Wednesday, October 08, 2008

A crisis of "enormous proportions"

Poor old Ambrose this morning was running out of hyperbole. Once you've proclaimed that the sky is falling in, there is not much left in the vocabulary to describe a situation that is getting even worse.

Nevertheless, our brave correspondent rose to the occasion, lifting a quote from Miguel Angel Ordonez, Spain’s ECB governor. In testimony to the Spanish Cortes, Ordonez "acknowledged" that the world now faced a crisis of "enormous proportions."

Guy Quaden, Belgium's ECB member, also helped out. He declared that the violent storm ravaging Europe's banking system was far from over. "This is the worst financial crisis since the Thirties," he told the Belgian parliament.

This is the European Central Bank, dramatically changing its tune over the last twenty-four hours. It is getting to grips with reality and testing out its own disaster vocabulary.

The problem is, once the situation does get even worse, what is there left after Ordonez's "enormous"? Do we raid the dictionary or start inventing new words, like "gigahorrendous" perhaps?

But, squeezed into Ambrose's dictionary of disaster, is a more pedestrian word, but one which nevertheless retains its power. That word is "shock". The collapse of Germany's Hypo Real, writes Ambrose, "has come as a deep shock since the company's assets are mostly high quality." The crisis, he tells us, was triggered when Hypo was unable to roll over loans or issue bonds in the closed credit markets.

Although the point is not directly made, this takes head-on the current mantra that the market is being taken down by "toxic" debt. Much of the paper being written down now would be, in an orderly market, of high value with limited default risk. But, in today's febrile climate, even these are worthless.

That point – rarely made – is that even much of the "dodgy debt" still has a default value. Yet, while one banker commenting on a Wall Street Journal blog was writing that even foreclosed mortgages were fetching 40 cents on the dollar, he was being forced to write down securities at zero value.

This is actually the madness that is infecting the market and when banks like Hypo Real Estate go down, when in fact they were perfectly sound, "shock" is a good a word as any.

  • Other posts on the financial crisis here.