The turbulence unleashed in the markets in recent days demonstrates the financial vulnerabilities involved in the fight against inflation, and therefore it is advisable not to minimize its severity. However, unless there is a monetary policy error, it does not seem that we are on the verge of a crisis similar to the one that devastated the world —and especially our country—.
Apparently, the bankruptcy of a Californian bank and the liquidity crisis of one of the flagships of global finance are isolated phenomena. In both cases, the management failures are obvious and therefore such setbacks cannot be extrapolated to the bulk of the sector. On the other hand, the direct contagion to the rest of the entities should be limited, especially taking into account the strength of the bailouts in progress, among which the historical injection of liquidity from the Swiss central bank stands out, equivalent to 6.6% of the country’s economy. According to this optimistic vision, which also alludes to “the high liquidity buffers and the healthy solvency of European banks”, calm should soon return to the markets.
These “market crashes”, however, are symptomatic of the macroeconomic risk generated by the tightening of monetary policy. A risk that, finally, the ECB could be beginning to incorporate, and that has a financial and an economic aspect. The first lies in the depreciation of the bonds purchased by financial, banking and non-banking entities, during the period of negative interest rates. The value of these bonds is inexorably reduced as interest rates rise, generating latent losses in the balance sheets of banking entities, and an even more worrying hole in non-banking entities (investment and pension funds, etc.) that they have borrowed to boost their profitability.
It is true that depreciation is theoretical, that is, it only materializes when the securities mature (or when banks are forced to sell them, exposing losses and aggravating the flight of deposits, as in SVB). And they have significant liquid assets, so we are not facing an imbalance similar to what happened after the burst of the housing bubble. Furthermore, it is assumed that European banks have insured themselves against interest rate fluctuations, without suppressing risk, which is transferred to non-bank players such as hedge funds.
But that is without taking into account the economic risk, highlighted by the significant fall in the demand for credit from both individuals and companies as a result of the increase in the cost of loans. This trend is the prelude to a cooling off in the economy, at the same time that it limits the possibility for entities to compensate for the depreciation of their bonds.
In the grip of double financial and economic risk, and the inability to identify new pockets of vulnerability —which will almost certainly emerge in some segment of the market, without regulators knowing where— monetary policy is bound to be more gradual. The ECB is right not to promise new rate hikes, and to show its willingness to take measures to deal with the episode of financial instability. The result could be a greater persistence of inflation, once again giving the lie to the forecasts of the monetary guru. But between two evils, you have to choose the lesser.
The persistence of inflation continues to complicate the task of the European Central Bank. Discounting energy and food, that is, the most volatile components, the CPI for the euro area increased in February at an annual rate of 5.6%, three tenths more than in January. In Spain the increase, also upward, was very similar (5.2%, one tenth more than in January). A pause in the year-on-year growth of the CPI is expected in the coming months, due to the strong rebound in prices registered last year after the invasion of Ukraine (step effect).
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