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Banking: Open markets offer some hope

Here’s the good news. Even as profound uncertainty persists over sovereign debt sustainability, the impact of deficit reduction on economies, the potential damage from declining prices and evaporating liquidity in government bonds on banks’ balance sheets and profits, the capital markets remain open.

Sovereigns and banks can access the wholesale funding markets. And that is both vitally important and remarkable. These conditions resemble those at the start of the financial market crisis in 2008 when uncertainty and risk aversion closed markets down. The lesson then was that access to finance is more important than credit fundamentals. The well-capitalized institution with decent assets will go bust if the market won’t roll over funding.

For now they will, and so there is hope.

Investors, it seems, who generally prefer even the certainty of bad news over the fog of all outcomes being possible, are coping in the absence of a deus ex machina saviour.

And yet: let’s not declare victory too hastily, just because a handful of the world’s strongest banks, such as HSBC and Credit Suisse, were able to launch bond deals in June while Spain, a country with a government debt to GDP ratio of 50%, successfully auctioned some government bonds. If they couldn’t, we would already be in the financial market equivalent of nuclear winter.

We are not, but how far away are we from that?

As market volatility declined towards the end of last month and primary markets reopened to the bigger banks, a curious explanation was being offered for this improved tone.

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