Lessons of 2008 leave Europe markets better protected

Bloomberg

The convulsions in European markets for the past month have traders looking back to 2008-2009, the last time the financial world seemed on the verge of collapse. The good news this time around is that policy makers are applying lessons learned from that crisis.
From the US’s $2 trillion rescue package to massive bond buying by the European Central Bank, officials have moved quickly to cushion the impact of the coronavirus outbreak. Sure, the responses have been uneven from country to country, the European Union’s members have struggled to agree on the details and the more ambitious ideas, like sharing the debt burden, seem out of reach for now. But overall, investors have been reassured by what they’ve seen.
“A key lesson from the 2008 crisis was for central banks to act quickly and be bold,”
said Jordan Rochester, a foreign-exchange strategist at Nomura International Plc in London. “They’ve done both in this crisis.”
To put the response in perspective, in 2008 several months elapsed between action by the Federal Reserve and the launch of a rescue programme for troubled assets. And in the subsequent euro-area debt crisis, investors criticised policy makers for repeatedly kicking the can down the road on matters such as how to rescue Greece.
Of course, the great crisis of more than a decade ago was a financial event rooted in the real estate market that had economic consequences; both the cause and the effect could be addressed by regulation and fiscal and monetary policy. This time around, all the stimulus in the world won’t help if the underlying public health catastrophe isn’t brought under control. Indeed, stocks finished the week with a decline on March 27, ending three days of gains, as case numbers in the US and elsewhere mounted.
That said, here’s a look at how markets have responded to the stimulus efforts, and how they’ve been informed by the 2008-2009 experience and the debt crisis.
Equity markets falling about 40% looks pretty similar to previous shocks; the speed of the fall is the main difference. The good news is that the massive risk-off event has also sparked a faster response from central banks and more importantly governments, which could avoid a structural bear market, according to Goldman Sachs Group Inc. In Germany, for example, the government announced a $824 billion stimulus plan at a time when the benchmark Dax Index was down 38% from its peak a month earlier.
“Policy has been fast to adjust this time, and we see this as a large positive and likely to prevent this from becoming systemic,” analysts at the investment bank wrote in a note.
The Stoxx Europe 600 Index reached its pre-2008 crisis peak in June 2007 and didn’t surpass that level until March 2015, almost eight years later.
Bank of America Corp strategists said the index could gain 25% by the end of August, which would still leave it about 8% shy of its February record. Goldman said stocks have a “good chance” of making new lows in the weeks and months ahead.
Governments are able to build their current measures on institutions implemented during the great recession or the debt crisis, like the European Stability Mechanism, which provides loans to EU member states. That avoids lengthly parliamentary processes and hence spares equities at least some uncertainty. And politics is temporarily turning a blind eye to the rules governing state aid to implement extensive state-guarantee mechanisms for bank loans.
“These mechanisms are crucial if banks are to continue to extend financing to companies in difficulty,” Natixis analysts wrote. The fear and uncertainty about a systemic credit crunch was one of the main reasons for the prolonged equity weakness 12 years ago.
With all the measures in place and central banks watching closely over subdued interest rates, there is a chance for deep but short-lived pain, enabling a faster equity market recovery.
“The recession is poised to be extraordinarily severe but relatively short, bottoming out in
2Q or early 3Q 2020,” said Francois-Xavier Chauchat, member of the investment committee at Dorval Asset Management.