Home Editorial: SVB’s bankruptcy – Systemic risk, end of innovation and strong euro

GEAB 173

The monthly bulletin of LEAP (European Laboratory of Political Anticipation) - 15 Mar 2023

Editorial: SVB’s bankruptcy – Systemic risk, end of innovation and strong euro

Dragging in its wake the Silvergate and Signature banks, the Silicon Valley Bank’s bankruptcy (SVB) remains the sad event illustrating this GEAB issue of March: as analysed/anticipated over the past three years, after the lyrical flights of Western tech at the start of the Covid crisis, painful returns to reality would inevitably be the batch of this sector, aggravated of course by the unavoidable rate hikes and the end of the easy money that fueled all the visionary fantasies of the past 15 years.[1]

As far as the SVB is concerned, the sequence of events is clear and admitted by all observers: companies in the technology sector that are experiencing difficulties tend to ask for their deposits within the SVB;  and the SVB saw the return on its investments fall recently ( US Treasury bonds particularly, due to the rise in interest rates, and the bank was forced to sell those bonds at a loss in order to return the deposits of clients, and even to evoke a capital increase). The SVB had to make its difficulties public therefore, and in less than 48 hours the customers claimed their deposits. This logically caused the bank’s failure.[2]

The reaction of the American authorities was just as logical, announcing that the clients’ deposits would be guaranteed[3] and that there was no reason to panic because the system was solid,[4] and no risk of contagion across the Atlantic either.[5] This is communication and crisis reactions without explanatory value. In reality, many questions are being asked about the possible domino effects of this new episode of the fragility of the heart of the American system, namely finance and new tech. If the most burning questions are those that are difficult to answer (for example: is SVB a new Lehman Brothers?), some systemic consequences are easy to present:

– Starting with the disappearance of part of the US innovation sector and the change of hands of another part. The British Treasury bought the UK branch of the SVB for £1 to prevent any risk of contagion. In the other countries exposed to the SVB (Germany, Canada, China, India, Israel, Sweden), the regulatory authorities are taking control of this strategic sector,[6] certainly not without conditions. The states are probably only dreaming of regaining control of the creative chaos of innovation incubators of the last decade. They now have a great opportunity to do so… but it remains to be seen what they will do in this respect (rethink health care, wage war, put public opinion under lock and key…).

– The end of the SVB also means the end of Silicon Valley’s domination of the technology world. This has been a reality for several years now, but this event has symbolic value and reinforces the diversion of the planet’s eyes towards Asia where ‘progress’ continues to unwind its thread less anxiously.

– It is not impossible that the main domino effect will be a collapse of the Californian start-up fabric – between bankruptcies and flights to less controversial skies. The future of California will thus raise questions: in an America that stops selling dreams to rebuild an industry, what about the situation of Hollywood, Disney and Silicon Valley?

– Furthermore, the SVB’s bankruptcy highlights the pressure of the Fed’s monetary policy on the economy. It is safe to assume that the Fed hawks will now have a hard time selling their rate hike proposals. This brings us back to our January anticipations of a rise in the EUR/USD pair, a new argument in favour of a slowdown in European exports and a growing risk of seeing what remains of our industry (automotive for example)[7] cross the Atlantic to take advantage of all the benefits of the “Inflation Reduction Act” programme instead of the fantasies of reindustrialisation of the old continent. Of course, the rise of the euro will ease inflationary tendencies, but to the benefit of imported consumption, a destroyer of our economic fabric, allowing us to anticipate an increase in the rate of SME’s bankruptcies, on the one hand, and the exhaustion of governments and taxpayers in their support for the great flagships of national economies, on the other.

But above all, this bankruptcy, by revealing the financial difficulties of the American start-up and tech sector, is one more argument supporting the anticipation of the West’s withdrawal from the global innovation race, which is one main focus of this GEAB issue and whose argumentation is to be discovered as follows.

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[1]     We have repeatedly anticipated the dangers of rising key interest rates, identifying the Tech sector as one of the most threatened, whether in terms of the repercussions on its financing resources (2021), its stock market values (2021) or the more general atmosphere of a shift towards the real economy to the detriment of companies in this sector (2020).

[2]     Source: The Guardian, 13/03/2023

[3]     Source: BFMTV, 12/03/2023

[4]     Source: The Wall Street Journal, 13/03/2023

[5]     Source: Reuters, 13/03/2023

[6]     Source: Quartz, 13/03/2023

[7]     Source: Les Echos, 13/03/2023

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