The collapse into insolvency protection of Australian lender Greensill Capital, which conducts most of its business out of London, is a ‘black swan’ event with capacity to unsettle global finance.
Aside from the embarrassment for former prime minister David Cameron, an adviser, it is a big threat to the empire of Sanjeev Gupta, the saviour of chunks of Britain’s steel industry, who has sought to buy the metal operations of Germany’s Thyssenkrupp.
Greensill operates in an obscure corner of the financial system, buying supplier invoices, packaging them into bonds and selling them on to investment funds.
Greensill Capital operates in an obscure corner of the financial system, buying supplier invoices, packaging them into bonds and selling them on to investment funds
If that sounds familiar, it is not that different to the slicing and dicing of sub-prime mortgages and the creation of new securities at the core of the 2007-09 financial crisis.
Even though Greensill is domiciled in the Australian city of Bundaberg, its operations reach deep into Western finance.
Backers include Japan’s Softbank, which has pumped £1.07billion in and reportedly is planning to write down its investment to zero.
In Europe, Greensill is closely tied to Credit Suisse. The Zurich bank made a $160million (£115million) bridging loan to the company last October.
On Monday, Credit Suisse froze $10billion (£7.2billion) of investment funds holding securities from Greensill amid concerns over exposure to Gupta.
It should reassure investors that most of the frozen funds are protected by credit insurance.
But that sounds a little too close for comfort to credit default swaps – insurance which went wrong in the banking crisis.
The potential harm to Credit Suisse is not the kind of welcome Lloyds boss Antonio Horta-Osorio was looking forward to when he agreed to join as chief executive.
Also sucked in is Swiss-based fund manager GAM, which has £600million exposed to Greensill bonds. The best hope for this mess being contained is a rescue by a generously endowed private equity group, with Apollo Global Management in the frame.
That assumes that the huge amount of supply financing done by Greensill (£106billion in 2019) stands up to closer scrutiny than Gupta’s empire. That is a known unknown.
The recent spike in the yield on Government bonds has been dismissed as no more than a tantrum.
But when the Office for Budget Responsibility lays out Britain’s borrowing and national debt reality in today’s Budget, there can be no room for complacency.
Serious concerns are being raised about the loosening of fiscal discipline, the willingness of central banks to print money and the potential impact on inflation.
The former Governor of the Bank of England, Mervyn King, argues that excessive confidence in the forecasts and models being used to justify bigger deficits and monetary creation could be ‘dangerous’.
Writing on Bloomberg, King says there is a difference from the past, when it was politicians who pressed for easier money.
Now it is the central banks who want to keep rates low. He asserts that any bad news now requires a monetary response.
The central banks see it as their duty not just to keep short-term rates low but also to ‘cap’ rises in longer term rates. President Biden justifies his $1.9trillion (£1.36trillion) fiscal package by saying that ‘inflation is nothing to worry about’.
There is more reality in the UK. Chancellor Rishi Sunak says it will eventually be necessary to restore fiscal discipline. The Bank of England’s chief economist Andy Haldane cautions that inflation could rise.
If that happens, King warns that interest rates may have to rise leading to a sharp market correction. Ouch!
If the UK is to take full advantage of life outside the EU it will need a second Big Bang which sweeps away intrusive regulation so as to make the City more competitive with New York, Singapore and our closer-to-home rival Amsterdam.
Former EU commissioner Jonathan Hill has come up with a blueprint for shaking up London equity markets – by easing listing rules so that dual classes of shares are more acceptable and the City is more welcoming to fashionable ideas such as special purpose acquisition vehicles – SPACs.
The deep flaw is that the new regime would be policed by the Financial Conduct Authority. Trust is in short supply after the LCF and Woodford scandals.