ALEX BRUMMER: Hidden Threats to Stability We Can’t Ignore

One of the disruptive effects of the pandemic is how it has affected the treatment of other medical conditions.

So much effort is being put into the coronavirus that other ills are fighting for time, recognition and treatment.

The same is true with the global economy. So much of the effort of policymakers is spent on monetary and fiscal responses to Covid-19 that everything else fades into the distance.

So much of policy makers’ effort is spent on monetary and fiscal responses to Covid-19 that everything else fades into the distance

The Omicron variant has rapidly changed the interest rate outlook, even as the cost of living has risen and monetary laxity, which requires a response from the central bank, has not faded.

Expectations of early rate hikes have been pushed into the future on both sides of the Atlantic, despite robust labor markets.

Traders are rightly targeting the weaknesses in the financial system in the Covid years.

There has been a 20 percent correction for bitcoin in recent transactions. Most special acquisition companies (Spacs) are underwater. Junk bond values ​​have sunk and the 50 percent drop in aviation stocks from pre-Covid levels are signs of nervous confidence.

In its latest quarterly report, the Basel-based Bank for International Settlements dispels the myth that somehow decentralized financial ledgers, widely used in the cryptocurrency world, are a breakthrough for transparency and a stabilizing force.

Decentralized Finance, also known as DeFi or blockchain, reminds me of Alan Greenspan’s analysis in a 2005 London speech.

He argued that the ownership of derivatives (of which subprime mortgages became a subset) by banks around the world meant better diversification of risk. If the market exploded, as it did just two years later, finances would be better protected.

The reality was that the packets were derivatives like cluster bombs that exploded around the world, bringing down Bear Stearns, Lehman, Northern Rock, RBS and much of the rest of the global banking system.

The same can be said for DeFi. This new space occupied by fintech banks, crypto producers, traders and exchanges does not have the capital and other shock absorbers put in place after the financial crisis. It is an unobstructed space operated by artificial intelligence and with very little human intervention or central authority.

Without any form of governance, the risks are significant. It is estimated that some $247 billion has gone down the DeFi rabbit hole.

Another undervalued gap in the global financial sector is credit risk in China. The debt problem of the Chinese real estate conglomerate Evergrande is still unresolved.

The company has acknowledged that it is struggling to meet repayments, causing its shares to fall 19.6 percent in last trade.

The difficulties are cascaded through Beijing’s real estate sector, raising questions about the stability of lenders.

Initially, China seemed to believe that there would be no concept of ‘too big to fail’. But a decision by de Volksbank to reduce banks’ reserve requirements, in an effort to ease the blockage, is an acknowledgment that all is far from good. Under the cover of Covid, the tectonic plates are moving.

Risk taker

Derivatives and clearing are of huge importance to the London Stock Exchange Group (LSEG) and the post-Brexit City.

The EU’s ambition to steal London’s thunder may have been derailed, but Wall Street continues to chase the Square Mile.

Because it wants to stay at the top, the LSEG, owner of the London Clearing House, needs the best technology.

The £274 million purchase of Quantile, which provides advanced risk management systems to hedge funds and banks, would bolster that quest to remain dominant.

The deal, which will greatly enrich Stephen O’Connor, who co-founded Quantile in 2015, looks incestuous.

O’Connor is the former chief of the derivatives industry association and was also an independent director of LSEG until August of this year. How cosy.

Test times

Stefano Pessina once dreamed of ruling the broken world of wholesale and retail pharmacies in Europe, the US and even China.

Boots and his coveted No. 7 beauty brands would help lead the charge. It didn’t quite work out that way for the spry Italian octogenarian.

The European drug distribution has been sold and Boots looks set to be next. Paying off debt and upgrading owner Walgreens is a priority.

Not sooner than the time, given the reports received of poor service by Walgreens staff and testing labs during the pandemic.

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