Liquidity mismatch likely to spark next economic crisis: Nataxis

HONG KONG - The 2008/9 global economic crisis was caused by a "risk mismatch"; the next crisis may be a "liquidity mismatch", according to the economic analysis division of global asset manager Nataxis.

It says the 2008-2009 crisis was sparked by a revaluation of the risk of financial investments linked to real estate-related credit in the United States: financial products (RMBS, bank bonds) which were perceived as safe proved to be very risky due to the rise in borrower defaults.

“So the crisis was fundamentally triggered by a "risk mismatch": the perceived risk of certain financial assets was far lower than their real risk,” says Nataxis.

“Nowadays, this risk mismatch is hardly present, given the greater caution of banks and investors.

“But a new danger has appeared: "liquidity mismatch".

“Financial instruments (ETF), investment funds that promise a very high liquidity to savers (they are listed, or provide daily liquidity) invest in assets whose markets are rather illiquid (corporate bonds, leveraged loans, even government bonds in certain cases).

“To increase their return, they no longer seek to receive risk premia, as from 2002 to 2008, but illiquidity premia. The "liquidity mismatch" between these investors’ assets and liabilities or financial instruments will probably trigger the next crisis.”

Nataxis says a shock (geopolitical crisis, default by a country or a major corporation) would cause a fall in the prices of risky assets, "panic" sales by savers, and an inability for investment funds or financial instruments to sell the illiquid assets they have in their portfolios, leading to a major solvency crisis, and the closing of these funds. www.nataxis.com (ATI).