2008 – After the mortgage loan crisis, here comes the corporate debt crisis


- Excerpt GEAB N°21 (January 16, 2008)



2008 – After the mortgage loan crisis, here comes the corporate debt crisis
If you were a subscriber to the GEAB, you would have read what follows as early as January 16, 2008

As we frequently remind it in the GEAB, the global systemic crisis seems to unfold like a spiral. Therefore it affects little for little the world’s entire economic, financial and political system, sweeping along new parts of the system each quarter (1). And it is now the time of company profits to be directly and suddenly affected by the ongoing recession (2), as they are caught in the crossfire between insolvent consumers and banks in a state of shock. The effect will be particularly powerful in the US and the UK which are today at the hub of the process, but also in China where the degree of fragility of companies has no equivalent but the frantic speculation on financial markets and the archaism of the banking system. In addition to the drop in corporate profits, or more likely the rapid increase in the number of companies which will have to announce losses at the Spring 2008 already, these developments will test the resilience of another important segment of the global financial system (an estimated USD 45,000 billion in the first half of 2007 (3)) as it developed in the past few years, and that is the Credit Default Swaps (CDS.

Global Credit Derivatives Market – Source: British Bankers Association
Global Credit Derivatives Market – Source: British Bankers Association
These contracts are agreed between two parties about a third-party value. CDS fundamentally resemble an insurance policy contracted by one party to another to hedge against credit events. Theoretically this system is extremely safe given that there is a protection buyer for each protection seller. If one loses the other wins. But in fact, the system was never tested in the event of a major crisis where simultaneously the mortgage moan market tumbles, Wall Street sinks into an ocean of debts, the rest of the world no longer ventures on the US credit market and a severe recession settles in the US!

Rating of Credit Default Swaps – Source: British Bankers Association
Rating of Credit Default Swaps – Source: British Bankers Association
According to our research, such a situation would provide all the elements for the CDS market to collapse before the summer 2008. On this aspect, a close examination of the CDS distribution (table above) highlights the resemblance with the distribution of mortgage loans two years ago (with an increase in the number of subprime loans, in this case the « Below Bs »). This time, the “Below Bs” will play the part of the « subprimes » and the scenario will follow the classical development: progressively more and more operators on the CDS market will stop being able to honour their contingent payments due to losses suffered in the other sectors in crisis or because they face too many simultaneous losses on the CDO market. Then this entire mega financial market will follow the fate of the US mortgage loan market, with much more severe global implications as this time we are talking about a real global market.

According to LEAP/E2020, this could be the next tipping point in the global systemic crisis, one likely to bring down the world’s entire financial system. There is only 6 months left at most for global leaders to limit the damage.



Which is the real bubble? – Source: StockMarketJungle (in green, housing prices in the US; in black, Nikkei; in red, Nasdaq; in blue, notional amount of CDS)
Which is the real bubble? – Source: StockMarketJungle (in green, housing prices in the US; in black, Nikkei; in red, Nasdaq; in blue, notional amount of CDS)
As evidenced by the above table, the magnitude of the CDS bubble burst will not compare to anything ever experienced in the financial world

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Notes:

(1) After acknowledging a few dozens of billions of USD at the end of the summer 2007, then a few hundreds of billions of USD in the middle of the autumn, banks now propound the figure of 1,000 billion USD (source: The Australian, 12/27/2007) knowing that some of them, like UBS, admit that they have no idea what their final losses in relation to this crisis will be (source: The Times, 01/12/2008).

(2) These days, in the US, poor corporate performance announcements followed one another, thus proving that a recession has been here for some time already. Now let’s take a few eloquent examples providing a clear indication about the economy’s general trends: American Express announces a USD 440 million provision in the fourth quarter because it appears that their clients find it more and more difficult to make purchases and to pay their bills; FedEx announces poor performances due to a general slowdown in the US economy ; AT&T explains that they must face a significant slowdown in their broadband and traditional wire phone sales resulting from increasing service disconnections due to non-payment by their clients.

(3) Source: International Swaps and Derivatives Association

Jeudi 27 Novembre 2008

GEAB N°61 - Contents

- Published on January 16, 2012 -

Global systemic crisis - 2012: The year of the world’s great geopolitical swing
This GEAB issue makes it six years that the LEAP/ E2020 team have shared their anticipations with their subscribers and readers of their public briefing on the development of the global systemic crisis each month. And, for the first time, in the January issue which presents a summary of our anticipations for the year to come, our team anticipates a year which will not result solely in a worsening of the world crisis but which will also be characterized by the emergence of the first constructive elements of the “world after the crisis”… (page 2)
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USA 2012: on the way towards the tragedy of QE3
Today, US financial policy is confronted by the sovereign debt crisis of which it will be the ultimate victim in 2012. As LEAP/E2020 anticipated, the 2011 European debt detonator has truly ignited the 2012 American sovereign debt bomb, even if the media coverage desperately tries to make us believe the opposite. The massive sale of US Treasury Bills by the planet’s major central banks in the second half-year 2011 perfectly illustrates this situation incidentally… (page 7)
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ANTICIPATIONS 2012 - ‘20-UP AND 15-DOWN’, THIRTY FIVE KEY TRENDS FOR 2012
Up or Down? The United States' political paralysis; The City and Wall Street ; The rise in interest rates; The forfeiting of value to Wall Street and the City; The value of Chinese reserves; The Pound Sterling (and Gilts); Euroland as new European sovereign; The USA-China “little cold war”; Italy; The importance of the US Dollar in world trade transactions; Rating agencies; The “great European public borrowing” (GEPB); MerkHollMont; Ron Paul; The number, size and influence of Western banks; The continuation of gold’s return in the international monetary system; Recessflation; Sarkozy, Cameron, Netanyahu and Medvedev; The BRICS maturing as a pro-active world player; Turkey’s exit from the Western camp; The Tobin Eurotax; Secular and pro-Western forces in the Muslim world; Growth; The usefulness of the G20; Lawsuits against those managing banks and hedge funds; The splitting of the world monetary system into three zones: Dollar, Euro, Yuan; The widespread downgrade of Western public debt; Peoples' anger; The Euro crisis; The EU as the principal incarnation of Europe; QE3 as the ultimate weapon for saving the US economy; The US’ capacity for military intervention; The West as a community of relevance and values; Scottish independence; Le détroit d'Ormuz et un nouveau contexte de crise au Moyen-Orient ; L'indépendance de l'Ecosse; The Straits of Hormuz and a new context of the Middle East crisis (page 19) (page 19)
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The GlobalEurometre - Results & Analyses
We are seeing a strengthening in the majority considering that common European solutions to the crisis are more effective than national ones (80% in January versus 77% in December)… (page 33)
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