On the back of the gloomy forecast for global economic growth by the IMF, the high profile failure of Silicon Valley Bank, First Republic Bank, Signature Bank, and the controversial takeover of failed Credit Suisse by UBS, stubbornly high inflation and subsequent interest rate rises, the main question that goes through my (admittedly Credit-focused) brain is, “are we headed for another Credit Crisis?
Banks, believe it or not, are generally risk-averse. Oh, when times are good they throw money around like confetti but when times get tough, they (and Credit Insurers) are the first to pull back and tighten up lending policies, reduce credit lines or even worse, pull debt cover entirely. This was how they behaved during the 2009 crisis and I’m concerned that history, as it often does, will repeat itself.
This would have a disastrous impact on the global economy. Governments, businesses and consumers, used to a decade of historically low borrowing rates, have managed to rack up unprecedented amounts of debt but have also helped fuel global economic growth. If sources of funding dry up or are constricted, government and business investment would be severely impacted, revenue opportunities minimised, crumbling infrastructure left to deteriorate, the markets would stagnate and we would enter a global recession.
I am (somewhat) hopeful that the lenders and governments have learned some lessons from the last financial crisis. As the macro-economic data, albeit mixed, points to an easing of inflationary pressures by the end of this year and while a recession is still likely, it may be shorter and less severe than originally forecast. Governments also seem poised to be more proactive to act when necessary to avoid the worst case scenario. However, things move rapidly and we must prepare for all potential outcomes.
As I said in my last article, do not despair! These are career-defining times for all Credit professionals. The trials and tribulations that we face now only serve to bestow the fortitude, knowledge and experience that we all require to perform well in our roles and give us the confidence to face further challenges in the future.
“Out of adversity comes opportunity” – Benjamin Franklin