by 21plankton
Germany financial sector facing dark clouds, Bundesbank warns
FRANKFURT, Nov 23 (Reuters) – Germany’s financial firms may be well capitalised now but face challenges ranging from rising interest expenditure and weak loan demand to unrealised losses, Bundesbank Vice President Claudia Buch said on Wednesday.
Interest rates have risen at the fastest pace on record in the past year and banks have done well to cope with the change but the new operating environment also holds risks, including a sharp fall in the value of securities held by lenders.
We have the same problem in the US and have had since the interest rates began rising. It is the secondary backlash to a zero interest rate environment. The zero interest rate environment was created to paper over a weak economy. In the US it was the sub-prime crisis and the subsequent great recession. So as interest rates rise those old bonds are not favored and their price drops, in tune with the old weakness.
In reality that is all they were ever worth. This support through interest rates buffers a weak economy but leaves a lasting problem commonly called zombiefication of the economy. It happened in Japan after the 1989 real estate crisis. It has now happened in most developed economies. It has occurred also in the US and is being ignored by governmental approval in avoiding mark to market accounting. Gradually as institutions have to sell underwater bonds they are marked to market and are sold off. This process can take many years.
So a stagnating deep pool of bonds is a known factor in modern accounting practice distorting both bond and stock market functions.
This process limits growth in developed economies. New Economics (see Keynsian economics) is used as an alternative to stimulate spending and growth. But that process,too, has blowback of inflation, and has rational limits. Asset bubbles are both an original problem and a result, they are a natural phenomenon of market forces.
The opposite governmental action of austerity is more limiting and leads to degrowth. Degrowth in the Euro zone has led to money flows into American high growth stocks and has led to extremes in overpricing of American tech stocks relative to other global areas, limiting options for future growth in stocks in the US as well.
The process of bond repricing in the US and other developed countries, stagnant growth and a rangebound stock market is not over. It will be continuing for the foreseeable future. We are all stuck. The asset bubble of tech stocks is not as extreme as 2000. Time will tell if it is as extreme or moderates. The real estate asset bubble is similar. Other commodified asset bubbles appear to be moderating.