SVB’s problems are a symptom of the end of the era of cheap money

The era of cheap money has come to an end and its impact has been felt in global markets, which have yet to see the end of the steepest interest rate hike cycle in decades.

The risks became apparent this week as US technology lender Silicon Valley Bank scrambled to seek fresh capital, sending bank shares tumbling. SVB was looking for financing to offset the sale of a bond portfolio with losses of 21,000 million dollars, as a result of the rate hike.

Central banks, for their part, are shrinking their balance sheets by unloading their bond investments as part of their fight against inflation.

The following are potential pressure points for the market.

1. BANKS

Banks have been high on the list of worries, after the fall in the SVB hit bank stocks around the world on fears of contagion. Shares of JPMorgan and BofA fell more than 5% on Thursday, and European banks tumbled on Friday.

SVB’s problems stem from deposit outflows due to heavy spending by clients in the technology and healthcare sectors, raising questions about whether other banks would also have to cover deposit outflows with losing bond sales.

In February, US regulators noted that US banks had unrealized losses of more than $620 billion in securities, highlighting the impact of rising interest rates.

For the moment, analysts see SVB’s problems as idiosyncratic and are reassured by the safer business models of the big banks.

“Normally speaking, banks would not be taking large duration bets with deposits, but with rates rising so quickly it is clear why investors might be concerned and are selling now and leaving the questions for later.”said Gary Kirk, a partner at TwentyFour Asset Management.

2. THEY LOSE FAVORITISM

Even after the rebound in stock prices in the first quarter, rising rates have curbed willingness to bet on early-stage or speculative companies, particularly as entrenched tech companies have issued profit warnings and cut jobs.

Tech companies are reversing the exuberance of the pandemic era, cutting jobs after years of big hiring. Alphabet, which owns Google, plans to lay off about 12,000 workers; Microsoft, Amazon and Meta are collectively laying off nearly 40,000.

“Despite being a rate sensitive investment, the NASDAQ has not responded to interest rate implications. If rates continue to rise in 2023, we could see a significant sell off.” said Bruno Schneller, managing director of INVICO Asset Management.

3. RISKS OF NON-PAYMENT

The corporate debt risk premium has fallen since the beginning of the year and signals little risk, but corporate defaults are rising.

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

The agency expects US and European default rates to reach 3.75% and 3.25%, respectively, by September 2023, up from 1.6% and 1.4% a year earlier, with pessimistic forecasts of 6.0% and the 5.5% who are not “discarded”.

And with defaults rising, attention is turning to the less visible private debt markets, which have soared to $1.4 trillion from $250 billion in 2010.

In a world of low rates, the largely variable nature of funding has appealed to investors, who can reap returns in the low double-digits, but now that means rising interest costs as banks power plants raise rates.

4. THE CRYPTO WINTER

Bitcoin rallied at the start of the year, but fell to two-month lows on Friday.

Caution is maintained. Rising borrowing costs rocked cryptocurrency markets in 2022, and bitcoin prices plunged 64%.

The collapse of several dominant cryptocurrency firms, most notably FTX, left investors saddled with heavy losses and sparked calls for more regulation.

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

5. “SOLD”

Housing markets began to crack last year and house 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.

According to the law firm Weil, Gotshal & Manges, the European real estate sector registered crisis levels in November that had not been seen since 2012.

The way in which the sector is financed is key. The authorities warn that European banks risk major losses from falling house prices, making them less likely to lend to the sector.

Property investment management company AEW estimates that the sector in the UK, France and Germany could face a debt financing gap of €51bn by 2025.

Asset managers Brookfield and Blackstone have recently defaulted on some of their real estate-linked debt as rising interest rates and falling demand for offices, in particular, have hit property values.

Brett Lewthwaite, Global Head of Fixed Income at Macquarie Asset Management, says: “The reality is that some of the existing values ​​are not correct and may need to be lowered.”

Source: Reuters