After more than two years of world financial crisis and the biggest recession since the Thirties of last century, we are finally beginning to see the first signs that the worst may now be over. The coming of the crisis awakened the whole world from a dream state in which financial risk was almost irrelevant, liquidity was unlimited, any imbalance was easily sustainable and economic-financial cycles had passed into history. In this state of Nirvana, investors were paying minimum risk premiums and taking on high risks, the stock markets were rising, households went into debt and the public sector accounts were obtaining satisfactory results.
The awakening has been especially severe. Companies, households and governments suddenly found themselves with huge financial problems with the halt to the flow of credit and the spread of uncertainty about the viability of the financial system. Practically without interruption, the sudden brake on the world economy between the end of 2008 and the beginning of 2009 led to a situation that threatened a total collapse. The measures taken by the authorities probably avoided a replay of the Great Depression but getting back to normal is still some distance away.
One reason for fearing that the recovery is going to be slow is the rearrangement that will be needed in the balance sheets of both consumers and companies. As set out in boxes in this Monthly Report, household indebtedness was a key factor in the growth years as it financed increased spending. When this exceptional situation was substituted by a brake on incomes, loss of wealth, an increase in unemployment and uncertainty about the future, the reaction was a halt to consumption and an increase in savings. This was a logical and rational response from the point of view of households but inevitably it meant lower aggregate demand and therefore much lower potential growth than what we had become accustomed to, at least to the point where households felt that their financial situation had got back to being satisfactory. The fiscal supports provided by governments may have eased the cut in consumer spending but sooner or later these aids will have to be withdrawn.
A similar thing took place in companies which, as well as needing to adapt their balance sheets to the current situation, must deal with more difficult financing terms. Getting back to normal will not be fast in this sphere either. Risk premiums are being eased little by little but investor sensitivity will take time to ease off and even when the world economy settles into a recovery we cannot expect that risk premiums will go to the abnormal lows seen in 2006. Investors, both private and institutional, will be much more selective in the type of asset and the issuer. Awareness of liquidity risk will be much greater. Caution exercised when dealing with financial innovation or complex assets will make these more difficult to place. The rise in public sector borrowing and difficulties in reducing fiscal deficits in a context of slow recovery could harden financial terms for economic agents as a whole.
Looking back to the moments of greatest splendour of growth at the beginning of the present century, the current situation seems almost like a punishment for past excesses. It is more likely, however, to be a return to normalcy, to good sense and a realistic evaluation of risks and the compensations that come from economic activity.
