Shortly after the main wave of the global financial crisis passed in mid 2009, the key word being thrown around was "confidence". The idea was that we needed to see a return of confidence in the market. That's because investors were shell-shocked. Billions of dollars had been wiped off the market and analysts were still trying to get their heads around what had happened. We'd been caught napping. We had ignored the signs of impending financial distress and had chosen instead to believe the economic story (of endlessly rising asset prices). This time is significantly different because we are all too aware of what's dragging us down. The trouble is, agreeing on a solution is causing the majority of the on-going financial turmoil.
It comes down to partisan politics. Members of parliament are accountable to their constituents, and they don't want to upset them! They also simply have different political ideologies and different ways of approaching the same problem. Either way, it's meant that significant financial problems have gone unsolved.
The result has been to ask the question, what financial institutions are exposed to these governments that seem unable to pay their bills? Or what institutions are vulnerable to financial contagion? It's seen extra-ordinary volatility on share and bond markets. Last Thursday night it also saw, perhaps for the first time, US banking officials express some concern about the degree of exposure their, and other foreign banks, have to Europe.
That concided with a move by the Swiss National Bank to ask the US Federal Reserve for a $200 million swap arrangement (to help devalue their currency). They essentially used those US dollars to buy their own bonds (to reduce their interest rates) and hence devalue the Swiss Franc. Investors were unimpressed that one of the world's stongest economies was looking to the Fed for help. Like us though, the Swiss are getting tired of forex traders buying up their currency (considered to be a 'safe haven').
We need confidence to return to markets. That will occur when markets believe that the engine rooms of world growth are on a sustainable path of growth again. That will occur when governments around the world get their fiscal houses in order and learn to sell the idea that some medium term consumer financial pain is necessary for overall longer term gain.
Until that time, volatility and uncertainty are likely to remain. There is, however, a better future, at some point, to look forward to.
David Taylor
