Global financial system facing ‘perfect storm’

The global financial system is now carrying more risk that it was at the time of the financial crisis, a senior central banker has warned.

A decade of low interest rates and other emergency stimulus has lured emerging markets into debt dependency, without addressing the structural causes of the global disorder, according to William White, the Swiss-based head of the OECD’s review board and ex-chief economist for the Bank for International Settlements.

What is more, the policies adopted by central banks since 2008 mean there is little authorities could do were another global financial bubble to bust, he said.

Subscribe to The Week

Escape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives.

SUBSCRIBE & SAVE

Sign up for The Week's Free Newsletters

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

Sign up

Speaking to The Daily Telegraph ahead of the World Economic Forum in Davos, White said: “All the market indicators right now look very similar to what we saw before the Lehman crisis, but the lesson has somehow been forgotten.”

Saying the financial system had been distorted by quantitative easing and negative interest rates, he said: “There is an intoxicating optimism at the top of every unstable boom when people latch on to good news and convince themselves that risk is fading, but that is precisely when the worst mistakes are made”.

Compared to 2007-08, says Ambrose Evans-Pritchard in the Telegraph, “this time central banks are holding a particularly ferocious tiger by the tail”, as global debt levels have surged by more than 50% of GDP since the financial crisis.

Last November, the World Economic Forum warned that a build-up of bad loans in India and China’s growing credit boom meant banks across the world were more vulnerable to a crisis than they were ahead of the credit crunch, The Guardian reports.

Writing in the South China Morning Post last month, historian Niall Ferguson echoed these fears and argued that another global financial crisis is imminent.

Yet these warnings appear to be falling on deaf ears. The International Monetary Fund yesterday revised up its forecast for world economic growth in 2018 and 2019, Reuters reports, saying that sweeping US tax cuts were expected to boost investment in the world’s largest economy and help its main trading partners.

The IMF report says 120 economies, accounting for three-quarters of global economic activity, saw a pick-up last year, “the broadest synchronised global growth upsurge since 2010”, says the BBC.

Yet the upturn in confidence came with a note of caution from the IMF’s chief economist, Maurice Obstfeld who said: “The present economic momentum reflects a confluence of factors that is unlikely to last for long.”

He argued it was vital for governments take steps to address impediments to growth, to make it more inclusive and to make economies more resilient when the next downturn comes.

However, just exactly when that will be remains a matter of some debate.