Column Is the global recovery here?

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: In January 2007, when trouble in the subprime mortgage market was brewing, optimistic pundits pointed out that subprime represented less than 10% of the US mortgage market. They predicted that once the uncertainty died away, the crisis would cost less than $100 bn and would be easily absorbed by the generous buffers of capital held by banks. Since then the world’s biggest commercial and investment banks have written down $500 bn of bad debt and have been begging for capital. The IMF estimates losses relating to the credit crunch could reach as much as $1000 bn. But the optimists are back suggesting that the worse is now behind us.

Around the world, bank stocks have bounced 21% from their lows of July 15. Hope springs from the belief that banks have now written down what there is to be written down, the authorities are extending unprecedented lengths of support and buyers of credit are finally emerging. Last month, GE Real Estate, the commercial and property arm of the industrial and financial services conglomerate bought a euro 642 mn credit portfolio from Credit Suisse. This is not an isolated trade. In the last eight months GE has purchased over $6 bn of European property-related loan portfolios.

The recent turn down in commodity prices has also helped bank stocks in one of those peculiar dynamics of the financial markets. The 45% rise in oil prices from January to July of this year and its expected knock on impact on inflation was seen by investors as a key constraint for central banks in supporting the financial sector with lower interest rates. Noticing this, unconstrained investors began to fund, leveraged, long commodity positions by shorting bank stocks. Once commodity prices began to fall back after July 3, leveraged investors were forced to unwind both their long commodity and short bank positions, exaggerating both the rise in bank stocks and the fall in oil prices. To some extent, therefore, the rally in bank stocks represents a technical dynamic tied up with commodity prices and rate expectations rather than a direct view as to the fundamentals of banking.