Debt crisis with seemingly no end
Of course there will be an end to the debt crisis. But as it drags on the risk is that we, as advisers (and you as an investor), become blasé about the associated risks. We all need to keep paying attention.
Even if you haven’t followed events in detail, you know that when the huge US investment bank, Lehman Brothers, went bust on 15th September 2008 it triggered an extraordinary global economic downturn. Lehmans, and now Greece, are symptoms of continuing deep seated problems which are global, and are derived from a mix of too much debt, a banking system which remains vulnerable, and ageing populations (demographics).
We will look at why the banks are so important, and focus on two particular problem areas, Greece and Ireland. We look at why this matters to you and how you should respond in the box below.
why banks matter
Banks are important. As well as the ways we all use them day to day, they oil the wheels of commerce; from providing basic overdrafts and payroll facilities to small businesses or oiling the wheels of international trade through letters of credit. And, through the proper role of debt, they lend to businesses large and small to enable expansion or greater efficiency, which in turn improves profitability and employment.
And (at least until 2007/8) we trust our banks. We deposit money with them, and we trust them to pay it back on demand; banks also transact with each other on the same basis, relying on trust.
But when banks have done stupid things, taken risks that should never have been taken, and get found out, trust breaks down. And the very clear evidence from the 1930s and 2008 is that when trust breaks down so too does the banking system, and when the banking system breaks down so too does the wider economy.
Lehman Brothers went bust in September 2008 and within a couple of weeks the global economy had, to a significant extent, ground to a halt and the worst recession since the 1930s ensued.
Roll forward to 2011, and it is countries rather than banks which are in the headlines, largely, though not solely, due to bailing out their banks in 2008/9. Now a number of countries are unlikely to pay their debts in full; these debts are in the form of bonds which they mostly sold to, you guessed it, the banks. Can those banks afford to take another hit?
(Taken from TopFunds Guide July 2011)