THE ORACLE
Ten years ago to the week, Lehman Brothers, one of the biggest financial institutions in the world at the time, suddenly and unpredictably went belly up.
The 100-year-old investment bank was a victim of what became known as the US subprime mortgage crisis, which set off an unprecedented global financial crisis, unseen since the great stock market crash of the 1930s.
While the problems with subprime mortgages in the US started being noticed early in 2007, they had been years if not decades in the making, eventually leading to the biggest financial meltdown in history.
In 2007, Ben Bernake, the then chairman of the Federal Reserve literally dismissed the emerging idea that the observed slowdown in the US housing market would ultimately have profound implications on the financial sector. According to the man who was at the helm of the world’s most powerful central bank, the slowdown in housing demand was nothing but a local US problem, that would soon blow over. He was very wrong.
Within, a year and half, the US subprime mortgage problem had taken a global outlook and had ballooned to trigger the biggest global financial crisis since the 1930s. When Lehman Brothers went bust in September 2008, filing for Chapter 11 Bankruptcy, it was the fourth largest bank on the planet, behind Goldman Sachs, Morgan Stanley and Merrill Lynch. It was unthinkable that such a large institution would fail, but fail it did. The bank’s failure was the catalyst for what became a very long month of global turmoil in which no financial institution anywhere in the world was considered safe anymore.
During that time, Zimbabwe was grappling with a financial crisis of its own. Hyperinflation had spiraled, cash shortages were abound and the local currency had been rebased no less than five times.
Inevitably, as we relive the anniversary of those tumultuous weeks of September and early October 2008, we just need to stop for a moment and ask ourselves whether, the events of 2008 could happen again, and if so, what will be the causes? What are the signs?
Taking a deep look into the global economy, there are plenty of potential signposts that spell danger. Many of the issues do not affect us directly here in Zimbabwe, but certainly, we need to be clear that any dislocations in the global economy, including any upsets to the global financial system, may pose risk, even to our local financial environment.
Here are a few issues that may cause disruptions to the global order, which may eventually have spillover effects on the local financial sector.
Are consumer debt levels generally rising?
The global financial crisis was caused primarily by excessive household debt levels, under conditions of very low interest rates, which incentivized households to engage in extensive consumptive borrowing while financial institutions themselves borrowed very heavily to fund speculative positions. At the global level, the deep global recession that followed the collapse of Lehman Brothers, however put a damper on borrowing, but the failure to deal with the root causes of the crisis has meant that consumer debt levels have since risen and are still rising, especially as a share of global gross domestic product. For Zimbabwe, consumptive lending has been on the rise, with close to 30 percent of banking sector loans attributable to household consumer debt. This level of debt is relatively high, for a small banking sector, but is it enough to upset the cart? Maybe not. The Zimbabwean banking sector seems rather resilient on that front. For the last three years, total private credit has slowed down markedly, although the share of household loans as a share of total credit has somewhat increased. However, the percentage of total household debt to GDP for Zimbabwe is very low, making the risk of the wheels coming off very slim.
The Zimbabwean financial system is currently very stable?
The Reserve Bank of Zimbabwe has made great strides in making the local financial institutions stronger and safer. Over the last nine years, there has been a marked effort to make the Zimbabwean banks much safer in recognition of the vulnerabilities that were exposed in the 2004 to 2008 period. Banks are now required to hold more capital following the upward revision of minimum capital thresholds that can act as a buffer in the event that banks suffer the sort of losses on their balance sheets akin to the losses suffered back in the 2004 to 2008 era.
The Zimbabwean banking system is also immune to the sorts of problems that remain in the rest of the global financial system. Global banks have largely fended off the pressures for structural reforms that followed the great crash of 1929. Since then, banking has become increasingly concentrated and risk has migrated from the more thoroughly regulated banks to other parts of the global financial system, such as hedge funds, that may fall into regulatory blind spots. Locally, we have composite banking licenses, with very tough regulatory framework that seeks to plug regulatory grey areas, minimizing regulatory arbitrage.
Bank balance sheets of Zimbabwean banks, apart from holding adequate levels of regulatory capital, are also reasonably liquid, with liquidity levels of some 70 percent. One could actually say Zimbabwean banks are under-lent, with loan to deposit ratios averaging below 40 or 50 percent.
Exposure to Emerging Markets
The dress rehearsals for the global crises of the 1990s and early 2000s took place in countries as far away and as far apart as Mexico, Russia, South Korea and Argentina. Globally, there are once again, strong signs of trouble. Argentina is in a debt crisis and the problems in South America seem to be mounting. Interest rates are at global lows, largely due to massive processes of money creation known as quantitative easing from Japan to the USA. This has driven massive capital flows into emerging markets to search for higher yields, which have not been on offer in the First World. Servicing those debts will have to become more expensive as global interest rates start to tighten, as global austerity takes hold. The crises that have unfolded in both Turkey and Argentina this year are unlikely to be the last, but could in fact be tell tale signs that all is not well.
Banks operating in the Eurozone have also made very little progress than their American counterparts in increasing their equity bases and as a result would be much more exposed in the event of a slowdown in global activity. A fullblown world economic recession would be a killer blow and Zimbabwean banks could be particularly exposed to global shocks as de-risking issues take further toll. Most Zimbabwean banks rely on European banks for correspondent banking relationships.
The US China Trade War
The US Sino trade war is potentially a big risk factor for global financial stability. For the time being though, the global economy appears to be shrugging off the Trump administration’s nationalist trade measures and economists think the real crunch point is likely to come in late 2019 or early 2020, when the impact of higher US interest rates start to bite hard and the impact of tax cuts begin to fade.
While China played a historic role in helping the global economy navigate the tumultuous post crisis period, this was achieved largely through a huge domestic credit binge and a massive public spending budget that dwarfed anything seen in the west. Much of the borrowing by Chinese consumers was done outside the regular Chinese banking system, mainly through shadow banks and this protected the Chinese banking system from the contagion effects of the global meltdown. The Chinese economy thus acted as a massive shock absorber for the global economy. Now that China’s economic growth remains very solid, with signs that perhaps it becoming even more balanced, there is hope yet, that it may be a while yet, before another crisis of the same proportion as that of ten years ago is seen again.
The writer is an economist and can be reached on oraclefiles@gmail.com.
