The Global Double Dip and the French Bank Run

I am not in the right frame of mind here to give this topic the well-developed attention it requires, but, with things unravelling in global stock markets, I feel that I have to take it on.

At some point soon, maybe tomorrow, I will be writing an update to two posts: The Fake Recovery and The recession is over but the depression has just begun. The gist of those two posts is still operative and also very relevant, namely that the problems which created a global panic in 2008 are still with us waiting for economic weakness to reassert themselves. When that weakness comes, bad things will happen. I think that about sums it up. We are about at that point right now.

As for this post, I’ll bullet it out to be more brief and I’ll try to tamp down undue alarmism. I just had a meeting with former US President Bill Clinton. He was explaining to us why inspiring, connecting, and empowering global leaders to forge solutions on problems that are most pressing in developing countries is still relevant during these trying times. I will write this up for a future post. But his comments there reminded me about the negative impact I could have in amplifying crisis by hyping pessimistic outcomes unnecessarily. So I’ll try to keep it real but not alarmist. Tell me how I do at the end.

  • The global economy hit stall speed earlier this year as Europe and the US became susceptible to a double dip at the same time.
  • Double dip will likely lead to such severe turbulence politically and economically that cohesion could rip apart in a way that creates depression instead of policy support and muddle through.
  • Until now, most people realised that fiscal support was lacking in both the US and Europe but they deluded themselves into believing monetary support would ride to the rescue. It will not.
  • The Fed statement yesterday, while initially billed as “the post-QE3 meeting statement” should now be seen as “the Fed reloads to find it’s run out of ammo meeting statement.” I should stress as I did yesterday that “it’s not that monetary stimulus is completely ineffective. It’s that you must really jam it on and you would have to target price instead of quantity to get any measurable effect and even then the transmission channel is going to be weak.”
  • The Fed is not going to jam it on. “the Fed is already feeling political heat from its previous policy actions, so it will allow the economy to slip before it embarks on the next round of asset purchases. Therefore, if and when the next recession hits, debt deflation will take hold. The calls for stimulus will be deafening. And because the Fed will have resisted more aggressive prior action, the Fed will then be forced to be extremely aggressive in its policy response. That is when expanding the balance sheet will be a go and the Fed won’t just buy Treasuries, but a lot of other assets too.” [Roubini: No QE3 announcement at Jackson Hole but QE3 will happen]
  • In Europe, the problem on monetary policy is the same as with the Fed; they want the fiscal agent to take on a larger role. From an ECB perspective, that means liquidity to buy bonds requires an austerity and structural reform quid pro quo from the periphery, something which is deflationary and depressionary. Unless Germany, the Netherlands and others loosen fiscal policy in turn, a double dip recession was always inevitable. [Spain’s debt woes and Germany’s intransigence lead to double dip]
  • Recent data show an economy that could already be in recession. That was how the European data released today was perceived.
  • Combine this with the Fed statement, which was very downbeat on the US economy and people are now panicked about a double dip for the reasons I mentioned above.

My greatest concern is the French Banks SocGen, Agricole and BNP Paribas. A wholesale funding run on these three is like a run on JPMorgan Chase, Citigroup and Bank of America in the US or HSBC, RBS and LLoyds TSB in the UK. This is major. Look at my posts on Chinese shunning trade with French banks or The European Bank Run. The French must do something. Unfortunately, that means one needs to consider not just the sovereign, but quasi-sovereign debt that creates contingent liabilities which the sovereign could be reasonably expected to cover in the event of crisis. In France, we may well see this problem crystallized next due to the liquidity crisis affecting French banks. As I see it, these banks will need a commitment from the EU on liquidity. I believe we have that. But they also need a commitment from the sovereign on capital. Look for a statement by the beginning of next week.

And, yes, I still do have hope even now that policy makers will get it right and prevent worst-case scenarios. But, the number of different upside outcomes dwindles the longer this crisis has proceeded. I will leave it there for now. I don’t have a ton of trading ideas here. Right now, it’s a liquidity crisis, a panic, and it’s all on policy makers. Good luck in the markets.

  1. Anjon says

    Thanks so much Ed

    I’ve asked this question around but getting conflicting answers. I had heard that Trichet and the ECB have promised unlimited liquidity support to the Euro TBTFs

    2 questions:

    1. Is that true
    2. If so, doesn’t that immunize the French (and other EU) banks to a pure Lehman style disruptive liquidity run from the wholesale markets? Still have solvency (and therefore capital) issues, certainly, but that’s different

    Your thoughts on this appreciated

  2. Dave Holden says

    So no mention of the possibility of debt restructuring?

    1. Edward Harrison says

      I told you I wasn’t going to do this topic justice. But even so, I don’t see a restructuring as a new type of near-term event. It’s now about the banks and their capital. How things change!

  3. Jim says

    > So I’ll try to keep it real but not alarmist.

    Did just fine. :)

    Looking forward to your updated posts tomorrow.

    One question – do you see the dollar rocketing higher like it did in 2008?

    1. Edward Harrison says

      Yes, I do see the dollar gaining further on the euro on safe haven status. But I try to stay away from making currency calls because there are a lot of moving variables.

  4. David Lazarus says

    The problem is that the three French banks named make up the cast majority of the French banking system. So if these three might be insolvent then providing unlimited liquidity will only be an exercise in insolvency containment.

  5. Alan Harvey says

    The fiscal side is critical, I admit. But not doing the bank restructuring right, bailing out the banks and their creditors the first time around, and not learning in the intervening period was at least as enormous a failure as the creation of the crisis in the first place.

    That results from the corporate and financial sector’s control of the government. What a mess.

  6. Henri Myllyniemi says

    I was thinking about the rumours on Friday that the French government is making a move to recapitalise her banks. However, the head of the France’s central bank shot down these rumours.

    Another interesting view came from Pimco’s El-Erian who cast his doubts over ballooning EFSF.

    If both the pouring billions of euros into French banks and having a multi-trillion EFSF forms, how would France’s credit rating fare?

    Between the rock and a hard place?

    1. Alan Harvey says

      You should ask the Irish before you pour billions into banks. Some of them are publicly owned, I guess. But they were paid for taking risk, and they should be made to take the risk. I find it curious that after the U.S. poured trillions into its banks and continues to guarantee credit of every variety and provide back-door bailouts, the banks are back to their old ways and are not lending to the real economy — for whatever reason. The reason for doing it in the first place

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