The collapse of Silicon Valley Bank in the US has a completely different meaning than that of Credit Suisse in Europe, which was only “a single, special case that is not generic around the European banks” according to Steven Bell, chief economist at Columbia Threadneedle.
“Just before Credit Suisse was forced into the arms of UBS, there was a dramatic difference between the credit default swap rate for Credit Suisse and Deutsche Bank. People who are looking at Deutsche Bank and thinking that it may be the next one to go should see it’s in a very different situation,” he said.
“The capital position of European banks is strong and they're typically in the process of returning cash to shareholders despite the credit tightening going on in Europe as part of their normal monetary transmission mechanism.”
Price of Deutsche Bank and Credit Suisse
Source: Columbia Threadneedle, Bloomberg
The same is true for UK banks, as no one is considering taking their money out of Barclays or HSBC, Bell argued.
But the improving news flow in Europe has been matched by a deteriorating narrative in the United States.
US banks, for example, have shown “a very significant tightening of credit standards” to small firms, as the chart below shows, using quarterly data relating to January.
US banks tightening to small firms
Source: Columbia Threadneedle
“This data only covers the situation well before the latest problems in small- and medium-sized banks in the United States and they were already tightening credit standards to small firms to a degree that is approaching the level seen during the global financial crisis,” said Bell.
“And one thing we can be certain of is when the next set of numbers for this are released in May they're going to be much higher and we’ll have a revival of concerns about the credit crisis in the United States.”
Bell also looked at consumer confidence in Europe and the US on the backdrop of inflation and rising interest rates. US consumers have remained positive and have been rapidly spending the money they saved up during Covid, “to an extent that has postponed any recession until now”.
“There are some encouraging signs of US inflation already falling, even in the crucial areas of accommodation and wages,” he said.
“However, we need clearer signs of a loosening employment market, which likely requires a recession and rising unemployment, before the Fed reverses course.”
Meanwhile, pessimism in Europe remains “excessive” despite the passing of the energy crisis and positive news around gas, where prices have fallen not only this year but futures prices for next winter have also declined.
“I'm not forecasting a boom in Europe, but I am forecasting stronger data and more resilient inflation, with the European Central Bank continuing to raise rates and avoiding the same credit crunch as the United States,” Bell said.
“If my scenario turns out and we get a mild recession in the US and inflation continues to decline there, the Fed will be cutting rates, the ECB raising rates, and I think there's a realistic prospect that US interest rates fall below European interest rates by the end of this year. That's a very significant change and the Euro is going to continue to appreciate against the US dollar,” he concluded.