The former head of the European Central Bank (ECB), Jean-Claude Trichet, assesses the situation in the financial markets today as dangerously as at the beginning of the financial crisis ten years ago. Emerging market debt is making the financial system "as vulnerable as 2008, if not more," Trichet told AFP. In mid-September 2008, the US investment bank Lehman Brothers filed for bankruptcy, marking the beginning of the financial crisis.
"It is now prevailing opinion that the massive over-indebtedness in the industrialized countries was a key factor in the eruption of the financial crisis in 2007 and 2008," said the 75-year-old, who was chief of the ECB from 2003 to 2011. "The growth in debt, especially in households, has slowed down in the developed world, but it has been offset by the debt of emerging economies." This makes the global financial system at least as vulnerable as 2008, if not more.
Trichet was president of the ECB when Lehman Brothers collapsed. "I recognized the true beginning of the crisis that collapsed over the world on August 9, 2007," he said. On the morning of that day, "the money market among banks stopped functioning completely".
There were already signs. But in the summer of 2007 it became clear that speculation with US real estate loans is not only causing problems for US banks. At the end of July, the German Mittelstandsbank IKB could only be saved from collapse with state aid amounting to more than three billion euros. She had invested heavily in complex US financial instruments.
"I was preparing for a disaster"
On August 9, the French bank BNP Paribas froze three of its mutual funds in the United States, after the loss had risen within a few days to 400 million euros. Fear and hustle and bustle spread, the banks did not lend each other any more money.
"That had not existed since the Second World War," said Trichet - "no more transactions between banks". He and his colleagues decided at that time to provide the banks with the liquidity they demanded. Around 50 commercial banks demanded the unimaginable sum of 95 billion euros - and got them.
In fact, the crisis worsened, the bankruptcy of Lehman Brothers on September 15, 2008 "was the detonator," said Trichet. He and his central bankers in the US and worldwide "were in a permanent conference". "We explained that the bankruptcy of Lehman would have catastrophic consequences, but I understand that the US government did not want to rescue Lehman unless there was a private-sector solution." At that time, the US government did not have the political will to step in with taxpayers' money. "I was preparing for the disaster."