Are Financial Crises Inevitable?
By François Masquelier, Head of Corporate Finance and Treasury, RTL Group, and Honorary Chairman of the European Association of Corporate Treasurers
Ten years already. In the summer of 2017, we marked the sorry tenth anniversary of the last great financial crisis. We may well ask ourselves what form the next one will take and most of all when it will happen (if it happens). We might also ask whether we have learned from our mistakes and from these crises. That is by no means certain. Finally, where might the next crisis come from, in a specific environment, such as the current one? These are the questions I would like to tackle, although with no confidence that my words will give any reassurance.
"What remains of our love?” in the words of the Charles Trénet song
What does a crisis leave behind and what do we learn from a crisis? We always learn something, of course. Do we come out of a severe financial crisis bigger and stronger? Probably. However, the learning process seems to take longer than common sense would suggest. We have a short memory for adverse events. People and finance companies are too quick to forget. We certainly try to do better without always achieving the success we might reasonably expect. The causes of crises and the crises themselves come and go like fashions, in a sort of never-ending dance with minor variations. It is as if there were a cycle of crises, doomed to repeat one after the other.
The real question is how to prevent them rather than how to deal with them once they have happened. Trying to achieve too much is always self-defeating, and when it comes to crises, trying to achieve too much can often be the cause of the crisis itself and of its scale. The domino or knock-on effect and the effect of correlation mean that today everything is intimately linked together and that sooner or later a crisis will end by impacting a whole series of things in a chain reaction. This is the collateral damage. The good news is that the budgetary virtue shown by the EU since 2007 has, to some extent, benefited us all. In terms of regulation, it should also be noted that behaviour has been whiter than white at the European level. The state is once again trying to play a key role in oiling the cogs of the capitalist system, but also acting as watchdog and guardian of the temple.
Outlook for the financial system
Although we may reasonably think that the financial system is more resilient than it was before the last crisis, the fact remains that the firefighters are still on hand to fight the fire, in case it should reignite. We would do well to remember the words of Janet Yellen who, in substance, said: "I hope – and I think – that there will be no further (major) financial crises in our lifetimes" (during a speech to the British Academy). She thinks that a crisis of such a scale, greater than that of 1929, is no longer possible in her lifetime. Let us hope she lives for a very long time, but I would not like to be the judge of her views. But we must hope that governments and supervisors have learnt from their mistakes. We cannot readily imagine the sudden onset of another crisis.
However, we need to remain vigilant. The question to ask is whether there is any risk of implosion. There is, in fact, a speculative bubble on the bond market (rather than on the equities market, even though it is very expensive). Long-term interest rates are too low. A sudden resurgence, when that happens, could have significant effects. An explosion will then no longer be beyond the bounds of possibility. The interest burden of companies will surge spectacularly. What is more, the Bank for International Settlements (BIS) has warned of the ‘debt trap’ risk. Businesses in the US have not de-leveraged since 2008. There are many ‘zombie’ companies whose interest expense exceeds profit before financial charges and taxes. No one disputes that stock prices and PEs are very high. The ratio of prices to earnings stands at over 30, according to the American Nobel Laureate economist Robert Shiller, a figure which was higher only before 1929 and before the dot-com bubble burst in 2000.
There are therefore very good reasons for being worried. China is another risk. A landing of one sort or another is on the cards, and there is nothing to say it will be a soft landing. China is thought to be vulnerable while at the same time being capable of affecting the rest of the world. There is a great and worrying over-dependence on the country. Then there is ‘shadow banking’, with little or no regulation, which includes hedge funds, private equity funds, investment funds, crowdfunding and others.
The 2007 crisis started with liquidity problems in three money market funds. Today, the finger is being pointed at the extraordinary expansion of ETFs (Exchange Traded Funds), tracker funds that are quoted and traded all day long in real time. Many are used for speculative purposes, which is a source of huge risk. The next risk in line is what is known as ‘sub-prime’ automobile loans – these Americans are certainly incorrigible. We are talking about a figure of around USD 1,200bn, which is 50% higher than in 2007. These loans have obviously been securitised and resold to lenders. They are under surveillance. However, nobody wants to see a second sub-prime crisis, but who knows…