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Seeds of next global financial crisis being sown, top officials warn
NUSA DUA, Indonesia, Oct 15, 2018 (BSS/AFP) – Rising US interest rates,
tanking emerging market currencies and a bitter US-China trade spat could
push the world towards its next financial crisis but there is still time to
avert disaster, global finance chiefs have said.
The world economy is still growing but faces an “unprecedented”
combination of threats, the International Monetary Fund cautioned at an
annual meeting with the World Bank in Bali this week.
Among them is growing protectionism championed by the Trump administration
and the intensifying trade-and-currency battle between Washington and
Beijing, which have imposed tit-for-tat tariffs on billions of dollars worth
of goods.
Opening the Bali talks, Indonesian President Joko Widodo compared the
dispute between the world’s two biggest economies to the hit television
series “Game of Thrones”.
“Great houses, great families, battle each other fiercely to seize control
over the Iron Throne,” he said.
But “confrontation and collision impose a tragic price not only on those
who are defeated but also on the winners”.
And IMF chief Christine Lagarde warned of a “degree of uncertainty that we
have not seen before” in international trade.
– ‘Constructive solutions’ –
Disaster can still be averted, officials said at the Bali meet, with
reassuring talk from the global financial elite that growth remains strong —
the IMF projects 3.7 percent for this year and the next — and could yet
withstand the risks gathering on the horizon.
And despite tensions, US and Chinese officials in Bali also sounded
conciliatory tones.
US Treasury Secretary Steve Mnuchin described “productive” talks with the
Chinese on the yuan, which Washington has accused Beijing of keeping
artificially low to boost exports.
And China’s central bank governor Yi Gang called for “constructive
solutions” to the damaging tiff, but insisted that Beijing was not devaluing
its currency to gain trade advantages — a practice the IMF this week called
on members to avoid.
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But there are also other brewing concerns, including the US Federal
Reserve’s decision to raise interest rates.
This year has already seen three hikes, which experts largely agree are
necessary to avoid overheating an economy with strong growth and low
employment.
That has squeezed emerging markets, which are seeing capital flee towards
the US enticed by higher returns, and also threatens developing countries
that have large debt burdens denominated in dollars.
“The global economy continues to grow but the outlook is now challenging
especially for emerging markets due to the normalisation of the US monetary
policy,” Brazilian central bank governor Ilan Goldfajn warned Sunday.
The US “needs to be very mindful that spillover from the effect of their
policies is very real for many countries,” Indonesia’s Finance Minister Sri
Mulyani Indrawati added, in an interview with Bloomberg TV.
– ‘Repair your roof’ –
Still, there is little expectation for now of a change of gear by the Fed,
despite President Donald Trump’s vocal criticism of the rate hikes.
And top officials said emerging markets should prepare for more hikes with
measures that could cushion the impact, including flexible exchange rates and
careful management of capital movement.
The consensus among central bankers and leading economic officials is that
while the next global crisis may not be imminent, now is the time to prepare
for it.
“The time to repair your roof is when the sun is shining,” French central
bank governor Francois Villeroy de Galhau told AFP.
He said the current stable global growth was a good moment “to rebuild
budget reserves” and for states that can to reduce their debt loads.
The IMF has also called on central banks to begin “normalising” loose
monetary policy that began in response to the last financial crisis a decade
ago, to give them more room to manoeuvre in the case of a fresh economic
disaster.
The need for a “cushion” in case of disaster has also been exacerbated by
the rise of so-called “shadow financing”, a largely unregulated system that
has spread globally, and an alarming expansion of public and private debt to
more than double the world’s GDP last year.
Lagarde urged vigilance as she addressed the meetings in Bali, warning
against “collective amnesia” about what sparked previous financial crises.
“Geopolitical tensions combined with… increased protectionism produced
terrible developments.”
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