Massive cross border contagion risk.
The unique feature of the global financial crisis (was) the poorly understood mechanism of contagion. One reason why people are more optimistic today is the belief that they we have nailed this problem.
The ECB warned us yesterday of a massive cross border contagion risk with real-estate investment funds (REIFs). The real kicker here is a whole series of contagion risks. Falling property prices affects the REIFs, but it goes both ways. REIFs account for 40% of the euro area's commercial real estate market (CRE). In addition, there are spillover risks to other financial institutions, lenders, and from one country to other countries. We are looking at Lehman-Brothers style contagion risk.
What is going on is not the same as what happened during the subprime boom and bust. REIFs are mostly open-ended investment vehicles. Many investors are now trying to redeem, but many REIFs have stopped or reduced redemptions. There is also a risk similar to that of bank run risk. There is a first-mover advantage for those who are redeeming, prompting others to follow suit.
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