The perfect storm? Similarities to the 2011 crisis
When I was young, I loved the movie “The Philadelphia Experiment (1984)”, where several U.S. Marines, in the middle of World War II (1943), traveled through a storm caused by an advanced technological experiment that transported them into the future, to the 1980s. In this context, the movie tells the story of their setbacks in returning to their natural historic moment.
Given our similar warlike context today, and the advanced technological experiments in monetary policy, I sense with some trepidation that we are rapidly moving toward another “Philadelphia Experiment”. With this more than possible perfect storm, we could end up in a crisis with enormous similarities to 2011.
The following could be the three elements of this Philadelphia experiment. On the one hand, our economic perspectives are increasingly uncertain, as a result of the energy and raw materials costs affected by the war, which were also affected by the unprecedented shock of the pandemic. In 2011, we were already seeing the consequences of the global financial crisis of 2008-09.
Secondly, there is an inflection point in the international financial cycle, as a result of the change in direction that U.S. Monetary policy took in 2021, followed closely by the ECB, as they announced last Thursday. In 2011, the monetary institution of the Eurozone had already raised rates twice before backtracking.
Let’s also not forget that increased risk premiums, and therefore increased yield differentials, are part of any monetary hardening. The poor stock market yield of the Eurozone banks, which should benefit from rising interest rates, raises concern about their capacity to continue to adequately and homogeneously finance the regional economy, especially at the borders of the union.
This is coupled with the stress of many emerging non-commodity and non-energy producing countries that are clients and recipients of financing from the Euro zone and the G20. They no longer benefit from the suspension of interest payments on pandemic-phase debt and have become de facto insolvent, needing to restructure their debt and causing a domino effect in some countries, which has led, for example, to an increasing perception of risk in the Euro zone.
And, finally, the rating agencies, which have adopted a very conciliatory attitude in the past, could soon change direction. This, coupled with the various political cycles of very relevant countries in the union, could further fuel the risk of convertibility and fragmentation that Lagarde is not talking about. Moreover, it is increasingly likely that financial markets will want to test the ECB's resolve at some point. Therefore, I believe that in order to avoid a “Philadelphia Experiment”, it is essential that a protective monetary or fiscal umbrella be activated immediately, in order to prevent possible financial stability and fragmentation problems.
Gonzalo de Cadenas-Santiago
Executive Director MAPFRE Economics