Western credit markets hold up significantly better

CREDIT is The supply of oxygen to the financial system. When it flows freely, it is unnoticed. When it shuts down, it soon does everything else. The hypoxic episode of the collapse of the American investment bank Lehman Brothers in 2008 caused chaos, turning a subprime-mortgage crunch into a global financial crisis. Since then, central banks and market pundits have set a hawk-like eye on credit terms, wary of repetition.

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Today’s shake-up for safe havens was motivated not by the financial crisis but by Vladimir Putin’s invasion of Ukraine. Still, there are similarities. Again, the dollar is rising as investors flee from risky currencies. Hedging costs, especially for the war-torn euro, have been rising as volatility has risen and traders are betting that a protracted conflict will continue in favor of the greenback. A rush for American government debt সবচেয়ে the safest asset of all – has pushed up Treasury yields as expectations of inflation have risen. Pricing security on returns, lenders have spread corporate-bonds.

This flight itself causes a lot of problems for safety. A stronger dollar, for example, increases the debt burden on countries that borrow from it, and reduces profits for American companies that earn a lot of their revenue abroad. But the biggest threat to financial stability comes from money market pressures, where firms borrow to meet their short-term funding needs. Occupying this market is the financial equivalent of a pulmonary embolism, otherwise forcing health organizations against the rapid wall. A dash for the dollar is fine if it only pushes the exchange rate. The real problem comes when it also creates their lack.

This happened in 2008, as banks became reluctant to lend to each other and the cost of borrowing for a few months rose overnight by a whole percentage point. The events were repeated in much lighter fashion as the world went into a coveted-induced lockdown in March 2020. On every measure of money-market pressure, from the cost of short-term commercial debt to the demand for dollars against other currencies, the effects of Mr. Putin’s war were still mild (see chart).

There are two main reasons for this. The first is that it follows a flood of liquidity from the central bank. Since March 2020, the Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England have issued $ 9.1trn (11% of the world). GDP) In the new reserve. In the aftermath of that catastrophe, Jonas Golterman of Capital Economics, a consultant, noted that it is almost surprising that there is a strain on funding.

The deeper reason is that money markets are now equipped with a comprehensive ventilation system Permanent swap lines between the Fed and the other five major central banks allow them to exchange their own currencies for dollars, which can be distributed to domestic companies in times of pressure. A second advantage allows a large group to borrow dollars from the Fed.

Meanwhile, banks no longer rely on unsecured loans from each other to meet their daily cash deficit. Replacement for dollar funds is the repo market, where financial institutions and large companies borrow প্রতিদিন 2.5trn from each other every day using the treasury as security. High-quality parallels make this market less susceptible to runs, making banks (and their clients) less vulnerable to crises. And it has been backstopped by the Fed, which has acted as a last resort lender since a series of liquidity crises in 2019.

Long-term credit conditions are also measuring the storm significantly better. The spread of risky high-yield (“junk”) bonds has been rising since the beginning of the year, but, starting from near-historic lows, they are nowhere near the level they reached in March 2020.

For Lotfi Carui of Goldman Sachs, a bank, this is not surprising. $ 1.6trn About one-fifth of the American high-yield bond market is issued by oil, metals and mining companies, which are benefiting rather than being hurt by the ballooning of commodity prices. More generally, issuers sit on high levels of cash and use the extra revenue to pay off debts, keeping their bondholders happy. Europe’s small € 450bn ($ 496bn) high-yield market, geographically close to war, has been similarly hit hard. But even there, investors are still not facing serious losses.

A fortnight in a conflict that can be measured in years, any claim that the credit condition will remain indefinite indefinitely would be foolish. Mr Carui noted that central bankers were forced to protect themselves from money market shocks, as this led to a crisis during the 2007-09 crisis. Risks that financial guardians have less experience are even more dangerous: who can say, for example, if one protracted war leads to another, more extensive gaming-up of global supply chains? Yet at least for now, the West’s financial system is proving to be much more resilient than Russia’s. 3

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This article is published in the Finance and Economics section of the print edition under the title “War Bonds”.

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