Fears of a repeat of the global financial crisis of 2008/2009 are beginning to escalate. You don’t here central banks sounding the alarm, but you get the impression that all is not well with crude price at sub-$40 level. The problem is that if a global financial meltdown were to reoccur today, it could be catastrophic. Think about central banks and countries being ill prepared to bail out failing industries because they are still recovering from the 2008/2009 economic meltdown.
Failure in the housing industry gave birth to the last global financial crisis. It was mortgage default that threw the banking sector to a crisis and because of the interconnected banking system of the modern world, the crisis spread quickly like a bush fire. Today, it is the oil and gas sector that is threatening to be the trigger of another global economic meltdown. The continued descent of oil prices doesn’t mean well for the global economy.
Depressed oil sector and irrational practices
Many players in the oil sector are already struggling with financial shortage as losses mount amid shrinking profit margins and fading cash flow. Because not many oil executives are taking the looming global economic threat seriously, they continue to borrow to keep dividends and buybacks. That not only means that drillers are risking their credit rating, but could also trigger defaults, thus spreading the problem to more industry as banking sector becomes strained.
Shortage of credit
If it happens that banks are strained to the point when people who want credit can’t access it, many industries will fail and that will usher in round-two of global financial crisis. But unlike the last one in which governments and centrals stepped in quickly and bailed failing companies, this time around it might be different.
Much worse than the last one
Because of the last financial meltdown, many governments and centrals exhausted their resources are only in the process of recovering from the last economic shock. That means that help would be limited if part-two of the global financial crisis were to strike because of collapsing crude prices.
It is the refusal of OPEC to cut production of oil to allow prices to rise again that is threatening to unleash another global financial meltdown, potentially worse than the last one.