What we have seen so far, fuelled by the US mortgage situation and the underlying greed of the US Investment banks (plus Swiss and UK Investment Banks’), is not the full measure of events. It is merely Act One.
The US and UK banks were part of the first wave of problems which have been well and truly felt in the US and the UK and to some extent in Europe and elsewhere because of course, all the markets are linked and the banks all trade with one another and pass their trading books from time zone to time zone in the course of a trading day; no one is exempt from the ravages sparked in the US investment banks by the sub-prime mortgage crisis.
The next wave will reflect the realities of a shrinking global economy. As the downturn bites, it in turn impacts on slowly weakening and deteriorating industries and economies. As demand flattens and declines and as the rate of decline accelerates into a more rapid decent into…… a deeper and longer, sustained recession which may even be in future characterised as a “depression”.
We are now seeing that many of the US banks in particular are quite heavily provided for, in terms of allocating funds for their non-performing loan portfolio caused primarily by the sub-prime mortgage situation. NOW, in the second wave we will see the better credit exposures held by the US banks start to fall as these companies, businesses and industries start to suffer as a result of a collective slowdown of the economy and of course everything is “linked” inexorably together. In the European market, many of the banks have not been forced (yet) to adequately provision themselves for their growing non-performing loans and some of them are sharply under-provided. This will have to be corrected in the short term AND, there must be a continuing recapitalisation in the EU banks as this deterioration evidences itself more and more and it must be an ongoing provision and recap demand. The lack of investment from the equity markets will reflect a lack of appetite (observe what happened in earlier recap’s in the UK which just went down the deep, dark hole). This leaves the only other resource for fresh capital; Government!
The German banks, French, Spanish, Dutch, Belgian etc. must all brace for another heavy round of ‘cap in hand’ to their respective Treasuries for a replenishment of their “written-off” capital. The refill will very likely come with strict terms and conditions and the banks’ will not welcome the fresh capital with alacrity. This second wave is less fuelled by the sub-prime mortgage situation than the continuing deterioration of previously thought to be, the better quality credits extended by the banks’. The economic downturn and recession will increasingly cause the better loans to become marginal, and then fail. It soon will become a self fulfilling prophecy that the economic slide worsens as the curve turns sharply down and the economy falls in on itself. The extent and severity of the economic morass yet to be experienced knows no bounds.
What this may mean and lead to is some degree of “civil unrest”. As the world economies turn down, unemployment becomes a more prominent feature of recession and with millions of people unemployed in Germany, France, UK, USA, Japan and possibly China, there will be some degree of dissatisfaction from the masses who will look to their economic leaders, their government leaders and administrators for answers and solutions to this growing problem. Do NOT be surprised when you see mass marches of people in the streets in Germany, France and the UK as massive and growing numbers of unemployed with no serious prospects of employment and dwindling economic resources from the goverment to make dole payments to support the growing numbers of those who “need”. The only solution may be for Governments to employ the people to work on infrastructure projects; roads, bridges, railways etc as was done in the 1930’s as part of a program to resolve the economic situation at that time.
