Escape towards quality

A escape towards quality (the English terms Flight to quality and Flight to security are often employed) is a phénomème important movements of capital which, at the time of a stock exchange Krach, move Transferable securities worms of the sure placements more (which are also generally more liquid).

Such a phenomenon generally makes following a Speculative bubble, which bursts sometimes very quickly during a Krach; the savers and the speculators precipitate to sell their titles, making fall the prices on the Stockmarket. They buy in particular Government loans, whose courses sides increase.

The source of such a movement, mimetic car-realizer and , is a speculative bubble ready to burst, and the publication of new information, sometimes rather minor.

The financial credits which present credit risks undergo a strong rebate. Following this movement, the borrowers have more difficulties of being financed, and if they arrive there, must pay a higher Interest rate.

Justification

The justification of this type of movements, which one even finds in their name, lies in supposed switches by large managers of funds between

on a side the stock market or obligations involving a risk of signature
and other the market of the Government loans,

i.e.:

of liquidations of positions in actions, or risked obligations,
whose products would be immediately reinvested in Government loans.

The episodes of escape towards quality draw their justification from what, if the things would go really badly on the stock market, or on that of the credit, the market knows that the central banks would intervene to add liquidities or cause a drop in the short rates - as the Federal fund of the United States did it on several occasions since 1987 - by thus involving the outputs of the new Government loans to the fall: the Government loans bought before this fall of the rates thus take quickly value.

It concerns thus rather the regular purchase of lottery tickets: the traders lose a little money to each flight to quality but, if this one is concretized, they can gain much, and avoid important losses.

The Russian Financial crisis of 1998

The flights to quality are generally rather short, but nevertheless one of them, at the summer 1998, had one duration, an importance and an exceptional virulence, taking into account the fertile ground where it had been born. Indeed, in a few months of the realization of the economic Union and monetarist European, the banks of investment of the whole world were in charge of positions of arbitration considerable, intended to benefit from the convergence of the markets of rate and had carried out in advance all the operations that the managers of OPCVM should make after the launching of the Euro and the unification of the markets, but could not carry out front.

This crisis of the summer 1998 was caused by the effective defect awaited then of the Russia on GKO, lasted several months, caused the quasi-bankruptcy of the Hedge fund Long Term Capital Management.

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