Financial markets: a shrinking pie

According to the Bank for International Settlements, the size of financial markets around the world in 2010 had already surpassed pre-crisis levels. I mean the size of debt and stock, at current prices. More than 212 trillion against the record of 202 tr. of 2007: 54 tr. in the stock market (65 tr. in 2007); 41 tr. in public debt (30 tr), 42 tr. in banking liabilities (41 tr.), 10 tr. business debt (8 tr.), 15 tr. securitization of loans (15 tr.) and 49 tr. (43 tr.) loans not securitized.

Feeling better? Now, think about the over $5 tr of debt purchases and other assets by the central banks of developed countries. And think about the explosion of public debt of these countries, at levels not seen in periods of peace. And, particularly, take a look at the impact of direct or indirect official interventions to increase financial assets inflation. Well, don’t call them so: just speak of “market intervention to hold down long-term interest rates, and to support the mortgage market and make financial conditions more favorable.”

Let’s see it from another viewpoint–flow–with data from the International Monetary Fund. Since 2007, 600 billion have fled from developed countries’ stock markets. The new money accumulated from the beginning of the crisis in emerging exchanges has remained stable in recent years at levels of 200bn; money accumulated in the international bond market was of 1 trillion. Again, consider increased borrowing by governments and central banks.

Finally, please, let’s do the last exercise: consider the size of these markets in terms of the world’s GDP. The result is not very encouraging: a total of 350% (stock markets, debt and bank assets) against more than 450% before the crisis. This happens due to a slight contraction of the bank assets (the process is far from complete), the debt size and a sharp contraction in the stock markets’ size.

Depressed? Believe me, I didn’t mean to upset you. I always prefer to know the truth instead of living in the past. And the past, in terms of depth and worldwide market liquidity before the crisis, is long gone and will never come back. At least in the near future.

Do you think that limiting performance of banks in terms of capital and liquidity won’t have an impact in attracting new risk? Under this premise, it is difficult that there is a clear credit recovery. The rest, in terms of economic uncertainty and forced deleveraging of the portfolios, will do the rest. On the other hand, the credit as such is not an advance but rather a delayed indicator of the economy. Can you grow up without credit? Take the look back, before the great moderation in which we were used to grow on the basis of the debt. Again, that belongs to the past.

What is changing is the model of growth over debt. Nowadays, almost all sectors of the economy are reducing its debt: companies see debt reduction as a priority, the financial sector is forced to do so (strengthen your balance, as they call it) and families are facing multiple challenges at the same time: reduce debt, save money to face future tax adjustments and to maintain their standard of living as much as possible. All this with maximum unemployment levels worldwide and wages restraints.

Despite the optimism posed by emerging economies’ growth in medium and long term, I am not very optimistic about the future. In the case of China, its growth already means almost half of the global growth. But, unfortunately its consumption does not reach 5%. Seen from our perspective, the country needs time.

So who keeps accumulating debt? I am sure you have guessed it. And considering the scenario, I am also convinced that an expression has come to your mind: crowding out.

Slower world growth, deleveraging and regulation: those are the premises that will mark the evolution of the size of funding markets around the world in the near future. The bright side is the performance of central banks, especially in developed countries. Always willing to take exceptional measures of monetary expansion, ordering the debt adjustment or at least setting cushioning it with higher prices for financial assets. In the end, they are acting to earn time to overcome the current problems. Or simply they are acting to prevent accidents.

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