Gloom grows as debts rise

The Jonathan Davis Column: Will current problems evolve into the most severe financial crisis since the last war?

READING THROUGH the pile of circulars and market commentary that accumulates weekly on my desk, one in particular caught my eye this week. It came from Stephen Lewis, a bond and economics commentator, whose experience of market-watching goes back well before the Seventies' crises, and whose analysis is always well-informed and perceptive.

A couple of years ago, I passed on his thoughts on what would happen to bond and equity prices in the event of a Labour Government taking office - advice that, in the event, proved well judged.

The phrase which leapt out at me from one of his recent reports was the comment that the turbulence we are now seeing in the world's financial markets represents "the worst financial crisis since the 1939-45 war". In an earlier note, he also warns us about the impact that the crisis could yet have on the prospects for European Monetary Union. For months now, the markets have accepted that monetary union will start on time, with as many as 10 or more members.

But this prospect, in Lewis's view, may be premature. There is a real prospect, he believes, that "the euro will be torn apart" by the fallout from the current financial crisis which is spreading from Asia, via Russia, into all of our lives.

And even if monetary union does still now go ahead, it is likely to be without at least some of the fringe members. Both Italy and Ireland, for example, are unlikely to make it to the starting post, in his view.

Now it is true that most bond market experts are prone to see the jar as half-empty rather than as half full, and Stephen is no exception (send for an equities' specialist if you want undiminished hope for the future). But nor could he, by any stretch of the imagination, be characterised as being a sensationalist.

When I talked to him this week, it turns out that he has been growing increasingly concerned about the way that the global markets have been developing for more than a year now.

His analysis goes along these lines. In Asia, the economic meltdown in Japan remains the heart of the problem. Put that right, and most of the contagion in the rest of Asia might well be containable.

The Japanese government's repeated attempts to stimulate the economy have so far failed to pull the economy out of its slump, vindicating Keynes' metaphor that using interest rates to try and kickstart a contracting economy is like "pushing on a string".

This week, the Bank of Japan cut its money market rates again from 0.5 per cent to 0.25 per cent, something it had earlier said was a step it would only take as a last resort to prevent the country's banking system imploding under the sheer weight of bad debts and valueless collateral.

In Russia, Lewis sees a danger that the debt defaults announced by the Russian government will now spread to Eastern Europe. This week, the government of the Ukraine threatened to default on its debts. If that becomes reality, the pattern may be followed by the Baltic States, many of which have large holdings of Russian government bonds.

With European banks, such as Barclays and CFSB, already having to own up to the heavy losses which they are nursing on their lending in Russia, no major lending country can now claim to be immune from the Russian crisis.

If the contagion were to spread any further, say to any of the three "star" Eastern European economies, Hungary, Poland and the Czech Republic, then some European banks may be facing significant problems.

So far, so conventional. What makes the current financial crisis potentially different from all previous post-war crises, in Lewis's view, is that for the first time there is no real, or at least visible, framework through which solutions to the crises in Asia and Russia can be worked through.

The IMF looks impotent and, more importantly, says Lewis, there are tensions between the United States and Europe which threaten to impede effective solutions to the crisis.

Whereas in the oil price crisis of the mid Seventies, the G7 group of leading industrialised countries managed to find common cause, they have so far shown themselves unable to take a united lead in finding a solution to the current problems - not least because of monetary union, which in Lewis' view is clearly intended as a challenge by Europe's leaders to the post-war "hegemony" of the dollar. All in all, concludes Lewis, the risks are both large - and growing.

Is he right to be so nervous? Well, the tide of events has still to run its full course. The trouble is that as crises such as this one unfold, it is all too easy for predictions to become self-fulfilling.

Against a background of spreading gloom, what can be said with confidence is that the risk of the present malaise developing into a severe economic crisis is growing by the week.

In the circumstances, Lewis thinks it is no surprise that there should have been such a "a flight to quality" in the world's financial markets, with a steady flow of funds into safe havens, such as US and UK government bonds. (Anyone with memories of the dark days of the Seventies will do a double take at the thought of gilts being seen as a safe haven, particularly when you consider that yields have already fallen to their lowest level since the Sixties, and we have a Labour government in power).

Nor is it surprising that the world's stock markets have also started to respond so sharply to the alarming messages now coming out of both East Asia and Russia.

As I observed last week, while the fundamentals are not yet deteriorating as quickly or as severely as some doomsters might expect, there is no doubt that sentiment is changing. If the bull market psychology is not already dead, it seems it soon will be.

In Stephen Lewis's view, the situation cries out for effective political leadership - but that is one of the few commodities which are not readily available at the moment.

It may seem somewhat tenuous to link President Clinton's domestic problems with the fate of the world's financial situation, but the weakening of his authority is not an insignificant factor in the gathering gloom.

Travel
travel
News
Tim Vine has won the funniest joke award at the Edinburgh Festival 2014
peopleTim Vine, winner of the Funniest Joke of the Fringe award, has nigh-on 200 in his act. So how are they conceived?
Sport
sportBesiktas 0 Arsenal 0: Champions League qualifying first-leg match ends in stalemate in Istanbul
News
Jamie and Emily Pharro discovering their friend's prank
video
PROMOTED VIDEO
Have you tried new the Independent Digital Edition apps?
Life and Style
ebooksA superb mix of recipes serving up the freshest of local produce in a delicious range of styles
Life and Style
ebooksFrom the lifespan of a slug to the distance to the Sun: answers to 500 questions from readers
Sport
Manchester United are believed to have made a £15m bid for Marcos Rojo
sportWinger Nani returns to Lisbon for a season-long loan as part of deal
News
news
News
i100
Arts and Entertainment
O'Toole as Cornelius Gallus in ‘Katherine of Alexandria’
filmSadly though, the Lawrence of Arabia star is not around to lend his own critique
Life and Style
fashion
Independent
Travel Shop
the manor
Up to 70% off luxury travel
on city breaks Find out more
santorini
Up to 70% off luxury travel
on chic beach resorts Find out more
sardina foodie
Up to 70% off luxury travel
on country retreats Find out more
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs General

    Junior DBA (SQL Server, T-SQL, SSIS, SSAS) London - Finance

    £30000 - £33000 per annum + Benefits + Bonus: Harrington Starr: Junior DBA (SQ...

    Business Anaylst

    £60000 - £75000 per annum + BONUS + BENEFITS: Harrington Starr: Business Anal...

    Senior Project Manager

    £60000 - £90000 per annum + Bonus: Harrington Starr: Global leading Energy Tra...

    Associate CXL Consultant

    £40000 - £60000 per annum + BONUS + BENEFITS: Harrington Starr: CXL, Triple Po...

    Day In a Page

    Ferguson: In the heartlands of America, a descent into madness

    A descent into madness in America's heartlands

    David Usborne arrived in Ferguson, Missouri to be greeted by a scene more redolent of Gaza and Afghanistan
    BBC’s filming of raid at Sir Cliff’s home ‘may be result of corruption’

    BBC faces corruption allegation over its Sir Cliff police raid coverage

    Reporter’s relationship with police under scrutiny as DG is summoned by MPs to explain extensive live broadcast of swoop on singer’s home
    Lauded therapist Harley Mille still in limbo as battle to stay in Britain drags on

    Lauded therapist still in limbo as battle to stay in Britain drags on

    Australian Harley Miller is as frustrated by court delays as she is with the idiosyncrasies of immigration law
    Lewis Fry Richardson's weather forecasts changed the world. But could his predictions of war do the same?

    Lewis Fry Richardson's weather forecasts changed the world...

    But could his predictions of war do the same?
    Kate Bush asks fans not to take photos at her London gigs: 'I want to have contact with the audience, not iPhones'

    'I want to have contact with the audience, not iPhones'

    Kate Bush asks fans not to take photos at her London gigs
    Under-35s have rated gardening in their top five favourite leisure activities, but why?

    Young at hort

    Under-35s have rated gardening in their top five favourite leisure activities. But why are so many people are swapping sweaty clubs for leafy shrubs?
    Tim Vine, winner of the Funniest Joke of the Fringe award: 'making a quip as funny as possible is an art'

    Beyond a joke

    Tim Vine, winner of the Funniest Joke of the Fringe award, has nigh-on 200 in his act. So how are they conceived?
    The late Peter O'Toole shines in 'Katherine of Alexandria' despite illness

    The late Peter O'Toole shines in 'Katherine of Alexandria' despite illness

    Sadly though, the Lawrence of Arabia star is not around to lend his own critique
    Wicken Fen in Cambridgeshire: The joy of camping in a wetland nature reserve and sleeping under the stars

    A wild night out

    Wicken Fen in Cambridgeshire offers a rare chance to camp in a wetland nature reserve
    Comic Sans for Cancer exhibition: It’s the font that’s openly ridiculed for its jaunty style, but figures of fun have their fans

    Comic Sans for Cancer exhibition

    It’s the font that’s openly ridiculed for its jaunty style, but figures of fun have their fans
    Besiktas vs Arsenal: Five things we learnt from the Champions League first-leg tie

    Besiktas vs Arsenal

    Five things we learnt from the Champions League first-leg tie
    Rory McIlroy a smash hit on the US talk show circuit

    Rory McIlroy a smash hit on the US talk show circuit

    As the Northern Irishman prepares for the Barclays, he finds time to appear on TV in the States, where he’s now such a global superstar that he needs no introduction
    Boy racer Max Verstappen stays relaxed over step up to Formula One

    Boy racer Max Verstappen stays relaxed over step up to F1

    The 16-year-old will become the sport’s youngest-ever driver when he makes his debut for Toro Rosso next season
    Fear brings the enemies of Isis together at last

    Fear brings the enemies of Isis together at last

    But belated attempts to unite will be to no avail if the Sunni caliphate remains strong in Syria, says Patrick Cockburn
    Charlie Gilmour: 'I wondered if I would end up killing myself in jail'

    Charlie Gilmour: 'I wondered if I'd end up killing myself in jail'

    Following last week's report on prison suicides, the former inmate asks how much progress we have made in the 50 years since the abolition of capital punishment