The next financial crisis keeps looming
No doubt: Globalisation offers many new opportunities such as new emerging markets as well as fresh competition. Get i right and we all could be winners and prosper. Get it wrong and the global financial crisis of 2008 threatens to be the first of many to approach.
Both nationalism and inaction pose serious threats to jobs, growth, climate change, social justice and global poverty reduction. At its most fundamental level, this crisis was caused by the rapid growth of the so-called shadow banking system over the past few decades and its remarkable collapse over the past two years
We also need to make sure that financial firms are not too big or too interconnected to fail. All financial transactions should either pass through organized exchanges, or be subject to some sort of strict reporting requirements to regulators.We were told the world economy was back on track, but festering problems threaten to hit developing countries hard food prices.
So currency wars have already started, but in a subtle, shadow-boxing way. Speculation driven rises in oil and food prices will be transmitted through the developing world causing the poor to be battered by oil and food prices.
This is the next financial crisis. Unlike the last one, it’s not going to blow up all at once. It will be slow torture.
The bubble will appear in developing markets
According to some creative analysts at the management consulting firm Oliver Wyman, that date is April 26, 2015. The next time, the authors say, the fat-cat financiers will be in Singapore or Hong Kong, chased away from New York and London by stricter reserve requirements and emboldened regulators. The bubble will appear in developing markets, with easy developed-world money and the promise of ever-spiraling commodity prices funding unnecessary building and silly investments. So there you have it—again: a big pool of money chasing market-beating returns and ultimately inflating asset-price bubbles that burst with awful consequences, from bank failures to sovereign-debt crises.
All of these narratives of the next big crisis share one very scary assumption: that whatever the United States and its European peers do to try to prevent the next crisis might not be enough. Some wise men suggested strong leverage caps, or size or activity restrictions to stop financial companies from getting too risky. Others suggested just taxing the whole sector. High interest rates will first increase profitability, then kill it. High interest rates, however, have a substantial downside. At some point, the interest rates become too high for many banking customers to pay. And when that happens, default rates start to rise and the banks’ earnings start to plummet as they set aside more and more of their revenues to cover the losses from loans gone bad.
Maybe it's something to do with its being summer time, with much of the world's top brass away, but it's becoming a month notorious for market turmoil. Four years ago last week the jaws of the credit crunch snapped shut. The start was marked by investment bank BNP Paribas closing two of its funds exposed to the US sub-prime crisis on 9 August 2007. Within just a few weeks, the queues of worried customers were forming outside the Northern Rock.
Four years on, and numerous bailouts later, the world economy seems once again to be standing on the precipice, with stock markets around the world losing billions of dollars in one of the bloodiest meltdowns since the 2008 crash. Share prices fell in Brazil, Tokyo, New York, London, Mexico and across Europe.
More than 10 per cent was wiped off the FTSE 100 index in London – equivalent to £270 bn – on the week and £144bn was lost on Friday alone. It closed 600 points down on the week to 5240, about the same level as it started the year. In New York the Dow Jones plunged by 5.3 per cent on the week.
Europe playing with fire
There are no magic wands. Time may heal wounds, but certainly does not extinguish fires. Without debt restructuring and financial regulation, the collapse of Europe is just around the corner and will quash the uneven and incipient global economy recovery. Europe is not playing with time, it is playing with fire..
We've been saying for years that we believe the period of 2016-2018 is the start of an overwhelming financial crisis, possibly much worse than the 2000/2001 stock market collapse, and the 2008/2009 credit crisis. 2016 appears to be the peak of the financial markets and economic escalation, with the giant reverse beginning as early as 2016 and as late as 2018, but more likely as late as 2017.
Although many financial experts are now saying the Greek Tragedy has been averted with a financial rescue plan by the International Monetary Fund and the European Union, Simon Black, Senior Editor of the website SovereignMan, says, "...anyone with two brain cells to rub together recognizes that Europe's economic woes cannot be contained with more paper money... and now the problem just became $1 trillion worse. Battling back from an economic crisis requires hard work, savings, and minimal disruption from the government. There's no magic pill, entitlement program, or paper money bomb that will suddenly make things better. Instead, governments should be curtailing social benefits that encourage people to be lazy, while simultaneously stripping taxes to the bare bones in order to give entrepreneurs and investors the proper motivation to work hard, take risks, and hire employees."
Even though the European debt crisis may appear to be under control by the end of 2010, it's to be expected that Europe, including Greece, America, and Japan are heading for a financial brick wall with government spending and regulations out of control and funny-money solutions. The causes of previous financial crises mirror how politicians are handling the problems now, which will only serve to create the next crisis.
Can small business avoid a credit crunch?
The perennial issue of small firm financing is once again to the fore as small and medium sized firms (SMEs) are experiencing a challenging financing environment in the aftermath of the global economic and financial crisis. A combination of factors has contributed to a credit crunch for small firms. Businesses struggling with negative effects of the recession are experiencing liquidity problems because of increased bad debts and slower payments by debtors.
The provision of credit to SMEs by the banking sector worldwide has decreased due to a number of reasons. Firstly, demand for loans by small firms has fallen as business activity has dropped, and firms seek to deleverage. Secondly, bank lending to the sector has declined because of the poorer financial condition of firms during the economic downturn. Thirdly, restricted liquidity in the interbank markets means that financial institutions must curtail their lending to the sector. Banks seek to accumulate capital reserves rather than advance them to SMEs. Additionally, banks seek to protect their limited capital reserves by investing in securities perceived as less risky, including sovereign and corporate paper.
Firms should become less dependent on bank financing, an issue stressed by Uriel Lynn at the ISBE conference in November. This can be achieved by retaining greater reserves within the firm, and by seeking sources of external private equity rather than debt finance.
Although not all equity investors may be interested in some sections of the SME sector, other equity providers, such as business angels, may willingly provide funding. Small firm owners should be encouraged to seek out investment from the plethora of Business Angel networks In a recent study, firm owners stated that the greatest constraint to growth and development is a lack of adequate financial management skills. Finally, it is imperative that banks significantly alter their lending practices. For many years, debt finance has been advanced on provision of collateral. New lending models need to be based on profitability and projected cash flow, rather than on property and personal guarantees.
Indeed, normally the main cause of disagreement between a bank and a customer when an application is rejected is because the bank cannot see sufficient source of income to fund repayments. It is rarely the lack of collateral (that may come later when we begin to consider price).
The only aspect of this article that I would specifically wish to draw attention to is the alternatives to raising finance beyond the banks and Angel investor networks that can allow small businesses to avoid a credit crunch. And to return to my earlier reference to the rise of social media – such technologies have also created a range of new financing programmes, including “Funding Circle”
It may be difficult to avoid increases in the costs of financing, now is a good time for small business owners and managers to hone their skills in financial management and identify new opportunities in both financing and business development.