7 October 2008
editorial
Johannesburg — THE thing about banks is they take a very small amount of capital and leverage it up tenfold or more, to a very large amount of lending. They borrow short and lend long.
They do things a prudent householder would never do. But it's the oil that keeps economies alive, because it matches those with surplus cash to those in need of cash. And it all works because of public trust.
When that trust in the banking system evaporates in a single country, the crisis that usually results is a sight to see. But when the loss of confidence crosses borders to become a global banking crisis, it is a truly amazing sight -- and a very scary one.
There are no precedents for a situation in which the governments of multiple countries feel the need to write guarantees for their entire banking systems. But that is what is happening in Europe, as the contagion from the loss of confidence in the US banking system spreads.
First, Ireland guaranteed private deposit accounts last week, and then Austria, Denmark and Germany followed, as, yesterday, did Sweden.
Instead of stabilising markets and restoring confidence, the series of uncoordinated actions within the euro area served to do the reverse. Not only did they raise concerns about the banking systems of those countries that declined to write guarantees, they also prompted political tensions within Europe. But yesterday's move to more concerted action by the European Union to maintain financial stability across borders was a good step, and today's planned meeting of finance ministers may help to calm markets.
But it's still not clear how and when confidence in the world's banks can be restored and when markets might start settling. And though it seemed initially that emerging markets might be protected to some extent from the crisis in more developed markets, with emerging market stocks falling the most in two decades yesterday and stock exchanges forced to halt trading in Brazil and Russia, the outlook will remain murky. And SA won't be immune.
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