Ten years on from the financial crisis

With the tenth anniversary of the global financial crisis upon us, now is a good time to take stock of what happened, what has changed and what this means for the chemical industry.

Debt linked to US sub-prime mortgages has been blamed for triggering the crisis. On Wall Street during the early 2000s this debt was being packaged and re-packaged into ephemeral products such as ‘Collateralised Debt Obligations’ designed to spread and reduce exposure to defaults.

But when US property prices fell and large numbers of these loans went bad, the market started to lose confidence. In June 2007 the US investment bank Bear Stearns failed to find buyers for its investment funds and had to close them for withdrawals.

What signalled the start of the crisis was the move on 9 August 2007 by French Investment bank BNP Paribas to close two of its hedge funds which had become more-or-less worthless. The news unnerved the financial sector globally and led to a sharp escalation in the cost of credit.

By 2008, credit markets had seized up and, in the panic that followed, Lehman Brothers collapsed and there were bailouts or forced mergers of other banks.

The knock-on effects on the global economy were profound with a collapse in industrial production, retail sales and most other economic activity. Those in the chemical industry who remember those days will recall how we were in more or less unknown territory as demand collapsed across value chains, leaving companies with huge amounts of inventory and plummeting sales.

At the same time, oil and chemical prices collapsed, making that inventory more expensive and damaging to balance sheets.

With credit markets closed, chemical companies also found themselves unable to borrow or refinance existing debt, sending some to the brink of bankruptcy.

As beleaguered finance ministers tried to identify the causes and safeguard against a recurrence of the crisis, there was a realisation that access to cheap credit for consumers and risk-taking by under-capitalised banks had sparked the problem. Baby-boomer fuelled growth had created benign macroeconomic conditions and, in this environment, only light-touch financial regulation had seemed necessary.

Following the crisis, stricter rules were introduced to force banks to recapitalise, reduce risk-taking and lend more cautiously.

DEBT CRISIS PERSISTS

At the same time, however, governments were forced to increase their own debt by bailing out many of the banks which had contributed to the crisis in the first place. State-sector debt is still at record levels for many countries.

Governments also created money electronically, attempting to kick-start the global economy through quantitative easing. Billions are still being poured into the purchase of financial assets such as government bonds in the hope that increased money supply will stimulate growth.

This is still proving elusive with demographic trends such as an aging population weighing on the global economy.

In some countries, since the crisis rules about lending have been relaxed across the board to stimulate growth. In China – the main engine of global economic growth since the crisis – credit has been growing faster than economic growth every year since 2008. With debt growing and its economy slowing, economists see China as one of the biggest risks to the global economy over the next five years.

INCOME INEQUALITY AND THE END OF GLOBALISATION

Commentators suggest the Brexit vote and election of Donald Trump signalled unhappiness amongst many people about rising inequality in the years since the financial crisis. As the economy collapsed, many people lost their jobs. Although employment has since increased in many countries, many new jobs are less well-paid and insecure.

Voters have blamed globalisation for exporting jobs and reducing their living standards. As this chart from the New York Times suggests, living standards have hardly risen for most people. Since the financial crisis it is those in the top 1% income bracket who have gained most income growth. In 1980 quite the reverse was the case.

The free movement of goods and capital around the world has benefited the chemical sector enormously. The anti-free trade movement shows there is now increasing societal pressure to restrict this through trade barriers.

LESSONS FOR CHEMICALS

Since the crisis, chemical companies have become leaner and stronger and, as a whole, the sector has become more careful about inventory control and more sensitive to economic signals. Although ultra-cheap finance is widely available, there is a more cautious approach to leverage and strong balance sheets are seen as an advantage. The sector has learned to live with low growth as the “new normal” and is seeking other ways of driving businesses forward.

Mergers and acquisitions (M&A) activity continues to reshape the industry as does a focus on service and value-added production. Digitisation is helping push efficiency in a variety of ways.

Although many CEOs have accepted that low GDP growth has become permanent since the crisis, the industry continues to forge ahead with waves of investment and executives say they are confident the current shale-led capacity boom can be absorbed mainly through exports.

However, remembering the lessons of the crisis would be wise: soaring public and private debt still has the potential to destabilise the economy. The rise of nationalism and the prospect of more restrictive trade rules are also a risk for the chemical industry.