2008 was a shock due to excessive household debt in the US, and excessive risk taking by under capitalised shadow banks (broker dealers like Lehman which werent deposit taking institution but pure investment banks)
The bigger issue was interconnected ness of the financial system
The bigger issue was interconnected ness of the financial system
Banks, Mortgage Finance Companies (Ginnie Mae, Fannie Mae, Freddy Mac) in the US along with insurers were too big to fail #TBTF and when the credit markets froze the whole world got a shock ...
Since then a lot of rules have changed and many countries have reacted differently
Since then a lot of rules have changed and many countries have reacted differently
US Banks got rules like Dodd Frank and Volcker rule - which pushed out proprietary trading from banks to Hedge Funds. A lot of tail risks resides on the buyside - in Hedge Funds and Asset Managers.
A big issue was trillions of dollars of bilateral derivatives trades between banks - like an interconnected spiders web.
Mandatory clearing (through CME, LCH, ICE or other clearing houses) and better margining has lead to less counterparty risk.
Banks also are better capitalised
Mandatory clearing (through CME, LCH, ICE or other clearing houses) and better margining has lead to less counterparty risk.
Banks also are better capitalised
Problem though now is rising corporate debt globally.
A decade of easy money has seen a lot of US corporates issuing debt to buyback shares, which has left the firm a lot more leveraged, though boosted CEO income through stock options being worth more.
A decade of easy money has seen a lot of US corporates issuing debt to buyback shares, which has left the firm a lot more leveraged, though boosted CEO income through stock options being worth more.
In terms of countries - Germany in particular stands out has running a fiscal surplus and reducing Debt/GDP in the decade by a large amount.
Small City States like Singapore use debt only for investment, and have stronger balance sheets
Small City States like Singapore use debt only for investment, and have stronger balance sheets
China in the interim years - moved from being an exporter of goods, to investing in domestic infrastructure. It has built world class infra - though at an expensive cost of ballooning debt of the State Owned Enterprises.
India - has done a few good things, messed up a few things.
Good - stable central govt debt to gdp, higher FX reserves by RBI, established Bankruptcy code, reduced subsidy on fuel
Bad - rising entitlement spending of government pensions and salaries and MNREGA schemes
Good - stable central govt debt to gdp, higher FX reserves by RBI, established Bankruptcy code, reduced subsidy on fuel
Bad - rising entitlement spending of government pensions and salaries and MNREGA schemes
but India's off balance sheet liability is very messy
- Public Sector Banks have large NPAs
- NBFC sector grew too fast, and ILFS default, Yes bank bail-in
- Zombie PSU like MTNL, BSNL, Air India are drain on country for few entitled employees. Cheaper to shut them down?
- Public Sector Banks have large NPAs
- NBFC sector grew too fast, and ILFS default, Yes bank bail-in
- Zombie PSU like MTNL, BSNL, Air India are drain on country for few entitled employees. Cheaper to shut them down?
Anyways - coming to this crisis - the #covid19 is a classic #Blackswan - cant predict the end, but surely can see who has the ability and room to make an impact
This is another inflection point for geopolitics and society and behavioural patterns
This is another inflection point for geopolitics and society and behavioural patterns
- Governments and Central Banks will come together to mitigate impact of the virus
- Who has room to spend more?
- who has state capacity of executing difficult task of controlling the spread
- who invested in medical infra
- which society has trust and puts group above self
- Who has room to spend more?
- who has state capacity of executing difficult task of controlling the spread
- who invested in medical infra
- which society has trust and puts group above self
East Asian Confucian societies - put group above self. Good social cohesion - e.g. Japan, South Korea
Strong government and good state capacity - E.g. singapore (you could lose you employment visa by disobeying quarantine rules)
Fiscal room - Germany ...
Strong government and good state capacity - E.g. singapore (you could lose you employment visa by disobeying quarantine rules)
Fiscal room - Germany ...
India and US score low on group vs individual.
That would hurt the stoppage of spread of the virus.
We need group cohesion to come together and work together.
Both countries are deeply divided in ideological lines
That would hurt the stoppage of spread of the virus.
We need group cohesion to come together and work together.
Both countries are deeply divided in ideological lines
We shall see a lot of changes - once we recover back from this virus.
Lot of impacts will be on regulations, impacts globalisation, etc
Who comes out stronger?
The ones who built resilient systems in the good years in between.
Lot of impacts will be on regulations, impacts globalisation, etc
Who comes out stronger?
The ones who built resilient systems in the good years in between.
Lets wait and watch.
While I want India to do well (could be an alternative manufacturing destination to China - its not a done deal)
While I want India to do well (could be an alternative manufacturing destination to China - its not a done deal)
some countries I think particularly fragile
- Italy aging demographics, high level of debt (fiscal stimulus), many changing governments
- iran - oil shock, large cases out of control
- Italy aging demographics, high level of debt (fiscal stimulus), many changing governments
- iran - oil shock, large cases out of control
