In its latest World Economic Outlook (WEO), the IMF warns that another financial crisis is brewing even though many parts of the world are still not finished fixing the last one.
Across the EU, a massive quantitative easing programme is still in play and despite its enormity, inflation and economic growth not to mention unemployment levels are still a massive problem. Even in the US, which has been showing signs of a recovery of late, the economic recovery there is not as seamless as many had hoped for. Just last month, Janet Yellen, head of the US Federal Reserve decided against increasing interest rates citing softer than expected economic performance.
Across developing economies, cheap money flooded in. In the case of Brazil, cheap credit inflated asset prices and encouraged both companies and government to load up on debt. The economy there has since weakened. Just this week, the organising committee of the Rio Olympic Games ordered a massive cost cutting programme to save the games. We were told that the BRICS (Brazil, Russia, India, China and South Africa) would be the saviors of the world economy, now it seems, they are struggling to save themselves!
According to the IMF, “Balance sheets have become stretched thinner in many emerging market companies and banks. These firms have become more susceptible to financial stress,”
The IMF warns that a failure to patch up the international financial system after the last crash, by ensuring that banks in emerging markets hold enough capital, and constraining risky borrowing, for example, means that a new Lehman Brothers-type shock could spark another global panic.
“Shocks may originate in advanced or emerging markets and, combined with unaddressed system vulnerabilities, could lead to a global asset market disruption and a sudden drying up of market liquidity in many asset classes,” the IMF says, warning that some markets appear to be “brittle”.
The IMF goes onto say that the global economy could well get back on a sound footing if certain things happen, including a successful re balancing of growth in China, to safeguarding against market illiquidity in financial markets. Here in the EU, the Capital Markets Union is a response to that but it is still in negotiation.
According to the IMF report, the world barely survived the last financial crisis and in failing to put robust measures in place to prevent another, we are still left very, very vulnerable.
Oh, dear! Batten down the hatches!