Hidden threats to stability
Among the distorting impacts of the pandemic is how it has impacted on treatment of other medical conditions. So much energy is expended on coronavirus that other maladies fight for time, recognition and treatment.
It is a bit like that for the global economy. So much of the effort of policymakers is expended on the monetary and fiscal responses to Covid-19 that all else fades into the distance.
The omicron variant has rapidly changed the interest rate outlook even though cost of living increases and monetary laxity, which demand a central bank response, have not faded. Expectations of early increases in interest rates have been pushed into the future on both sides of the Atlantic, in spite of robust labour markets.
Traders are right to focus on the weaknesses in the financial system in the Covid years. There has been a 20pc correction for bitcoin in recent dealings. most special purpose acquisition companies (Spacs) are underwater. The value of junk bonds has sunk and the 50pc slump in airline stocks from preCovid levels are signs of twitchy confidence.
In its latest quarterly report, the Baslebased Bank for International Settlements blows away the myth that somehow decentralised financial ledgers, used heavily in the crypto-currency world, are a breakthrough for transparency and a stabilising force.
Decentralised Finance, otherwise known as DeFi or blockchain, reminds me of Alan greenspan’s analysis in a 2005 speech made in London. He argued that holdings of derivatives (of which sub-prime mortgages became a subset) by banks across the globe meant that risk was better spread. If the market blew up, as it did just two years later, then finance would be better protected.
The reality was that the parcels of derivatives were like cluster bombs which detonated across the world bringing down Bear Stearns, Lehman, northern Rock, RBS and much of the rest of global banking.
The same could said for DeFi. This new space occupied by fintech banks, cryptocurrency producers, traders and exchanges lacks the capital and other shock absorbers put in place post the financial crisis. It is an untrammelled space run by artificial intelligence and with very little in the way of human intervention or central authority.
Without some form of governance, the risks are considerable. It is reckoned that some $247bn has disappeared down the DeFi rabbit hole.
Another under-recognised fissure in global finance is credit exposures in China. The debt problems of Chinese property conglomerate Evergrande are still unresolved. The firm has acknowledged it is struggling to meet repayments, forcing the shares down 19.6pc in latest trading.
Its difficulties are cascading down through Beijing’s real estate sector, raising questions about the stability of lenders.
Initially, China seemed to take the view that there would be no concept of ‘too big to fail’. But a decision by the People’s Bank to cut the reserve requirement of banks, in an attempt to ease the logjam, is recognition all is far from well. Under the cover of Covid, the tectonic plates are moving.
Risk taker
DERIvATIvES and clearing are of immense importance to the London Stock Exchange group (LSEg) and the post-Brexit City. The EU ambition to steal London’s thunder may have been derailed but Wall Street continues to nip at the heels of the Square mile.
As it seeks to remain on top, the LSEg, owner of the London Clearing House, needs the best technology. The purchase for £274m of Quantile, which provides advanced risk management systems to hedge funds and banks, should support that quest to remain dominant. The deal, which will greatly enrich Stephen o’Connor who co-founded Quantile in 2015, looks incestuous.
o’Connor is a former boss of the derivatives trade association and until August of this year was also an independent director of LSEg. How cosy.
Testing times
STEFAno Pessina once dreamed of ruling the broken world of wholesale and retail pharmacy in Europe, the US and even China (see Page 66).
Boots and its coveted no 7 beauty brands would help to spearhead the assault. It hasn’t quite worked like that for the spry Italian octogenarian. European drug distribution has been sold off and Boots looks to be next. Paying down debt and upgrading owner Walgreens is a priority. not before time, given reports received of rotten service at the hands of Walgreens staff and testing labs in the pandemic.