SVB, Eurovita: The Global Bond Crisis Begins

Just after the bankruptcy of SVB (Silicon Valley Bank), Bruno Le Maire claimed that there was "no risk of contagion in France". He is completely mistaken, especially since a similar event has already occurred in Europe- in Italy to be precise- with the bankruptcy of the life insurance company Eurovita, which we were among the first to report.

It is important to understand that the bankruptcies of Eurovita and SVB, while waiting for the next ones, are linked to a bond crisis. It is not a question of fraud (FTX, Madoff), toxic assets (subprimes), or adventurous management (LTCM in 1998). No, the problem is the huge bundle of sovereign bonds that form the basis of the balance sheets of financial institutions around the world and whose value has shrunk dramatically.

For years, in fact, since the subprime crisis of 2008, we have been living with low, zero, and sometimes negative, interest rates. Bonds issued by governments to finance their deficits therefore yield little, but they are very liquid (a crucial element in finance). Moreover, prudential regulations (Basel 1, 2, 3) oblige banks to own them (for their security and that of their depositors). Considered risk-free (a government does not go bankrupt), the sovereign bonds of major countries rated AAA or AA offer a safety cushion to banks, insurers and fund managers.

But as inflation returned, the Fed and ECB decided to raise their key rates and stop buying bonds. As a result, interest rates have risen sharply in a few months, at a very fast pace for this market of pachyderms. As a result, old, low-yielding bonds saw their value plummet. If the bank or the insurer can wait for the maturity date (one, two, five, ten, or more years), the bond purchased for €100 will be reimbursed for €100. No problem. But if it has to sell it on the market to meet sudden commitments, it will get back €80, €60... And if the loss exceeds its equity, it's bankruptcy. This is what happened with Eurovita and SVB.

An announcement should have alerted regulators and governments: the record loss of 132.5 billion Swiss francs (133 billion euros) of the Swiss National Bank (SNB) last year, published on October 31, 2022 and confirmed on March 6th. This loss is essentially due to write-downs on its bond investments (note: the SNB accounts for its assets at market value, which the Fed or the ECB are careful not to do...). Only a central bank cannot fail with such a balance sheet.

Many financial players on both sides of the Atlantic could thus find themselves in difficulty (Credit Suisse). The bond crisis has only just begun.

The main culprits of this crisis are the central banks: they left interest rates at zero for too long, without anticipating the inflation that was bound to come, and then they raised their rates too quickly, taking the world's finances by surprise. What will they do now? Keep raising rates or turn the printing press back on?

Like bulls in a china shop, whatever they do, central banks will only add to the confusion...