• Tue
  • Sep 23, 2014
  • Updated: 1:35pm

Ask our experts

PUBLISHED : Monday, 22 August, 2011, 12:00am
UPDATED : Monday, 22 August, 2011, 12:00am

Given the recent turmoil in the financial markets and so many problems worldwide, this week we asked the expert panel whether there was a connection between today's problems and the recent financial crisis.

Can you draw a line between today's sovereign debt crisis and US economic malaise to the 2008-09 credit crisis? Are these events connected and, if so, what is at the root of these crises?

Craig Wright (chief economist, RBC) says the 'global economic and financial system continues to be buffeted by the ongoing fallout from the decade of excess that came to an abrupt end in 2008'.

The decade of excess has given way to the decade of stress as the financial crisis led to an economic crisis that contributed to the fiscal crisis now commanding attention around the globe, Wright says.

'Unless policymakers and politicians act aggressively to shore up confidence, the risk is that the current fiscal crisis feeds back into another financial crisis, with this negative feedback loop leading to a vicious cycle of pain,' he adds.

A difference this time around relative to the earlier crisis is that the authorities know that this vicious cycle ends in pain, so they will do everything they can to prevent the negative feedback loop from taking hold, Wright says.

Monetary authorities are showing hopeful signs in the more challenged economies by holding interest rates lower for longer and keeping the system flush with liquidity. But the fiscally challenged countries have yet to convince markets and rating agencies that they have a credible, long-term consolidation plan, he says.

Mark Matthews (head of research for Asia, Julius Baer) says the 2008-09 crisis is related to the sovereign debt crisis. In the previous decade in the United States and Europe, there was a large amount of lending at low interest rates. They both became bloated and uncompetitive as Asia was becoming a major contender on the world stage, he says.

'The weakest link in the chain is always the first to break. In the US, it was sub-prime mortgages in 2007, which caused contagion across the whole housing market in 2008,' says Matthews. 'In Europe, it was the small countries of Greece and Portugal that have caused contagion in Italy and, now, France.'

Matthews says the answer on both sides of the Atlantic has been to throw money at the problem, adding: 'Had they not done this, the whole world would probably have lived through some very tough times over the three years, especially in the financial markets.'

But eventually assets would have been transferred to those who could use them productively, and by now both the US and Europe would probably be starting to come out of their crises recapitalised and better for having lived through them. 'Instead,' he says, 'the underlying structural problems are still with us.'

Sen Sui (head of Asia, markets and investment solutions, Credit Agricole Private Banking) says fiat money (currency that a government has declared to be legal tender, even though it has no intrinsic value and is not backed by reserves) and cheap credit are the root causes of the rapid build-up of debt.

In the past decade or so, the developed countries have accumulated debts both at the household level - in the form of mortgages and consumer loans - and in the form of sovereign debts. The 2008-09 burst of the credit bubble put strains on national finances as governments were forced to take on private sector debts (such as the US mortgage agencies Freddie Mac and Fannie Mae).

In Europe, the unified euro provided access to cheap funding for economies such as Greece's. As a result, a so-called balance-sheet recession has been elevated to the government level.

Marc Lansonneur (regional head of investment teams and market solutions, Societe Generale Private Banking Asia Pacific) says the situation today is less dramatic than that of the 2008-09 crisis. Then, there was a real systemic risk in the financial markets amid poor understanding and visibility of how much toxic assets were held by banks and in the financial institutions' balance sheets. By comparison, the size of the problems faced in the current sovereign debt crisis is more visible. Although the lack of trust in world markets has caused a correction, mainly to equities, other asset classes remained relatively spared.

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