Global Finance 'As Vulnerable' as in 2008: Ex-ECB Chief
WASHINGTON, D.C. – September 4, 2018
We continue to speak about economy and first of all about the financial markets. By estimates of Europe's top central banker, too much debt has made the world's financial system as vulnerable as it was 10 years ago, during the 2008 global meltdown.
According to Jean-Claude Trichet, who ran the European Central Bank between 2003 and 2011 "There is now agreement that the excessive debt level in advanced economies was a key factor in the triggering of the global financial crisis in 2007 and 2008."
"The growth in debt, especially private debt, in advanced countries has slowed, but this slowdown has been offset by an acceleration of emerging country debt," said Trichet, a Frenchman who ran his country's central bank, the Banque de France, before taking the helm at the ECB.
"This makes the entire global financial system at least as vulnerable as it was in 2008, if not more so."
Trichet was only the second president at the ECB, which was barely a decade old when US bank Lehman Brothers collapsed in September 2008, a date widely seen as the trigger of the global crisis.
But Trichet said the bank had detected big trouble much earlier.
"I witnessed the real start of the financial crisis that was about to sweep the world in the morning of August 9, 2007, when we were confronted with a complete interruption of the eurozone money market," he noted.
After claiming its first bankruptcies in the US in the summer of 2007, the budding crisis quickly made world stock exchanges wobble too.
The contagion reached Europe when German bank IKB issued a profit warning, prompting the German government to extend it a lifeline of more than three billion euros ($3.5 billion).
Then, on August 9, French banking giant BNP Paribas froze three of its US funds specialising in securitised mortgages whose value plunged by 400 million euros within a few days.
Panic gripped financial institutions, causing the money market, where banks lend each other short-term liquidity, to suddenly dry up.
Central banks are generally tasked with lowering or raising interest rates to achieve price stability.
But when access to credit dried up after the Lehman collapse, they had to think outside the box.
First, they slashed interest rates to record-low and even negative levels.
Next, they flooded the financial system with cash.
They offered cheap loans to banks and began massively buying up government and corporate bonds in a stimulus scheme known as "quantitative easing" (QE), hoping to encourage lending and stimulate spending.
In the end around 50 eurozone banks came looking for a total of 95 billion euros in liquidity -- a sum exceeded in recent history only by the nearly 110 billion the ECB injected after the 9/11 attacks in the United States in 2001.
Trichet was in his French summer house that day, far from the Frankfurt-based ECB, and "in constant electronic contact with the ECB and the council members. After two and a half hours we decided to give the banks the 95 billion".
The move was a watershed because "it showed that the ECB was able to take extremely bold decisions very quickly".
By the time Lehman started to crumble, Trichet said he and his central banker colleagues, including Fed chief Ben Bernanke, "were very much aware that we were looking at a completely systemic major global crisis".
"We said that the Lehman's bankruptcy would have catastrophic consequences, but I realised that the US government was not going to save Lehman if the private sector failed to find a solution," he said.
"It was my understanding that the American government at the time did not have the political leeway to intervene with public money. So I got ready for the catastrophe," Trichet said.
That time the fire in the financial markets was extinguished by issue money. Now this process will have to be unwrapped, especially against the background of the intentions of FRS to raise a key interest rate. Any shock can lead to implementation of the adverse scenario. The trade war which is seriously menacing to the global "open multilateral trade system" is one of such shocks. There is very few spots for a political manoeuvre than before the crisis: interest rates are much lower now, but the balances are much worse. Though after crisis the central banks have tested nonconventional tools in practice, their side effects set restrictions for how widely these tools can be used.
It is a very sobering picture.