China's crash could take Dublin property market back to bad old days before Nama
Published 26/08/2015 | 02:30
Almost 20 years ago in Hong Kong, my mind was opened to what actually happens when financial markets unravel. I witnessed how panic spreads like a virus from market to market. It was 1997 and the Asian crisis, which had started as a small problem in Thailand, suddenly engulfed the entire region. By the time it was all over, Russia had defaulted, as did huge swathes of South Korean industry. Meanwhile, LTCM - the most feted investment fund in the US - imploded. In such a panic, markets that appeared strong become weak and traders who appeared to be superhuman, masters of the universe, are revealed to have feet of clay.
The very remote can become local too. So, for example, the crash in China may well affect Dublin's commercial property market. I'll explain this transmission mechanism later but for now let's focus on the cause rather than the consequences of the Great fall of China. The culprit is always leverage or borrowing. Once people borrow to speculate, the move from greed to fear and from fear to greed is lightning quick. In leveraged financial markets, there are only three certainties: death, taxes and margin calls.
Margin calls are what happens when speculators use borrowed money to speculate. When things are going well, they can make ridiculous profits but if the assets bought with borrowed money fall in value, the speculator has to come up with cash to plug the gap.