• The focus of the financial crisis has moved away from fears of systemic risk in the financial sector and towards the economic consequences of the situation. The economic fallout from the financial crisis has thrown the world economy into the deepest recession seen at least since the 1970s. We still have the bulk of real economic losses (rather than the marked-to-market losses that have dominated so far) ahead of us, as unemployment and delinquencies surge higher. Default rates are heading for record highs.
• For a long time, the main issue for banks has been constrained access to funding markets. After a series of central bank and government initiatives, now banks largely have access to (short-term) funding. As the negative impact of the financial crisis is being felt in the real economy, the focus has turned to the capitalisation levels of the banks, which are increasingly in need of government help to raise capital.
• More quantitative easing may be on the cards in the US, and other countries, eg, the UK, are also moving in the same direction.
• Intra-euroland spreads have exploded on the back of rating actions and an increased focus on economic imbalances. This has fuelled speculation that one or more countries may feel the need, or be forced, to default on their debt and/or leave the euro area.
• Recently, emerging markets have been hit hard and more problems may be in the pipeline. Unwinding of carry and dwindling risk appetite is hitting the most imbalanced markets the hardest. Local emerging markets crises could flare up with little warning.
