Economics News Of The Week – Major economic events: Banking crisis engulfs global markets; The Silicon Valley Bank Collapse – What Happened and What It Means; and so on.
The risk of a global banking crisis has increased after the collapse of the share price of the Swiss bank Credit Suisse and the collapse of the US lender Silicon Valley Bank.
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Credit Suisse’s share price fell 24% on March 15 after its biggest investor said it could not provide the bank with more money. The bank suffered billions of dollars in losses related to the collapse of the investment fund Archegos and Greensill Capital.
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Stock markets subsequently tumbled around the world, with banking stocks seeing particularly large declines. The stress on bank stocks also sent yields on US Treasuries and Eurozone bonds lower, while gold prices rallied recently as investors sought safe havens.
Since then, the Swiss central bank has spent $54 billion at Credit Suisse to boost liquidity and boost investor confidence, making it the first major global bank to go into emergency mode since the 2008 financial crisis.
But the sell-off in Credit Suisse’s shares has raised questions about potential problems in the wider banking system. Major US banks poured $30 billion into First Republic Bank on March 16 in a bid to rescue the lender after its share price fell 70% this month.
The broader decline in banking sector shares came a day after ratings agency Moody’s Investors Service cut its outlook for the entire banking system from stable to negative due to the failure of Silicon Valley Bank and another mid-sized US lender, Signature Bank (see more below).
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Goldman Sachs cut its forecast for US GDP growth in the fourth quarter as small banks withdraw loans to maintain liquidity in the face of a potential banking crisis.
California-based Silicon Valley Bank (SVB) was shut down by state banking regulators on March 10 after a rapid decline in deposits. SVB has served many start-ups and described itself as a “bank of the innovation economy”.
The bank counted about half of the US venture capital-backed technology and healthcare companies among its clients, and its deposit flow began as those clients sought to raise cash elsewhere. The tech downturn has led to a significant slowdown in startup funding from venture capitalists.
SVB has launched a $1.75 billion stock sale to shore up its balance sheet, but investors in its stock have worried whether the capital raising will be enough at a time when many tech startups are in dire straits.
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The bank’s stock price subsequently fell 60%, wiping more than $80 billion off its stock. Some startups have started withdrawing their money from the bank as a precaution.
Reuters said SVB’s collapse signaled the end of the “easy cash era,” with high interest rates reducing investors’ willingness to invest in early-stage or speculative businesses.
Corporate defaults continue to rise amid a tightening monetary environment, with S&P Global saying Europe had the second highest default rate since 2009 last year. It expects US and European default rates to reach 3.75% and 3.25% respectively in September, versus 1.6. % and 1.4% a year ago, with pessimistic forecasts of 6.0% and 5.5% “impossible”.
People in Britain are facing the biggest fall in spending in 70 years, says the government’s independent forecaster, the Office for Budget Responsibility (OBR). It comes after the government announced a new budget and said the country would avoid recession this year. But Britain faces low growth and high debt, and the OBR says Brexit has hit business investment.
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The European Central Bank continued its fight against inflation and raised interest rates by 50 basis points, defying calls from some investors to hold off on policy tightening until tensions in the banking sector eased. Its deposit rate is now 3%, the highest level since late 2008.
Top Japanese companies this week agreed to their biggest wage hikes in a quarter of a century at annual labor talks, heeding Prime Minister Fumio Kishida’s call for higher wages to offset rising living costs. The decision could have a big impact on the start of consumer demand and how quickly the Bank of Japan ends its ultra-low interest rate regime.
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The US Consumer Price Index rose 6% in the year to February – its slowest annual gain since September 2021 and the eighth straight month of annual declines. But inflation remains high, and economists are divided on whether the data will prompt the Federal Reserve to raise interest rates next week.
Argentina’s annual inflation rate exceeded 100% in February, the first time since a period of hyperinflation in 1991 that it tripled. Inflation hit 102.5% last month, with consumers seeing price changes almost every week.
Turkey’s budget deficit reached TRY 170.56 billion ($9 billion) in February as the government implemented measures to minimize the economic impact of last month’s earthquake. Economists say the government’s spending on recovery and relief efforts could push the deficit to 5% of GDP this year, against the 3.5% target the government set in September.
EU finance ministers agreed on broad principles for reforming Europe’s fiscal rules to better accommodate investment and give highly indebted countries more flexibility to reduce debt. Regulations have faced challenges as public debt has risen due to government support during the pandemic and cost-of-living crisis. Efforts to stop climate change will also require enormous public investment.
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Lebanon’s commercial banks resumed open strikes on March 14. The move is due to legal changes that allow borrowers to repay foreign currency loans at the old official exchange rates – due to a 98% drop in the value of the Lebanese pound. Banks say this has depleted their foreign exchange reserves and they do not have enough liquidity to repay depositors.
This week, the explosion in talk of the banking crisis has also led to an explosion in the use of financial jargon. Spencer Feingold, digital editor of the World Economic Forum, explains five key financial terms.
Central banks are likely to revise their interest rate plans because of higher core inflation numbers – a measure that strips out volatile items such as food and energy – to give a clearer picture of price behavior in the economy.
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