A new world order, almost unnoticed

Après les Etats-Unis, l’Europe? asked the French daily newspaper Le Monde this morning in an Internet leader on how the contagion from the banking crisis that started in Lower Manhattan is now sweeping Europe.

We’ve already had a dose of it, of course, with the nationalisation of the UK bank Northern Rock and the bail-out in Germany of institutions such as IKB Deutsche Industriebank and Sachsen Landesbank, but this weekend things got much, much worse.

Sunday brought news of failures at the European banking and insurance giant Fortis and at the UK bank Bradford & Bingley. Fielding the now-familiar too-big-to-fail argument, the Belgian, Dutch and Luxembourg governments have drawn up a €11.2bn rescue plan for Fortis, and the UK government has announced the nationalisation of Bradford & Bingley and the sale of its savings unit to the Spanish bank, Santander.

Today, we learnt that the German mortgage lender Hypo Real Estate is in trouble and is to be bailed out to the tune of €35bn by a consortium of German banks and the state – but mainly the state. Meanwhile, the share price of the Franco-Belgian bank Dexia plunged 31.78% on the Paris Bourse this morning, prompting the Belgian government to intimate that it would, if necessary, offer Dexia the same support it had Fortis.

Even sweet little Iceland with its tiny population and free electricity hasn’t been spared. David Oddsson, head of the Icelandic central bank, announced this morning that the government has purchased a €600m stake in the country’s third-largest bank, Glitnir, to prevent it from failing.

“Without this intervention, Glitnir would have ceased to exist within the next few weeks. It's as simple as that,” Oddsson told a news conference, summing up the position not only at Glitnir, but at many much larger institutions.

So what now? As we wait to find out if the US Congress will pass the revised Emergency Economic Stabilization Act 2008, which further to interventions from both Republicans and Democrats no longer makes Treasury Secretary Henry Paulson king of the universe, people are asking just how bad this crisis is.

Some see in it nothing less than the end of the existing world order. Last week, I trawled the web sites of Europe’s remaining communist newspapers looking for death-of-capitalism type pronouncements and found only a strange silence, but this weekend, John Gray, the philosopher, author and Professor of European Thought at the London School of Economics, obliged me with some Überdoom.

“The upheaval we are experiencing is more than a financial crisis, however large,” Gray wrote this weekend in the the UK Sunday newspaper the Observer. “Here is a historic geopolitical shift, in which the balance of power in the world is being altered irrevocably. The era of American global leadership [...] is over.”

Even Gray doesn’t think that we’re experiencing the end of capitalism; he just sees the passing of one type of capitalism. The experiment in financial laissez-faire has, he says, imploded.

Others remind us that the crisis isn’t that bad. Comparisons with the Great Depression, for example, may be overblown. Unemployment in the US is still only 6%, and while financial firms may be dropping like flies Stateside – the latest and biggest casualty is Washington Mutual and there is now a question mark over sometime Morgan Stanley suitor Wachovia – other sectors of the economy have not yet been affected in the same way.

“It’s hard to evaluate a crisis when you’re in it,” Hubert Goyé of BNP Paribas AM recently observed when I interviewed him for a piece on US equities, and he is surely right. It’s too early to know whether Professor John Gray will ultimately be proved correct in his view that “a new word order is coming into being almost unnoticed”, but there are a couple of things we can be fairly sure about.

There are going to be some very big changes in the very near future and the finance industry is probably never going to be quite the same again. Or, as Nancy Pelosi, the Democratic Speaker of the House of Representatives, put it when announcing the revised $700bn government bail-out plan for the US finance sector, “The party is over.”

Fiona Rintoul, Editorial Director
©  2008 Funds Europe