BNP Paribas Fortis’s chief economist may have seen it all before, but this financial crisis is different, he says. Contagion and an imbalance in global markets could send the economy toppling back into chaos, and it is ultimately the insurers that will pay for this greater climate of risk, he warns
Despite best intentions, conference lectures don’t always go to plan. They can be long, uninspiring and, at worst, downright tedious, leading to tell-tale yawning and shuffling from bored delegates. But during this year’s European Insurance Forum, held in Dublin, one speaker had little trouble keeping his audience in thrall.
Renowned economist Freddy Van den Spiegel of BNP Parabis Fortis took listeners on a rollercoaster ride through the “extraordinary” financial landscape of the past 20 years. It took in globalisation, technology revolution and economic bubbles, before touching down in the meltdown of 2007. But there was more: he reckons the next big crisis could come within the next four years.
Born in Aalst in Belgium in 1952, Van den Spiegel gained a PhD in economics at the Free University of Brussels, before heading the asset management department of the Bank of Belgium. After a four-year stint as managing director of Fortis Investments, he became chief economist in 2000. While there, he had a front-row seat in the crisis, as the bank buckled under its ill-fated takeover of ABN AMRO and was then sold, first to the Belgian government and then to BNP Paribas.
Today, with his shock of white hair and beaming smile, Van den Spiegel is genial and faultlessly polite in his heavily accented English. He readily admits that being trapped in the corridors of the bank as it was thrown headlong into the financial storm was an eye-opener.
Unsurprisingly, he says direct experience of a crisis is a little different from reading textbook case studies. “You see for the first time all the things that you have read in lots of books about how a crisis behaves. You see how quickly things that you considered to be impossible become possible.
I saw how panic is created and how things have to then be managed. So, as an economist, it is a very interesting time – and also very frightening.”
Time for a redesign
But, while the recent financial crisis is the latest in a long list over the past 100 years, Van den Spiegel believes this time is fundamentally different. With previous crises, such as the dotcom crash of the early noughties, the markets reacted accordingly and developed new strategies to move forwards. But he says that, with the bail-out of the banks, the markets are in new territory and the future direction remains more unclear than ever before. “This time it seems to indicate there is a need for a fundamental redesign of the world economy.”
It is commonplace for insurers to say that the sector has emerged relatively unscathed from the crisis. But Van den Spiegel explains the seismic events of the last couple of years have generated a much greater climate of risk, the cost of which will be borne by – yes, that’s right – insurers. And while the economies of the USA and Europe are showing some signs of growth and Asia is “full-steam ahead”, Van den Spiegel points out the current chapter of turbulent markets and economic certainty is far from closed. “We still have all the same problems that ultimately created this crisis in 2007.”
The USA has gone into deficit for the first time, in contrast with the buoyant bank balance of China, creating a fundamental “structural imbalance” in the world economy. This, coupled with the ongoing volatility of commodity and energy prices, means that markets continue to do a fragile balancing act.
This brings us to the growing threat of contagion, which Van den Spiegel regards as one of the most dangerous trends of recent years. “Who would have forecast that a crisis caused by subprime loans in the USA in 2007 would lead to the effective bankruptcy of Greece in 2010?” he asks.
Chaotic situations in one market, he explains, can spread like a virus, infecting other areas much more quickly than before. “The way that the many strands of the financial world connect and react to each other, and how finance links to the commodity market and other aspects of the real economy, presents a major challenge in terms of risk management,” he says, adding that the illusion that risk “can be quantified in efficient and rational markets” is no more.
Indeed, he believes that escalating oil and energy prices, coupled with inflation and interest rates, problems financing government debts and of course contagion, could easily tip the world economy back into crisis again. So what can be done?
In high demand
Better risk management along with more varied methods of risk assessment is vital, he says. Using the old models is no longer enough: innovative methods, such as stress testing and scenario analysis, must also become a priority. “We are not going to throw away these models, because they are useful; but in the future they will only be part of the process,” he says. “The lesson learnt from the most recent crisis is that risk management must be a core consideration for the senior managers of banks and insurance companies.”
And what of the much-anticipated Solvency II? He warns that while the regulatory framework compares favourably with Basel II (the equivalent framework for the banks), care must be taken that it does not become a mere tick-boxing exercise. “The risk of Solvency II is that if you don’t take care, it becomes nothing more than a mathematical process, which would be a fatal error,” he says.
So how does he unwind when not trying to forecast when the next financial disaster will strike? Mostly, he indulges his love of music whenever possible, playing the violin and listening to styles ranging from classical to rock and jazz.
“I don’t have much spare time, but there is always time for music.That is the best way for me to calm down and think, and clarify the ideas when trying to come up with a coherent global picture.”
It looks like this creative outlet will become more necessary than ever, because demand for Van den Spiegel’s skill set is growing. As he points out, the need for good economic analysis is at a premium since the crisis and the “need for economists are higher than ever”.
But even so, he admits the business of gauging future trends is never going to be easy, a lesson he first learnt at university. “From 1945 to 1971, there were perfectly fixed exchange rates; there was no inflation and interest rates were stable. But when we were still studying, the dollar collapsed and we entered 10 years of high inflation and volatility,” he explains, adding wryly: “From that time, I understood how difficult it is to make forecasts – but we still have to continue.” IT