A new systemic crisis on the horizon?

Written by Andre Cartapanis (Member of the Circle of Economists and Professor of Sciences Po Aix.)

The war in Ukraine has already caused a real explosion, obviously at the geopolitical level, but also for the world economy. The International Monetary Fund has just revised its growth prospects downwards, and inflation caused by the shock of energy prices or certain agricultural products is accelerating and reaching a level not seen in forty years.

An increase in interest rates seems inevitable and is likely to put an end to the recovery after Covid. Nouriel Roubini announces a stagflationary storm, and Kenneth Rogoff highlights the growing threat of a global recession. This situation poses significant risks to international financial stability in terms of markets, banks and investors, as well as at the macroeconomic level.

Rising rates in the United States are never neutral

On the scale of international markets, we have already seen a forced adjustment of stock prices and a marked increase in long rates in bond markets. The direct or indirect propensity of banks to risk Russia or Ukraine (sovereign risk, portfolio risk of private assets, counterparty risk) raises new concerns in the euro area.

In developing countries, financial conditions are intensifying in the form of falling stock market prices and rising credit or bond prices in response to a jump in the risk premium combined with high volatility.

In the past, tightening monetary policy and, above all, raising US interest rates have often led to a “sudden halt” in international capital movements between developing countries, putting pressure on exchange rates and the position of debtors in dollars. , and causing financial crises (1994, 1997, 2006, 2013).

Therefore, we may fear that this tension will spread to global finance as a whole, and its resilience may be put to the test.

Risk of global macroeconomic imbalance

At the macroeconomic level, risks are also growing. Slower activity and projected increases in military spending and compensation provided to households to overcome rising energy and food prices, not to mention significant decarbonisation costs and energy transition policies, may halt public debt stabilization policies in the context of inflationary monetary normalization. that will increase the load.

This should reduce existing savings in economies with current account surpluses (Germany, the Netherlands, China, Japan, Ireland, etc.) and thus jeopardize the global macroeconomic balance, depriving their countries of international financing of savings and current account deficits. deficits, creating further pressure to increase risk premiums and interest rates and pressure to lower exchange rates.

In addition to many developing countries, this applies to the United States or the United Kingdom, as well as France, Turkey and sub-Saharan Africa. A kind of global war for savings may begin in response to the reduction of surplus global savings, the famous “global oversaturation of savings” by Ben Bernanke.

That is why the world economy is now threatened by a new systemic crisis, which is likely to increase interest rates and increase the threat of recession.

Andre Cartapanis, Member of the Circle of Economists and Professor of Sciences Po Aix.