SVB turmoil a sign of pain from the end of the easy cash era

LONDON (Reuters) – The era of easy money is over and its effects are only just beginning to be felt in global markets before the end of the sharpest cycle of interest rate hikes in decades.

The risks became clear this week when US tech specialist Silicon Valley Bank sought fresh capital, prompting a collapse in bank stocks. SVB was seeking financing to offset the sale of a loss-making $21 billion bond portfolio due to rising interest rates.

Central banks, meanwhile, are shrinking their balance sheets as part of their fight against the hot inflation sell off bond holdings.

We look at some potential pressure points.

1/ BANKS

The bank’s worry list skyrocketed as the SVB defeat hit bank stocks worldwide on contagion fears. JPMorgan and BofA shares fell over 5% on Thursday, while European banks slid on Friday.

SVB’s problems result from deposit outflows due to high spending by customers in the technology and healthcare sectors, raising the question of whether other banks would also have to cover deposit outflows through loss-making bond sales.

In February, US regulators said US banks had more than $620 billion in unrealized losses on securities, underscoring the impact of rising interest rates.

Germany’s Commerzbank issued a rare statement downplaying any threat from SVB.

Analysts initially saw the problems of the SVB as idiosyncratic and consoled themselves with more secure business models at larger banks. BofA found that European banks’ bond holdings have not grown since 2015.

“Typically, banks wouldn’t make big duration bets on deposits, but with rates rising so quickly, it’s clear why investors might be concerned and sell now and ask questions later,” said Gary Kirk, partner at TwentyFour Asset Management.

US bank sell-off US bank sell-off

2/ LOVE NO MORE

Even after stock prices rose in the first quarter, higher interest rates have dampened willingness to get involved in early-stage or speculative companies, as established tech companies issued profit warnings and cut jobs.

Tech firms are reversing pandemic-era exuberance and cutting jobs after years of hiring frenzy. Google owner Alphabet plans to lay off about 12,000 workers; Microsoft, Amazon, and Meta fire nearly 40,000 together.

“Although NASDAQ is an interest rate sensitive asset, it has not responded to the impact of interest rates. If interest rates continue to rise in 2023, we could see a significant sell-off,” said Bruno Schneller, Managing Director at INVICO Asset Management.

Tech layoffs announced in the last four months

3/ DEFAULT RISKS

The corporate bond risk premium has come down since the beginning of the year, signaling little risk, but corporate defaults are rising.

According to S&P Global, last year Europe had the second-highest number of defaults since 2009.

She expects default rates in the US and Europe to reach 3.75% and 3.25% in September 2023, respectively, up from 1.6% and 1.4% a year earlier, with bearish forecasts of 6.0% and 5 .5% are not “excluded”.

And amid rising defaults, the focus is on the less visible private debt markets, which have risen to $1.4 trillion from $250 billion in 2010.

In a low-interest-rate world, the largely floating-rate nature of the funding appealed to investors who can generate returns in the low double-digits, but now that means rising interest costs as central banks hike rates.

Corporate failure rate could double in 2023 reuters.com/graphics/GLOBAL-STRESS/dwpkdegzdvm/chart.png

4/CRYPTO WINTER

Bitcoin recovered earlier in the year but was at a two-month low on Friday.

caution remains. Finally, rising borrowing costs roiled crypto markets in 2022, with bitcoin prices plummeting 64%.

The collapse of various dominant crypto companies, notably FTX, left investors shouldering huge losses and called for more regulation.

Shares of crypto-related companies fell on March 9 after Silvergate Capital Corp, one of the largest banks in the cryptocurrency industry, announced it would cease operations, sparking a crisis of confidence in the industry.

Pain in Cryptoland

5/FOR SALE

Property markets started to crack last year and property prices will continue to fall this year.

Fund managers surveyed by BofA see China’s troubled real estate sector as the second most likely source of a credit event.

The law firm Weil, Gotshal & Manges has found that the European real estate sector has reported by November at a level of distress not seen since 2012.

How the sector finances itself is crucial. Officials warn European banks are risking a significant hit to profits from falling house prices, making them less likely to lend to the sector.

Property investment management firm AEW estimates the sector in the UK, France and Germany could face a €51bn funding gap by 2025.

Money managers Brookfield and Blackstone recently defaulted on some real estate-related debt as interest rate hikes and falling office demand hit real estate values ​​in particular.

“The reality that some of the values ​​out there aren’t right and may need to be downgraded is something everyone’s focused on,” said Brett Lewthwaite, global head of fixed income at Macquarie Asset Management.

The distress in the European real estate sector is increasing

($1 = 0.9192 euros)

(Reporting by Yoruk Bahceli, Chiara Elisei, Nell Mackenzie, Dhara Ranasinghe, Naomi Rovnick, Elizabeth Howcroft; Graphics by Kripa Jayaram and Vincent Flasseur; Editing by Dhara Ranasinghe and Toby Chopra)