, 2008.

With interest rates so low, central bank balance sheets are so high and national debt levels so high that in relative terms policymakers may lack ammunition to fight the crisis.

Central banks now have a permanent presence in the financial markets, and it is very unlikely that they will return their interest rates or balance sheets to "normal" levels before the crisis.

Japan's experience with extraordinary measures, including QE and zero interest rates, and moderate growth rates over the last 20 years, is a useful guide to what we can expect from the developed world.

"UNKNOWN KNOWN"

There are also new market risks, such as the rapid growth of algorithmic trading, a universe of passive and ETF-based investing that is now worth billions of dollars, the encrypted world and the proliferation of money laundering. artificial intelligence and big data.

All this comes down to an increasingly fragile political and structural context. Populism, the far right and strong leaders are on the rise, globalization is fading and public confidence in governments and institutions is decreasing. It is a potentially toxic mixture.

Global borrowing costs are rising, pulled by the Fed. The increase may be gradual but comes from the lowest base of history, so the context is unprecedented. Higher rates in the US are rarely good news for asset markets, no matter how slow.

The universe of corporate bonds, especially China, is exposed to higher borrowing costs and a stronger dollar. Emerging markets, too, especially those dependent on foreign capital to fill deficits, are turning to Turkey and Argentina.

Other emerging markets, such as Brazil, Indonesia and South Africa, are under increasing pressure, but contagion has been fairly limited. Developed markets, surprisingly, remain largely unscathed.

This may be due to the fact that economic growth, corporate profitability and asset prices have been boosted by the trillions of dollars in cash injected into the system since 2008 by central banks.

There is some degree of complacency in financial markets – volatility has rarely been lower, and many potential risks and burst points have been clearly identified. In rumsfeldian terms, they are all "known unknowns".

They include a bond issue of companies in China; a collapse of emerging markets caused by rising US rates and the dollar; American companies enjoy diving; break-up of the euro area; a global trade war; a drop in oil prices; a sharp rise in inflation.

Of course, anticipating what can trigger a recession and developing contingency plans are two different things. How are you supposed to prepare adequately for the possibility that Italy may, at some unknown moment in the future, leave the euro zone?

Rightly or wrongly, investors simply hope for the best. If the eurozone avoided Grexit and the imminent collapse in 2012, it will surely do it again, right? And no one in the White House really wants a global trade war, is it?

May be. But maybe not.

(The opinions expressed here are those of the author, columnist for Reuters)