Unfortunately, we do not have more reason to trust the markets today than yesterday and if one looks at the economists’ analyses, one finds reasons to moderate this optimism.
Indeed, this crisis is much more than a traditional turnaround of economic climate because it highlighted major dysfunctions in the financial system, caused by a change of the banks’ business model and an excessive debt of the economic agents, predominantly in the United States.
To carry on a famous expression among the economists, the banks went from a “originate and hold” model to a “originate and distribute” model, which means that the banks moved away from their core business which is to convert deposits into credits (i.e. to evaluate the risks, to hold and finance the loans considered to be sound) to become market intermediaries, immediately reselling the loans produced and making support by others the risks and financing of these loans. Their incomes have thus mainly consisted of fees while their levels of regulatory equity were mechanically lowered and the banking regulations were circumvented. All the conditions were thus met for completely eroding the chain of actors and financial consultants’ responsibilities with consequences known today by all, particularly the debt of economic actors which all and sundry knew that their cash-flows would not allow to reimburse their debt (subprime lending in the United States but also bullet debt with regard to LBOs) and the ultimate explosion of this bubble.
We are far from our core business of expansion capital, patient investor reinforcing the equity of the companies in order to foster their growth and to help them to overcome the periods of crisis.
This is why the subject of the traders’ bonus is so important; it is not only a question of ethics but of the world financial system’s stability.
This is also why the recovery will depend mostly on the spontaneous or forced will of banks to lend to the economy and particularly to SMEs (large corporations having understood that it was directly necessary to be refinanced on the bond market). One cannot but notice that we are very far from that today when the banks’ requirements (required guarantees often disproportionate, indecent spreads reaching sometimes 400 basic points, granted amounts in decline) are proportional to their laxity of yesterday. The extension of the universal bank model (i.e. commercial banks and investment banks) also appears to us to go exactly in opposite direction of the system’s stability: many economists consider that it is indeed the abrogation of the Glass-Steagall act (mandatory separation of commercial banking and investment banking) in 1999 in the United States which opened the door to the availability of important liquidities for the investment banks.
In addition, as Olivier Blanchard underlines it, IMF chief economist, the inescapable decline of the purchasing power of the American employees (because of the necessary downturn of their borrowing power) will have to be compensated by more exports to the emergent countries which are consequently once more in the middle of the recovery issue.
We, at Demeter are convinced that the recovery will not be able to only come from traditional defensive measures (ultra expansionist monetary policy, support given to the sectors in difficulties….), but that it requires major structural changes including predominantly a contraction of the market and finance activities in the general added value and a rebalancing of material and financial world exchanges.
This is why once again we assert our conviction that the recovery by Cleantechs is the only durable recovery. Essential, of course, to slow down climatic changes, it has also an advantage of finding a new equilibrium for world exchanges while reducing energy dependency (and consequently importance of the petrodollars which feed the financial circuits) and creating local jobs.
We are happy to see that this conviction is shared today by the majority of political leaders which gives us a certain optimism, although the setting up of these measures is not always easy.
The end of the year 2009 will see some crucial meetings for the future orientation: G 20 summit focusing on the reform of the financial system (it will not be easy considering the power of the lobbies), climate change conference in Copenhagen in December, debate on the tax carbon in France (prone to be very difficult with regard to its structure because it is hard to imagine how this type of contribution can function within a national framework).
At Demeter also the program will be overloaded:
- Participation in the national brain-storming through the presidency of the working SMEs group of the Eco-Industries Orientation Strategic Committee on the use of the funds of the “National great loan”.
- End of the subscription period of Demeter 2: €182 M reached at the beginning of July, the initial challenge of €200 M in October is on the way to be raised in spite of the economic situation.
- Overloaded investment plan: two new investments will be announced very soon
- Move in new and larger offices on November 1st
- And evidently an ongoing support of the portfolio companies.
Vacation, you said vacation, yeah, when was that again?
Olivier Dupont
President of the management board
