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The global financial crisis as source of opportunities
submited on 01.04.2008 in category Political stability | Fiscal affairs | Monetary policy | Regulated markets | Privatisation | Macroeconomic developments
submited on 01.04.2008 in category Political stability | Fiscal affairs | Monetary policy | Regulated markets | Privatisation | Macroeconomic developments
The popular opinion is that financial crises threaten economic growth and in this line of thoughts must be avoided at any cost (or at least postponed in time). With this argument the Federal Reserve undertook a series of monetary measures, as it even became lender of last resort. Apart from source of negative effects however the financial crisis could accelerate some positive processes, such as the elimination of some of the unhealthy investments, made under record low interest rates and easier access to credit. Thus the financial crisis “punishes” financial institutions, which have taken unreasonable risks with the aim being to realize higher profit. In the moment namely the banks which invested most actively in high-risk financial instruments are among the threatened from falling into liquidity crisis and potential acquisition by their rivals.
The dominating thesis is that the world financial crisis represents biggest threat to emerging markets. Most analysts however accentuate rather one-sidedly on dangers for small open economies such as the Bulgarian, not paying attention to some positive effects, stemming directly or indirectly from the credit markets’ stagnation.
In first place, the decline on the Bulgarian stock exchange led to reassessment of risk. In a period of accelerated and almost incessant stock prices’ growth, reaching its peak in October last year, the predominantly speculative investors had probably unrealistically high expectations for making fast capital gains. To confirm this BNB data for mutual funds shows that high-yield (and high-risk respectively) schemes attract biggest portion of the holdings of citizens (some 69%). As of end 2007 balanced vehicles manage 29% if household assets in collective schemes, with barely 1.5% for funds, investing primarily in bonds. The stock exchange decline would probably lead to partial reallocation of financial means from higher-risk to less volatile investment alternatives, which would stimulate the more balanced development of the mutual funds’ market in the different risk segments. One of the major opportunities before the pension industry is the introduction of the so called multifund system, which allows for segmentation of clients according to their risk preferences.
The bank system was also affected, although partially, by the secondary effects of the mortgage crisis, mainly with respect to growing price of credit on the interbank market. Only in a year the EURIBOR picked up by some 70 basis points. The necessity of attracting internal resource accelerated the introduction of some bank innovations. In their marketing strategies banks emphasize not only on price competitive advantages (higher interest on deposits), but also on development of portfolio of new deposit products, among which also deposits with speculative element (based on stock prices, oil or metals), providing opportunities for achieving higher yield under particular conditions. An answer to this market strategy is the opportunity for mutual funds to offer product with guaranteed part of the principal, which to some extent resembles the characteristics of the bank deposit. Thus in the mid-term we will probably witness acceleration of competition not only among particular market participants, but also between market segments of the entire finance industry.
On the other hand, the improve liquidity on deposit products gives citizens the opportunity to cut the share of the lowest yield part of their financial assets – cash, which are still ¼ of the aggregated household wealth.
The long-term outlook is for growing importance if low-risk investment alternatives (different from bank deposits) due to the development of the non-bank intermediation and the gradual improvement of the investment culture of the population. With respect to the informational asymmetry on credit markets and the non-precedent low household confidence in financial intermediaries abroad, which resulted in liquidity issues on a micro and macro level, the Bulgarian financial system looks for now stable. The maintenance of this financial stability however requires the balanced development of the financial intermediation between the different risk segments.
The dominating thesis is that the world financial crisis represents biggest threat to emerging markets. Most analysts however accentuate rather one-sidedly on dangers for small open economies such as the Bulgarian, not paying attention to some positive effects, stemming directly or indirectly from the credit markets’ stagnation.
In first place, the decline on the Bulgarian stock exchange led to reassessment of risk. In a period of accelerated and almost incessant stock prices’ growth, reaching its peak in October last year, the predominantly speculative investors had probably unrealistically high expectations for making fast capital gains. To confirm this BNB data for mutual funds shows that high-yield (and high-risk respectively) schemes attract biggest portion of the holdings of citizens (some 69%). As of end 2007 balanced vehicles manage 29% if household assets in collective schemes, with barely 1.5% for funds, investing primarily in bonds. The stock exchange decline would probably lead to partial reallocation of financial means from higher-risk to less volatile investment alternatives, which would stimulate the more balanced development of the mutual funds’ market in the different risk segments. One of the major opportunities before the pension industry is the introduction of the so called multifund system, which allows for segmentation of clients according to their risk preferences.
The bank system was also affected, although partially, by the secondary effects of the mortgage crisis, mainly with respect to growing price of credit on the interbank market. Only in a year the EURIBOR picked up by some 70 basis points. The necessity of attracting internal resource accelerated the introduction of some bank innovations. In their marketing strategies banks emphasize not only on price competitive advantages (higher interest on deposits), but also on development of portfolio of new deposit products, among which also deposits with speculative element (based on stock prices, oil or metals), providing opportunities for achieving higher yield under particular conditions. An answer to this market strategy is the opportunity for mutual funds to offer product with guaranteed part of the principal, which to some extent resembles the characteristics of the bank deposit. Thus in the mid-term we will probably witness acceleration of competition not only among particular market participants, but also between market segments of the entire finance industry.
On the other hand, the improve liquidity on deposit products gives citizens the opportunity to cut the share of the lowest yield part of their financial assets – cash, which are still ¼ of the aggregated household wealth.
The long-term outlook is for growing importance if low-risk investment alternatives (different from bank deposits) due to the development of the non-bank intermediation and the gradual improvement of the investment culture of the population. With respect to the informational asymmetry on credit markets and the non-precedent low household confidence in financial intermediaries abroad, which resulted in liquidity issues on a micro and macro level, the Bulgarian financial system looks for now stable. The maintenance of this financial stability however requires the balanced development of the financial intermediation between the different risk segments.
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