A New Financial Crisis Rears its Ugly Head
Tensions were high at the IMF-World Bank Annual Meetings in Bali this October. After a decade of recovery, there are warning signs of an impending financial crisis. The United States hold the key to helping the world survive this new emergency, but will they take action?
A New Financial Crisis Rears its Ugly HeadBy Yun-han Chu
From CommonWealth Magazine (vol. 661 )
The global financial system suffered three major catastrophes in the past thirty years. In the eighties, it was the Latin American debt crisis. The nineties ended with the Asian financial crisis. Ten years ago, the subprime mortgage crisis swept through the United States, leading to a global recession.
If economists were a superstitious lot, they would certainly call it the “Ten Year Curse”. We stand again at a critical moment. During the IMF-World Bank Annual Meetings held last month in Bali, Indonesia, key representatives from around the world were feeling uneasy. Not because they were superstitious, but due to real concerns about warning lights flashing all over the global economy.
The first warning is the Federal Reserve System reducing its balance sheet and raising interest rates. This will drive the dollar back stateside, which in turn may cause foreign debt crises in large emerging economies built on fragile debt structures, such as Argentina, Turkey, South Africa, and Pakistan. Exchange rates will plummet as forex reserves evaporate. The devaluation of the Yuan is the coup de grâce to these emerging economies’ declining currency value.
The second portent is the looming trade war between China and the United States. Multinational enterprises, which rely on a healthy global supply chain, are facing the worst political crisis in thirty years. Growing trade tariffs will only diminish profits for American corporations. Though the U.S. stock market has enjoyed a historically long bull market, there are signs the good times will end soon, ushering in the dreaded bear market.
Europe is an additional burden to the world economy. At this critical moment, when various institutions of the European Union need to buckle down to survive the approaching storm, Europe is experiencing a spectacular leadership vacuum. French President Emmanuel Macron may have a gift for words, but he has trouble turning words into action. His proposed reforms for the EU will surely fail without German support.
That support may be slow in coming. After thirteen years of exhaustive dedication, German chancellor Angela Merkel has announced she will not seek reelection. Taking into account the newly elected Italian government’s budget deficit row with the European Commission, Trump’s not-so-subtle efforts to undermine the EU, and Brexit setting a bad example for countries with isolationist leanings, the European debt crisis may continue indefinitely.
During the Annual Meetings this October, IMF Chair Christine Lagarde warned that international banking institutions need to look into expanding long-term bailout packages, lest they be ill-prepared for a string of foreign debt crises going off like firecrackers in medium and large emerging economies across the globe.
The credit packages distributed by the IMF in the wake of the Great Recession were temporary measures, due to run out in the next three to five years. Lack of funding may spark an international systematic financial crisis. But whether the IMF will be able to raise more capital depends on the United States.
The Trump Administration’s slant on radical unilateralism means they are instinctively hostile toward any existing multilateral agreements. If the IMF is to increase its capital reserve in the long term, the quotas and voting power of key IMF members must be reallocated. The fear is that the U.S. will veto all these life-saving decisions by refusing to sacrifice voting power or increase capital contribution.
Translated by Jack C.
Edited by Tomas Lin