The world’s financial markets have been severely spooked – and not without good reason. Of course, with the benefit of hindsight the summer market volatility had an air of predictability about it. Everyone said there had been too much easy credit and that as a result there had been bad/crazy lending decisions. Abundant credit, liberalised financial systems across the globe, a desire for growth, in the UK fast-rising asset prices (in the housing market), plus a dash of enviable glamour in the form of private equity with its allure of half hard-nosed business sense, half alchemy. For those with grey hair and long memories, it had the whiff of the run-up to the 1970s secondary banking crisis.
But parallels can only be taken so far. The central banks had already professed themselves uneasy about the uncertainty of where the risks were and whether organisations and individuals truly understood those risks. We all knew that it couldn’t last for ever and it was a matter of if, not when. Sensibly, treasurers have been quietly building contingency plans for when the screw would turn.
The biggest ‘known unknown’ – how much does the world owe Donald Rumsfeld? – is how much more bad news has yet to emerge. Mortgage arrears and repossessions started this fall; will other bad news continue the decline?
Only when you quantify with certainty the losses in the sub-prime market can you begin to tackle the problem. Before that happens, everything else is fire fighting.
While it may have started as a silly season story, with the media not understanding liquidity, it seems to have moved on from there. We wait to see whether there will be an economic slowdown as consumers respond to the rise in interest rates. At the time of writing we are being told there are still deals out there waiting to be done.
Above all, there is one key and simple question: where next for the markets? At the moment anyone who is prepared to make predictions is either very brave or very foolish.
Whatever happens, treasurers must hold their nerve, keep their focus on the fundamentals of the business, and remind their colleagues to do the same. Decent companies will still find bank support, albeit at a higher prices. For corporates that don’t fall into the decent category, it could be a long, hard or expensive autumn.