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The trust crunch


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Raoul Ruiz Martinez is the resident Independent Financial Adviser for Finesco Financial Services Ltd at the offices of euroFINESCOs.a. He provides financial advice to UK and European expatriates in Portugal with a high degree of client service and total confidentiality. Finesco Financial Services Ltd is authorised and regulated by the UK Financial Services Authority (FSA).

THE UNPRECEDENTED events of recent weeks across the financial markets in the US, UK and Europe are, as we should all be aware by now, the after effects of the global credit crunch.

As part of my work, it is paramount that I share views and opinions exclusively on the markets with my peers. During one discussion regarding the current turmoil, one of my colleagues interrupted with the statement “this is not the credit crunch – it’s the trust crunch!”

Momentarily, all of the daily events and reams of analysis melted away. While this statement then appeared to be obvious to me, it must be said that sometimes the obvious is beguiled by a continuous chain of remarkable events. As a result, this makes us lose perspective of the fundamentals.

So, if there is no trust, what happened and how can we get it back?

Let’s start at what trust means in these circumstances, before we can even consider how to get it back.

A promise is made that you were going to do something for someone and you don’t. This person doesn’t believe you and without belief there is no trust.

In very recent historic and simplistic terms, this all began with the good people in the US who were able to get mortgages from their local banks with little or no difficulty. The banks then sold these secured mortgages (debt, or for simplicity’s sake, pieces of paper) to the investment banks. The investment banks then merged other similar pieces of debt from credible institutions such as corporations and governments. These became packages known as ‘quality’ debt instruments (secure packages with various pieces of paper in them, if you will) which were then sold on to other national and international institutions. Globally, financial institutions acted as catalysts to this boom by building their own packages, which incorporated some of these ‘secure’ US packages.  

Going back to the US at the start of this journey, the mortgagees became, for one reason or another, unable to pay back their loans. With so many defaulters, the banks’ liquidity reserves dried up and suddenly, across the globe, they all realised the pieces of the paper that were in these packages weren’t worth the paper they were written on.

In permitting this Pandora’s Box to open up, the ensuing panic and mayhem drove the world to look frantically for cash (the trust) and realised that it had all gone because, in the end, they had all left promises that were unfulfilled. They then turned on each other and…..well, you know the rest.

Now think again. What is trust and where is it?

Under these exceptional circumstances, in reality, trust hasn’t gone. It has always been there.  Trust is an asset in the mind of every investor and on every balance sheet of every bank, company and government. Unfortunately, amid the hysteria of the opening of Pandora’s box, it has sent the world into a downward spiral of financial irrationality.

Underneath it all, from the US home-buyer to the international investor, confidence needs to return to the financial system so that we can begin to build on this primary asset – trust.  

We will be heading back to basics – mortgage lenders lending, banks banking, investors investing and advisers advising – you can’t deviate from these truths.  In fact, even as I wrote this article, the UK Treasury had enforced a measure to instill confidence into the system and stated that it is to put up to 250 billion pounds Sterling into the banking system in an effort to keep banks lending. It has also offered a guarantee to banks issuing medium term debt, which could mean backing a further 250 billion pounds of bank borrowings.

Inevitably more news will follow, perhaps even a full-blown recession.  However, real opportunities will return once more and, while the financial world is nursed back to health, ensure that you have discussed matters with a qualified and trusted financial adviser to help show you the path that accommodates you best.

Raoul Ruiz Martinez is based in the Algarve office of euroFINESCOs.a. as an Investment Adviser for Finesco Financial Services Ltd., Glasgow and regulated to advise on capital investments in both the UK and Portugal. He can be contacted either by telephone on 289 561 333 or on email [email protected]