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

We make it make sense

If this story helped you navigate your world, subscribe to the M&G today for just R30 for the first three months

Subscribers get access to all our best journalism, subscriber-only newsletters, events and a weekly cryptic crossword.”

Related stories


Already a subscriber? Sign in here


Latest stories

Tutu Puoane back on the South African stage after two...

She may have left South Africa more than 20 years ago, but this jazz singer is still firmly rooted in her heritage

Pandor: Blinken did not come to tell SA to choose...

The US secretary of state said that when one country invades another country, sovereignty and independence mattered

Emerging technologies show a clear pathway to ending the age...

We have all the tools we need to usher in a new era of superabundance but we need to ditch dying industries such as fossil fuel and livestock fast

Malibongwe festival returns with a tribute to women

Female artists celebrate Women’s Day and their achievements in the music world

press releases

Loading latest Press Releases…