From IMF to World Bank, the financial warnings piling up should jolt us out of our complacency
- The belief that markets will recover as soon as inflation is curbed and interest rates have peaked is sheer ignorance
- Experts warn that a systemic crisis is looming, affecting everything from banks and insurers to the housing and cryptocurrency markets
The implication is that markets and the global economy may need to brace themselves not just for a hard but a crash landing, and that the already stretched “emergency services” – government budgets and central bank resources – will need to be on hand again to attempt a rescue operation.
This is a dangerous complacency born of the fact that many observers seem ignorant of how economies and markets act and interact, especially in a crisis, as the IMF’s semi-annual Global Financial Stability Report released just a few days ago has joltingly reminded us.
Financial vulnerabilities, it said, “are elevated for governments, many with mounting debt, as well as nonbank financial institutions such as insurers, pension funds, hedge funds and mutual funds. Rising rates have added to stress for entities with stretched balance sheets”.
That’s about as close as you can get (if you are not to be charged with actually precipitating disaster) to saying that we are headed for a global systemic financial crisis, one which could dwarf even the 2008 global financial crisis in size and fallout.
It’s hardly necessary to explain this. The prospective crisis is looming when the global economy is still struggling to recover from Covid-19, geopolitical tensions are elevated, economic linkages are fractured and climate change is beginning to wreak economic havoc.
As the IMF notes, there is a risk that “rapid, disorderly repricing of risk in coming months could interact with, and be amplified by, pre-existing vulnerabilities and poor market liquidity. Market liquidity metrics have worsened across asset classes, including in markets that are generally highly liquid”, including in US bonds.
Where will this drying out strike next? IMF’s head of monetary and capital markets department, Tobias Adrian, raised a number of (chillingly) possible answers in a blog timed to coincide with last week’s annual meetings of the Bretton Woods institutions.
So-called “non-banks”, including insurance companies – which nowadays rival banks as sources of consumer credit – are especially at risk. As the IMF warned, those who deal with non-banks need to be vigilant about the relative lack of transparency and high leverage in this rather shadowy sector.
The global corporate sector is meanwhile being pressured in the economic environment. Credit spreads have widened substantially across all sectors and large firms report a contraction in profits owing to higher costs while at small firms, bankruptcies have started to increase.
As central banks aggressively tighten monetary policy, soaring borrowing costs and tighter lending standards, coupled with stretched valuations after years of rising prices, could adversely affect housing markets. “In a worst-case scenario, real house price declines could be significant,” said the IMF.
Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs