Investors are placing bets on a Black Monday-style crash in the British stock market at the fastest rate since the collapse of Lehman Brothers bank in 2008, the Bank of England has warned.
By Edmund Conway, Economics Editor
Published: 7:48AM BST 14 Jun 2010
A trader despairs as the market crashes on Black Monday in October 1987 - investors are placing bets on a similar crash in the UK stock market.
In a survey of markets, the Bank warned that widespread fear over the possible collapse of a sovereign debtor, including Greece and Portugal, had sparked a mass of bets on a 20 per cent fall in the FTSE 100.
The warning coincides with calculations from the Bank for International Settlements (BIS) showing that Britain has major exposure to the Irish and Spanish banking systems, which many fear could be at risk in the next round of the financial crisis.
The Bank of England used its Quarterly Bulletin to warn that markets were under increased strain following the International Monetary Fund and European Commission's bail-out of Greece.
It said that investors had fled into safe haven assets, including Treasury bonds, gold and, to some surprise, UK government bonds.
However, it pointed out that the number of investors betting on a 20 per cent fall in the FTSE 100 index, based on their purchase of options connected to such a scenario, had risen from below 5 per cent to about 13 per cent in the past month alone.
Although this is below the 25 per cent level around the time of the Lehman implosion, the rate of increase is similar.
Share prices have been hit by the fears surrounding sovereign debt in recent weeks.
Some analysts fear problems surrounding government bonds could trigger a repeat of Lehman-style events.
The BIS used its own Quarterly Report to point out that, although the strain had worsened throughout the international banking system, banks' balance sheets were slightly healthier than in the early stages of the subprime mortgage crisis that led to the Lehman collapse.
However, it also pointed out that various countries in the euro area were particularly exposed to each other – both in terms of sovereign and private debt. Banks headquartered in Britain had larger claims on Ireland ($230 billion, £158 billion) than banks based in any other country. Britain has a $150 billion (£103 billion) exposure to Spain.
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