On 8th April, 2019, I addressed the annual conference of the British Universities Finance Directors Group held at Royal Holloway College. The theme of my presentation was: “For how much longer is globalised, credit-fuelled ‘growth’ sustainable?” The assembled Treasurers and Finance Directors listened in respectful silence, but few questioned me after the presentation.
My presentation warned in particular of the danger posed by what Keynes called ‘the fetish of liquidity.” “While a bond issued by a university can be (more or less) liquid” I warned “not so the university”. The evaporation of liquidity would leave universities as ‘beached whales’ – which I illustrated with an image of a beached First World War German submarine.
To illustrate this point I used the example of BNParibas’s famous press release of 9 August, 2007, quoted by Reuters:
“The complete evaporation of liquidity in certain market segments of the US securitization market has made it impossible to value certain assets fairly, regardless of their quality or credit rating….BNP Paribas investment Partners has decided to temporarily suspend calculation of the net asset value as well as subscriptions/redemptions, in strict compliance with regulations, for these funds”
Thus was launched what came to be known as the Global Financial Crisis of 2007-9.
In my post I noted that global liquidity (post QE) in 2019, after 10 years of calm amounted to $377.8 trillion – calculated by the Financial Stability Board as total global financial assets in Feb 2019. Shadow Banking – insurance corporations, pension funds, other financial intermediaries and financial auxiliaries – defined as the “Monitoring Universe of Non-Bank Financial Intermediation” in the FSB Report, Feb 2019 – amounted to $185 trillion. Global GDP by contrast amounted to just $80 trillion.
At that point the Institute for International Finance calculated global debt as amounting to $244 trillion – 318% of Global GDP or income. Non-financial corporate debt was “close to the pre-crisis peak” of 73% of global GDP. I followed this with a quote from the IMF: “Compared to the previous peak in 2009, the world is now more than 11 percentage points of GDP deeper in debt.”
I listed the threats facing universities, including that of a Corbyn-led Labour government. But I also warned of “a collapse of trust in the valuation of assets (student accommodation?).”
Such a collapse in the valuation of the real estate asset (and its expected revenue streams) could be catastrophic for university debtors. It would likely lead to creditors losing trust in the asset, which would in turn amplify the cost of debt, and demands for rapid repayment. More seriously, given system-wide scale of debt leveraged against university accommodation, a collapse of trust in the value of university assets could trigger another crisis. I cited the famous 9 August, 2007 press release from BNP Paribas as an example of the scale of impact brought on by such a loss of trust.
I have decided to upload the presentation I prepared for that event, for the benefit of PRIME readers. The final presentation was edited to eliminate much of the text included in this first version, as the text was delivered as speech. Below are links to first, the full version, and then the images-only version.
- Topics: Finance & Regulation, Private Debt, UK
