Tags: us | economy | BNY | Mellon | Strategist | Derrick | 2011

BNY Mellon Strategist Derrick: 2011 Crisis Could be Worse Than 2008

By    |   Thursday, 07 Apr 2011 08:47 AM

Many economists say the global financial system is now reasonably safe after suffering its worst crisis in more than 70 years during 2008-09. But Simon Derrick, chief currency strategist at Bank of New York Mellon, isn’t so sure.

He sees some parallels between financial developments now and three years ago before Lehman Brothers imploded. But in some ways, the magnitude of the current problems are greater, he writes in a research note obtained by CNBC.

So what are the similarities? “The front-month Nymex (New York Mercantile Exchange) crude future is trading at almost exactly the same level that it was in early April 2008,” Derrick says. “Foreign exchange reserves are growing at a similar pace globally, and the euro is in demand, as talk focuses on what the ECB [European Central Bank] will do next.”

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A trader works on the NYSE floor. (Getty photo)
Oil prices hit a 2 ½ year high Wednesday, with May crude trading at about $108.50 on the Nymex. As for currency reserves, China’s rose by a record $199 billion in the fourth quarter to $2.85 trillion.

On the currency front, the euro breached a 15-month high against the dollar Wednesday, hitting $1.4349. The yen too has strengthened against the greenback, just as it did before Bear Stearns failed in 2008, hitting a post-World War II high last month, Derrick notes.

The precarious state of sovereign debt in European Union nations including Greece, Portugal, Spain and Ireland raises the stakes from 2008, he says.

"This time around, the battle is being staged in the euro zone and is taking place at both an institutional and sovereign level," Derrick explains.

“If the loans extended to Northern Rock (a British bank that had to be bailed out by the U.K. government in 2008) and Bear Stearns collectively amounted to somewhere in the region of 72.5 billion euros (about $104 billion), then how does this compare to the bailouts of Greece and Ireland?”

The bailout totals for Greece and Ireland alone — 195 billion euros ($280 billion) – top the assistance to Bear Stearns and Northern Rock by 170 percent.

And the troubles in Europe are far from over. “It is apparent from the recent price action in the sovereign debt markets that Ireland and Greece still do not command the confidence of investors,” Derrick said.

“With the yields on Portuguese debt rapidly approaching the same levels being paid by Ireland, it seems reasonable to say that the collapse of confidence in peripheral euro zone states is gaining momentum rather than stabilizing.”

Derrick isn’t the only one concerned. Bank of England Gov. Mervyn King, asked by The Daily Telegraph whether another financial crisis can hit, said, “Yes. The problem is still there. The search for yield goes on. Imbalances are beginning to grow again.”

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Many economists say the global financial system is now reasonably safe after suffering its worst crisis in more than 70 years during 2008-09. But Simon Derrick, chief currency strategist at Bank of New York Mellon, isn t so sure. He sees some parallels between financial...
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Thursday, 07 Apr 2011 08:47 AM
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