BANKS failing to lend to each other could undermine any recovery in the economy, according to Quilter head of fixed income Oliver Stones.
Speaking at a client briefing in the island entitled ‘Green Shoots – Myth or Reality’, Mr Stones identified areas of promise in the markets as well as those to avoid.
Looking specifically at US consumer sentiment he said there were definite signs of improvement, although ‘recovery was tenuous at best’.
Improvements were seen in the Michigan University Consumer Sentiment Index, which had recently shown clear signs of bottoming out, and that global trade had begun picking up, as evidenced by the Baltic Dry Index, which tracks worldwide international shipping prices of dry cargo, as well as China’s purchasing managers’ index and Taiwan’s trade figures.
However, he warned caution as the disparity between the London Interbank Offered Rate and the base rate was still too wide for there to be a conclusive recovery.
‘Primarily this is a problem because Libor is the much more important rate to the capital markets given it underpins up to 300 trillion dollars-worth of global financial assets,’ said Mr Stones (pictured).
‘Official centre rates are an important tool for central government monetary policy, such as the current UK base rate of 0.5%, but the stubborn nature of three-month Libor means it is maintaining a differential of 0.75% between its rate of 1.25% and base rate at 0.5%.
‘This, we believe, is proof that the banks are still not lending efficiently to industry and individuals or trusting and lending to each other, and ultimately the financial sector has not proved to us that is has recovered sustainably.
‘This is a problem that potentially undermines the green shoots of economic recovery.’
In the current climate he also maintained that it was important to favour companies with sustainable and recurring revenue streams.
‘A sustainable and recurring revenue stream is vital in a time when credit or cash liquidity is hard to come by.
‘A credit crunch means that those companies that are cash rich and not over-levered can survive the crisis but those that need to borrow to service existing debt are going to find life very hard.’
Article posted on 1st July, 2009 - 2.30pm
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