Billion crowdfunding to save banks says little about the future of the crisis – 03/16/2023 – Vinicius Torres Freire

The Swiss Central Bank offered a loan of up to CHF 50 billion to Credit Suisse. The bank will take a lot of that money, as it was in the crow’s beak. This monstrous overdraft is equivalent to 6.7% of Switzerland’s GDP. Barely comparing, it would be as if the BC of Brazil offered R$ 674 billion to a pesky bank.

The number serves only to give an order of magnitude of the problem. It is not useful for another speculation.

In the United States, banks and smaller peers pooled together to deposit US$ 30 billion (R$ 157 billion) in First Republic, a bank for the wealthy in California, who had been withdrawing the money for fearing a fate similar to that of the SVB.

The patches had some effect. Stock markets rose, interest rates stopped plummeting, etc. Is the crisis over?

Historically, at least, financial crises come in waves. It’s like a firebomb went off upriver. There are some floating corpses — looks like it hit a town. And where does the fire go? You can reach places that are not even on the map.

Sometimes waves and swells reappear months later. Already in 2006 there were many warnings of the 2008 tsunami. In April 2007, the crashes started. Bear Stearns failed in March 2008. Lehman Brothers in September.

This turmoil now has NOTHING to do with 2008. The idea here is just to remember how financial crises can unfold even slowly.

At the very least, there should be scars from this turmoil.

Medium and small banks, for example, the most affected, will they lend more or less after the shock? It wouldn’t be hard to guess “minus”.

After the blow, which hit a sector that had already been rocking, will the sale of real estate securities increase or decrease? If the sale goes up, mortgage interest rates go up (even more).

The price of a barrel of oil took a tumble, one more, with the panic in the banks. On Monday, March 6, the beginning of the week of agony for the SVB, a barrel of Brent oil was at US$ 86. On Wednesday, March 15, it dropped to US$ 72. On this Thursday of “relief in the markets”, it rose by a tick to $74. At the peak of Putin’s war panic, it had passed $120.

US government bond rates rose slightly on this bank-saving Thursday as well. But they indicate interest rate cuts ahead. Like in Brazil. By the way, in South America.

In summary, there are indications that bank sururu and its consequences are, in theory, disinflationary. That is, they reduce economic activity and, in principle, as a result, inflation.

Also this Thursday, the European Central Bank raised its basic interest rate by 0.5 point, to 3%. He may have tried to convey the message that the inflationary crisis has nothing to do with the financial crisis (as he reiterated in a speech and interview with ECB President Christine Lagarde). Hmm.

Lagarde also said that European inflation will remain high for a long time. A cynic might say that the ECB has seized its last chance in the near future to raise rates before the turmoil gets worse.

How will the Fed, BC of the USA, and BC of Brazil act next Wednesday? Market prices indicate rate cuts, if not now, then in a month or so (in Brazil, later. May?). Is the Fed going along the same lines as the ECB? “Do we hold the ends of the panic and go ahead with interest rates”? Or will it indicate that the risk of recession has increased? That this slowdown would be enough to contain inflation?

Besides, it’s a complicated time. The Fed promoted one of the fastest interest rate hikes in history, inflation dropped a bit, but it is still high, and the country is still living at full employment. It’s hard.

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