As many as five red flags have gone off in markets in recent hours after the collapse of Silicon Valley Bank and the turmoil unleashed across the banking sector [consulta aquí las claves sobre las causas del desplome y sus efectos]. These indicators point to the threat of economic recession in the United States and Europe. This risk and the financial instability that has been evident are forcing central banks to reconsider aggressive increases in interest rates.
Financial turmoil puts pressure on central banks to curb interest rate hikes
Given “the recent strain on the banking system, we no longer expect the Federal Reserve (Fed) to raise rates at its March 22 meeting, due to considerable uncertainty,” investment firm Goldman Sachs emphatically said in a Sunday report. to which elDiario.es had access.
This entity and practically all those who follow these monetary policy decisions expected an increase of 0.25 percentage points, up to the range of 4.75%-5% —the ‘price of money’ was at 0% just a year ago in the United States-. But expectations quickly changed.
Also with regard to the European Central Bank (ECB), which in recent months has shared the strategy of stifling household demand and the investment and spending capacity of States and companies, in order to combat inflation. The institution chaired by Christine Lagarde raised rates from 0% to 3% since July in the euro zone. And commits to another 0.5 point increase this Thursday.
This aggressiveness assumes the risk of recession and, therefore, of greater unemployment and suffering for families. And this was championed by the Federal Reserve and the ECB. Although the first big scare of this price crisis was not due to damage to foreclosed homes or the blow to small and medium-sized businesses. It has been due to the failure of a bank specialized in technological ‘startups’, and to the imbalances revealed in other entities.
In other words, as David Cano, a partner at AFI, observes, “if until yesterday the absolute priority of central banks had to be inflation, today it must be financial stability”. And that scenario is haunting the financial markets like a ghost.
“With this scare in the body, the increase in unemployment is guaranteed, and with it greater economic fragility”, which is the central bank’s antidote against inflation, according to Víctor Alvargonzález explainsfounder of Nextep Finance, who warns that “the ECB will have to keep this in mind if it does not want to create a bigger problem”.
One of the most popular financial indicators due to its direct impact on monthly mortgage payments is the Euribor, which trades in line with the ECB’s official interest rate expectation. If it exceeds the benchmark ‘price of money’, it means more increases are expected. If it returns, it is estimated that it will fall.
And this Monday it fell by about a tenth, to 3.85%, from the 2008 high it closed last Friday, as can be seen in the following chart.
short term debt
This fall in the Euribor shows the turning point that has taken place in the financial world. A change that is more evident in the negotiation of the states’ short-term debt.
Interest rates demanded on the US two-year debt markets, the main benchmark for short-term debt, have suffered the biggest three-day drop since the so-called ‘Black Monday’ of the 1987 financial crisis, by almost one point, from 5% to 4%.
Debt yields in Germany, up 2.6%, or Spain, from 3.5% to 2.9% in recent days, for the same two-year period, also suffered sharp setbacks.
Interest rate hike expectations
This maturity date is one of the benchmarks for where large investors (funds, banks, insurance companies…) expect official interest rates to be in the near future in each currency region.
And with the drops in profitability are indicating that the central banks will stop the increases in the ‘price of money’ in the face of the financial turmoil that was unleashed and after months of tightening the financing conditions to combat inflation.
“Short-term rates fall due to the almost certain possibility that from now on central banks will moderate their aggressiveness, under penalty of creating a much more serious economic problem. And in an environment where managers stop hiring people and moderate or stop their expansion plans, the fall in inflation is almost guaranteed”, says Víctor Alvargonzález.
The ‘fear’ index
Another indicator that sounded the alarm bells after the collapse of Silicon Valley Bank was the VIX, better known as the ‘shit index’. This indicator measures the volatility of the US stock market and usually triggers when there are losses in the parquets. On Monday, the VIX jumped to autumn highs, as rising energy prices raised the threat of recession in the United States and the euro zone.
Credit Suisse Bankruptcy Insurance
And another data that serves as a serious alert for the current uncertainties is the historic high of the bankruptcy insurance company (CDS, its acronym in English) quoted in shares of the Swiss bank Credit Suisse. This entity has been questioned for months due to its balance sheet situation and solvency problems.