Savings Guarantee? U.N. Warns Next Financial Crisis Seems Imminent

“There remains a risk of deflationary spirals in which capital flight, currency devaluations and collapsing asset prices would stymie growth and shrink government revenues. As capital begins to flow out, there is now a real danger of entering a third phase of the financial crisis…”

UN Conference on Trade and Development’s Annual Report (UNCTAD), September 22, 2016

Image from “Extraordinary Popular Delusions and the Madness of Crowds” by Charles Mackay – Wikipedia

This hard hitting critique in the UN Conference on Trade and Development’s Annual Report, released this week, is suggesting that the ‘third leg of the world’s intractable depression is yet to come.’

“Alarm bells have been ringing over the explosion of corporate debt levels in emerging economies, which now exceed $25 trillion. Damaging deflationary spirals cannot be ruled out,” said the annual report of the UN Conference on Trade and Development (UNCTAD).

But what does these grand, scary predictions really mean for us? Bankruptcy? Economic collapse? Apocalypse now? End of the world as we know it?

The UN economists certainly think that a la 2007/2008, we are on the verge of the third leg of the global financial crisis – with prospect of epic debt defaults.

We may soon experience the end of the financial world as we know it … but investors and savers feel fine! Many bond and stock markets, including the S&P 500, continue on their merry way to all time record highs.

Few know, or (it seems) care anymore. As we end yet another week with yet another anticlimactic announcement from the “all powerful” Fed, it is understandable that many of us are feeling some cognitive dissonance when it comes to the real impact of central bank announcements, economic forecasts and political changes.

Bail-In Regime Cometh

There was one major ‘solution’ to the crisis that was announced in recent years with so much spin you would be forgiven for thinking it has little to do with you. When in truth you are the one who could be most affected.

In 2012 the release of a joint paper from the US Federal Deposit Scheme and the Bank of England included the words; “deposit schemes may have to contribute to the recapitalisation of a failed bank”. Bail-ins in the UK banking system had become a possibility.

This was made official by a “watershed” moment in 2014 when Mark Carney announced the end of the bail-out era, he was calling time on ‘too big to fail’ for banks.

“Let’s face it, the system we’ve had up until now has been totally unfair…The banks and their shareholders and their creditors got the benefit when things went well. But when they went wrong, the British public and subsequent generations picked up the bill – and that’s going to end.”

The media, politicians and until now, the general public fell for this. The promise of no more bailouts has resulted in feelings of reassurance that the taxpayer won’t be asked to foot the bill when irresponsible bankers mess up.

But this is fundamentally wrong. As we outline in a forthcoming report on bail-ins, the British public and subsequent generations are still going to be ‘picking up the bill’.

For the first time depositors in the form of retail savers and companies with capital, (who also happen to be taxpayers) will also be exposed in the event of governments bailing out banks again.

But what about the much supported Deposit Guarantee Scheme? It’s unlikely to last, or mean much when crunch time comes.

“It is not enough to have just a Deposit Guarantee Scheme [for a major bank rescue] if the losses are vast enough, then the haircuts imposed by the resolution authority can in principle permeate to any level of the creditor stack. In the case of insured deposits, that means Deposit Guarantee Schemes suffering losses …”

Paul Tucker, Deputy Governor Financial Stability of the Bank of England, October 2013

In the EU depositors are protected by some form of a deposit guarantee scheme, EUR100,000 or £75,000 for UK depositors, is protected in the event of bank failure. However, as we outline in our forthcoming report this amount or even any kind of insurance, is not guaranteed. Some politicians and think tanks are even recommending that deposit guarantee schemes be removed.

What does this mean in the context of a forthcoming third financial crisis -- and are your savings ”guaranteed”?