The Velocity Of Modern Financial Crises

Jean-Claude Trichet, European Central Bank president, noted when speaking in Cambridge last Thurdsay that the speed at which financial disruption can spread had “accelerated tremendously over the past few decades”. While debt crises in the 1980s occurred over years, the effects of the Lehman collapse “spread around the world in the course of half-days”.

As Ralph Atkins pointed out, the Greek government is but the latest to learn that in the modern world you can be catapulted from relative obscurity to global prominence in a matter of hours. Everyone can be famous for five minutes, as Andy Warhol said, but this kind of fame most of us could well live without.

Faced with the assessment by Ratings Agency Standard and Poor’s that Spain’s economic and financial situation was deteriorating, the Spanish Prime Minister Jose Luis Rodriguez Zapatero simply limited himself to an outright rejection of such negative economic forecasts, declaring the naysayers to be wrong in the light of the -to him – self-evident fact that Spain was just about, at this very moment, to emerge from the recession which has now bedevilled it for so many months. Indeed he even went as far as to say they were wrong, since he he could find no reason why Standard & Poor’s should downgrade Spain’s long-term sovereign debt rating, “From our perspective there are no reasons for it, firstly because of the strength of the country (and) because the public accounts are solvent,” he told the Onda Cero radio station. Standard and Poor’s in fact argued that “The downgrade … reflects our expectations that public finances will suffer in tandem with the expected decline in Spain’s growth prospects”, a viewpoint with which few external observers would disagree.

Indeed, Spain’s representative on the ECB governing council Jose Manuel Gonzalez-Paramo told the Spanish press agency EFE, in an interview widely quoted in Spanish media, that he, himself, found the S&P opinion hard to disagree with: “The ECB is not taking issue with whether Standard & Poor’s should cut Spain’s rating, but the report that accompanies this warning is hard to deny….I’m convinced that Spanish authorities share this analysis and will do whatever is needed to avoid S&P’s negative outlook resulting in a change in rating,” he said.

Had Mr Zapatero found it within his repertoire to be able to express similar sentiments I am sure he would have done more to convince the world at large that he is aware of the problem, and is willing to take the necessary action. As it is, he simply leaves the impression that what just happened in Greece will eventually and inevitably happen in Spain, with all the suddenness and lightning-strike velocity M Trichet was warning about. What we seem to be facing is what Gabriel Garcia Marquez once called the Chronicle of a Death Foretold.

So what do the rest of us do, simply sit back and watch that “accident waiting to happen” actually happen? Angela Merkel may have other thoughts, since speaking in Bonn last Thursday she indicated that she, at least, was of the opinion pressure could be brought to bear on the national parliaments of countries with looming budgetary difficulties.

“If, for example, there are problems with the Stability and Growth Pact in one country and it can only be solved by having social reforms carried out in this country, then of course the question arises, what influence does Europe have on national parliaments to see to it that Europe is not stopped…..This is going to be a very difficult task because of course national parliaments certainly don’t wish to be told what to do. We must be aware of such problems in the next few years.”

Well, if such pressure can be brought it most certainly now should be. And not over the next few years, but rather, if M Trichet is to be believed, during the coming weeks and months. Lightning may well not strike twice in the same place, but it most certainly can strike twice.

This entry was posted in A Fistful Of Euros, Economics: Country briefings by Edward Hugh. Bookmark the permalink.

About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

9 thoughts on “The Velocity Of Modern Financial Crises

  1. I think this increased emphasis on enforcing the stability and growth pact is great. Except that the biggest violators, apart from the Greeks who essentially cooked their books to get into the EU, during the last decade were Germany, France and Italy.

    So if I were sitting in Madrid, I would be skeptical of any kind of ‘threat’ from the ECB/Eu. Italy has been in breach since when, 2003? And as far as I can tell they’ve felt on EU based effect of it.

    Quite frank,y unless Germany comes around to declaring the 4th Reich and starts actively managing the economies of the Latin-speaking members, + Greeks, this will just be empty words

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  3. I agree with Dennis to a point. I think Frau Merkel has made an important statement. And, given reports of the Greek Premier’s admission that the bureaucracy of Greece is riddled with graft, is worth pursuing.

    It is said that the first step towards redemption is to recognise openly one’s failings, then The Greek PM has done the right thing. However, actions speak louder than words (like all these clicjés?). The EU now has to put pressure on the Greek government to show action.
    As for Spain – seems we’re still waiting the self-abasement. Is that in the Spanish repertoire?

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  5. Well, Spain’s financial situation is certainly bad, bud not just because Standard and Poor’s say so. Together with Kees de Kort, I am amazed how anybody could take ratings agencies like these still seriously, knowing that those agencies were giving the A ratings to the mortgage packages which caused the swift worldwide spread of the current financial crisis. I, among many others, already were waiting for the American housing bubble to implode, when those jokers still were giving their A ratings. I am sure of the fact that the financial experts of Standard and Poor’s and similar agencies have much more financial knowledge than I have. So the only explanation I can find for their ”optimistic” ratings, is that they let the short term interests of the banking-industry prevail above the truth. In my opinion these guys have lost their credibility.

  6. Indeed, the ratings agencies are a trailing indicator. For their best clients, they downgrade only after the client’s finances have blown up. Otherwise they are nothing but a reflection of the conventional wisdom. At best, they’re useless, meaning that they subtract a little value.

    Their power to do harm is vast though, as you mention.

  7. “At best, they’re useless, meaning that they subtract a little value.”

    This may, or may not be true. But, tell me, who do you recommend we heed as an institutional watchdog, when governements reassure us as everything is just fine. Or do you think, as some have suggested, that we as a species are simply “doomed” by our own incapacity to create vialle structures?

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