Seeds of next global financial crisis being sown, top officials warn

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.

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 on 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.”

© Agence France-Presse

Subscribe to the M&G

These are unprecedented times, and the role of media to tell and record the story of South Africa as it develops is more important than ever.

The Mail & Guardian is a proud news publisher with roots stretching back 35 years, and we’ve survived right from day one thanks to the support of readers who value fiercely independent journalism that is beholden to no-one. To help us continue for another 35 future years with the same proud values, please consider taking out a subscription.

Related stories

No mention of Africa when it comes to US foreign policy

During pre-election debates in the United States, very little has been said on how they view one of the world’s largest markets — which, in turn, is determined to come into its own

How US foreign policy under Donald Trump has affected Africa

Lesotho has been used as a microcosm in this article to reflect how the foreign policy has affected Africa

Why would anyone vote for Trump?

COMMENT: For this gay, white soldier there simply isn’t a good enough challenger to knock him off his perch

Richard Calland: South Africa needs a Roosevelt style of leadership

President Cyril Ramaphosa needs to hold ‘fireside chats’ and have more power and institutional muscle around him, writes Richard Calland

Trump win will abort health care

Threats of funding cuts has caused a reduction in reproductive and sexual health services

The African Union’s (un)official statement on the US elections

The United States has never been shy to pass judgment on African elections. What does it look like when Africa passes judgment on America’s chaotic vote?
Advertising

Subscribers only

The shame of 40 000 missing education certificates

Graduates are being left in the lurch by a higher education department that is simply unable to deliver the crucial certificates proving their qualifications - in some cases dating back to 1992

The living nightmare of environmental activists who protest mine expansion

Last week Fikile Ntshangase was gunned down as activists fight mining company Tendele’s expansions. Community members tell the M&G about the ‘kill lists’ and the dread they live with every day

More top stories

Khaya Sithole: Tsakani Maluleke’s example – and challenge

Shattering the glass ceiling is not enough, the new auditor general must make ‘live’ audits the norm here in SA

State’s wage freeze sparks apoplexy

Public sector unions have cried foul over the government’s plan to freeze wages for three years and have vowed to fight back.

‘Veteran’s stripes’ vs ‘kind and fair’

This weekend the Democratic Alliance will choose between two starkly different visions for its future

The high road is in harm reduction

While the restriction of movement curtailed the health services for people who use drugs in some parts of the world, it propelled other countries into finding innovative ways to continue services, a new report reveals
Advertising

press releases

Loading latest Press Releases…

The best local and international journalism

handpicked and in your inbox every weekday