April 29, 2009
A few weeks ago, in a car crossing from China to Hong Kong, I caught a glimpse of what the future might hold. After the usual formalities about visas and passports, the car door was opened aggressively. The woman with a SARS mask said nothing but pointed a gun to our heads and pulled the trigger.
As a medical test, it was a bizarre — and momentarily terrifying — way of going about things, but thankfully that’s all it was. She was testing, with an infrared gun, our temperatures. This was a precaution against SARS, which, as a virus, raises temperatures above normal.
Now, with the outbreak of swine flu, we should expect similar checks all over the world. Today I am in Perth, Western Australia, and the controls are already in place. The Australians were caught flat-footed by SARS five years ago and are taking no chances now.
The outbreak of yet another pandemic got me thinking about how financial markets operate and how Ireland has been effectively put in a financial isolation ward as a result of a global credit panic.
Ireland is a contaminated area and the resulting scarcity of credit is at the root of most of our problems. In financial terms, our bad behaviour of the past few years has ensured that we are considered contagious. We have the virus.
Think about what is happening now with respect to the potential pandemic. People, who are potential carriers, are being tracked, particularly as they come home. The reason the airline shares and the price of petrol dropped this week is that in a pandemic people want to get as far away from the source as possible. There is a dramatic retrenchment of people away from foreign, potentially contaminated places to the relative safety of home.
The flight is not orderly: it is a panic. Everyone is a potential danger and the best way to avoid contamination is to avoid contact with others. We know that there is no antidote and no amount of government guarantees or promises is going to change that view.
The transmission mechanism is so virulent and random that it terrifies us all.
Now think of the financial markets.
What have swine flu and global financial markets got in common? At first blush nothing, but on closer examination everything. The way a pandemic creates panic is a wonderful way to look at financial contagion when it takes hold. A rumour can lead to a crisis and, depending on how robust the system is, total meltdown.
The financial world is now dominated by 24-hour news programmes, as well as trading systems like Bloomberg and of course the internet, where news is instantaneous. The markets become a global blog with the attention span of Twitter, where every minor whisper becomes amplified. The trading floors of the world serve as global echo chambers.
And this isn’t limited to trading floors; all business works the same way and in a crisis the slightest whiff of a problem can cause otherwise good creditors to cut credit lines.
In a pandemic, people flee the stricken area. In a credit crunch, capital flees the stricken region. No one trusts anyone. It is not that there is a lack of money; there is a lack of credit. Everyone is a potential carrier and potentially bankrupt. Banks stop lending to each other and begin to distrust not only other banks, but departments of their own institutions.
Like a health pandemic, a financial pandemic is characterised by fear, which prompts massive overreaction. This swine flu overreaction can only be assuaged by massive government action. At the moment no one trusts the ability of governments to come up with an antidote, so countries try to stock up on what medicine they have. This means that the poorer countries can’t get their hands on the antidote.
In business terms, this is like good businesses becoming bad because of cash-flow problems. This is precisely what is happening in Ireland.
Because the banks and the developers were delinquent, credit fled from the whole country. Businesses that had nothing to do with the contaminated property sector found that they too faced a squeeze.
The other day I was talking to a friend of mine who has run a fantastic business in terms of profits, turnover and market share in the past few years. Now he is faced with personal cash calls to cover part of the business that is shipping water. In normal times, the banks might cover that or at least, with credit available, he could paper over the cracks and buy himself time. Now that is not the case. We are a high-risk zone and therefore, the credit is gone. He is now being pressed to sell his shares to one of the major shareholders at a massive discount because he can’t personally come up with the cash.
So we can see how events in one part of the world spreading contagiously through the financial system can lead to good businesses going bad.
This is happening all over Ireland. Like the world in a swine flu pandemic, it might be some time before normal conditions return. For many, even if the next year proves to be less dreadful than we imagine, we still won’t believe that the danger has passed. The financial virus may be mutating, waiting for a chance to jump species again and attack us.
It is this virulent nature of global finance, driven by 24-hour communication, that implies governments need to take up the slack now. The Government is like a hospital. If we think the doctors are up to fighting the virus with everything at their disposal, the panic might begin to subside. Unfortunately for us at the moment, our Government has never been so important, yet it has never been so unimpressive.