Back up on the precipice? What happens to financial services jobs if the sovereign debt crisis goes nuclear?

eFC logo

Nick Clegg thinks something bad is coming. According to our current poll (on the homepage), so do 80% of you.

Admittedly, the sample size for poll respondents is currently small (16 people) and there's a chance that only the pessimistic and ill-informed respond to polls on a Monday. But as the FT pointed out on Friday, an August panic akin to 2007 and 2008 no longer looks far-fetched. And history dictates that an August panic is followed by an autumn meltdown.

In the three years since 2008, the biggest investment banks have added thousands of staff. BarCap has nearly 2,000 more people; Goldman has 6,000 more, Credit Suisse has 2,000 more, UBS has 2,300 extra.

Some of these headcount additions are already being dented by redundancies. But the biggest banks still employ thousands more people than at the end of the last crisis. And as the FT's

Lex Column commented last week, in the current environment, banks' post-crisis hiring splurge looks both premature and costly.

The US debt situation

For all this morning's coverage of the European stress tests, the biggest issue at the moment is the US debt ceiling.

If the US government can't agree to

raise the debt ceiling by August 2nd, all bets are off.

As Jamie Dimon noted last week, failure to raise the US debt ceiling would lead to the US defaulting on its debt, which would...

...cut across intraday lines, revolvers, take down revolvers, money market funds, securities lending. Something like $3 trillion or $4 trillion of treasuries are used collateral around the world. It would change the pricing of securities. Some buyers, some owners will be forced to sell because they are not allowed to own defaulted securities.

Ben Bernanke has been more blunt, stating that there will be a 'huge financial calamity' if the debt ceiling isn't raised.

So it will be raised. Right? Maybe not.

CBS News conducted a poll last week suggesting only 27% of Americans want the debt ceiling raised; 63% are opposed to raising it.

More importantly, as this article points out, the increasingly vocal Tea Party strain of the Republican party is absolutely unwilling to raise the debt ceiling or to increase taxes. The US is stuck in standoff.

If this standoff can't be resolved, the prospects for banks, banking jobs, and the Western financial and economic system as a whole, don't look great.

The European situation

All of this is bad, and then there's Europe, which - as Jean Claude Trichet points out - could also trigger a Lehman-style crisis on its own.

This morning - after the European Banking Association's stress tests - the yield on Italian ten year bonds has risen to 6%.

As UBS analysts point out, last week's capital-based stress tests were merely a sideshow for the main event: sovereign illiquidity. For concerns about sovereign illiquidity and the European banking system to be taken off the table, UBS analysts say three fundamental assumptions must be shown to still hold:

- 'interest rates are low relative to nominal GDP

- interest spreads to Germany are permanently trivial, that is, there is no credit

dimension to any Eurozone sovereign

- wholesale funding is abundant and, because of assumptions 1 and 2, essentially indifferent to domestic issues such as current account and budget deficits.'

Unless these assumptions can be validated, pressure on the European banking system will remain an issue.

For the moment, most banks have run their own versions of the stress tests under more punitive conditions than those assumed by the EBA.

Morgan Stanley analysts, for example, have scrutinised banks under market-implied losses (Greece 56%, Ireland 47%, Portugal 45%), and concluded that €37bn of new capital will be needed to reach a 7% tier one capital ratio. Encouragingly, they think this is doable and that even the most undercapitalised non-periphery European banks could withstand the first order impacts of a 30-60% restructuring (writedown) of Greek, Portuguese and Irish debt. Depressingly, they also point out that the first order impacts of a restructuring are not where the risk lies. The risk is in the second order impact: a massive increase in funding costs that would make banks' current modus operandi unviable.

No matter how bad things become, UBS analysts identify one improvement on 2008: trading. They point out that most banks have reduced their trading risks since 2008, with RBS alone shrinking its trading book by over 800bn. As a result, UBS thinks trading revenues are likely to prove more robust "under most circumstances" than most people expect.

Trading jobs could therefore prove safer than before - as long as you're at a 'flow monster' and clients keep on trading. If the banking system goes over the precipice again, this could prove scant consolation to the thousands who could lose their jobs elsewhere in the industry in 2012, however.

Popular job sectors


Search jobs

Search articles