Thomas Cook Collapse Is Only the First in 2008-Type Credit Crunch

Sept. 25, 2019 (EIRNS)—The bankruptcy of the Thomas Cook Group travel agency on Sept. 22, is the result of a credit-crunch phenomenon that is similar to the 2008 financial crash. As the costs of interbank lending rise, it has become more expensive for banks to share the risk of their loans to non-bank companies. Therefore, companies with large debt, which, up until this point, were able to have their loans rolled over, have become too great a risk for the banks. Thomas Cook can be seen as the first victim of this phenomenon, with many more potential victims to come. While it was first announced that Thomas Cook had £1.7 billion in debt, court documents revealed its balance sheet had a deficit of £3.1 billion.

The negative interest-rate policies of the national banks have added a hitherto unknown element of unpredictability in the credit markets. Somehow, the normal connection between risk and interest rates seems to be decoupled.

Today, Sept. 25, one of Northern Ireland’s largest employers, Wrightbus, transport vehicle manufacturer, collapsed. Dubbed the “Boris Bus” because, when Boris Johnson was Mayor of London, he had bought 600 of them, its collapse threatens 1,300 jobs, mostly in Ballymena, where it is based. Similar to Thomas Cook, it was in negotiations with prospective buyers, including the Chinese engineering group Weichai when a firm led by Jo Bamford, heir to the construction machine manufacturer JCB, pulled out of the talks. The collapse is also a victim of the Brexit crisis, since a significant number of the parts for its buses, including chassis and engines, are sourced from companies in the European Union.

“This morning Wrightbus entered administration as all potential bidders had withdrawn from a sales process,” Unite Regional Secretary Jackie Pollock said. “Prime Minister Boris Johnson has made great play about how he stands strong for British industry. He must now intervene to safeguard these workers’ jobs and skills and a future for Ballymena by nationalizing this business,” he said.

It is now further reported that Metro Bank, a relatively small British Bank, is in trouble and already conjuring up the ghost of Northern Rock, a big British mortgage lender that collapsed in 2008. According to the Guardian, the bank is unable to come up with the funds in order to fulfill the requirements for MREL, “the minimum requirement for own funds and eligible liabilities,” under the new bank resolution rules of the Bank of England and EU regulators. The requirement must be met by the end of this year, which is now called into question. It was widely reported that the bank’s attempt to raise £250 million in a bond issue bearing 7.5% interest had flopped. The bank, which has £21 billion in assets, saw its share price collapse from £40 to 175 pence in the last 18 months, following the bank’s announcement in January that it had allocated £900 million of loans to the wrong risk bracket, which prompted a regulatory investigation. While it was able to raise £350 million from shareholders, analysts now openly question whether it will be able to come up with the necessary funding.

This wrongly estimated value of its assets is exactly what the European Central Bank stress tests have systematically failed to assess, by trusting data from the banks’ own models. Metro Bank is a smaller financial institution, but in these times, confidence is a rare commodity on financial markets, and contagion could be easily triggered. Metro had put a low risk-weighting on its commercial loans (50%), and has now corrected it to 100%. A closer look at the books shows that there is little “commercial” in those loans. For instance, one borrower was Crispin Odey’s fund which has bet £19 million against Metro’s shares. Odey took a short position on Jan. 16 and today has a gain of £75 million, which is 2.7% of the entire capital stock. De facto, Metro Bank has financed its own larger short-seller.

Aston Martin, manufacturer of James Bond’s favorite sports car, is in trouble. It just barely managed to raise $150 million at a 12% interest rate in 3-year bonds. Cash is needed to complete the launching of its new DBX SUV in December. It will need another $100 million, which would have a 15% interest rate! One catch is that they have to come up with 1,400 pre-orders of the DBX, which will have a starting price of £140,000.

Hedge funds have been taking short positions in Aston Martin’s debt and equity since its stock sank 75%. Ratings agency Standard & Poor’s has cut Aston’s credit rating by one notch to CCC+, which is deep into junk territory.